New Jersey millionaires’ tax could drive rich clients to relocate

A tax increase for New Jersey residents earning more than $1 million annually is likely to start conversations between high-net-worth clients and their financial advisers about whether it’s time to pack up and leave.

Gov. Phil Murphy was scheduled to sign into law today a budget bill that would impose a 10.75% tax on every dollar earned between $1 million and $5 million. Previous law levied an 8.97% tax on incomes in that range and imposed the 10.75% tax at $5 million and above.

When he announced the tax hike earlier this month, Murphy said the extra revenue would bolster the state’s budget during the coronavirus pandemic. In addition, he said the state would provide a $500 tax rebate to families with incomes under $150,000 — or individual making less than $75,000 — and at least one dependent child.

“In this unprecedented time, when so many middle-class families and others have sacrificed a great deal, now is the time to ensure that the wealthiest among us are also called to make a modest sacrifice by paying pennies on the dollar more for any income over $1 million,” Murphy said in a Sept. 17 statement.

But wealthy New Jersians may reconsider remaining part of the state’s tax base, investment advisers said.

“I don’t know that this tax increase creates an outflow, but it makes people think about it again,” said Christopher Cordaro, chief investment officer at RegentAtlantic in Morristown, New Jersey. “For anyone earning between $1 million and $5 million, it makes them take another look at is it worth it to stay in New Jersey. It will be on our clients’ agendas to discuss.”

The extra tax burden will make New Jersey residents think about relocating to lower tax states, such as next door in Pennsylvania, down to Florida or even to New York, where taxes are looking more affordable, said Kevin Donohue, a partner at Legacy Planning in West Chester, Pennsylvania.

“Those clients who are on the bubble about where they’re living, it could be the straw that breaks the camel’s back,” said Donohue, whose firm is located in suburban Philadelphia, not far from the New Jersey border. The tax hike “may cause them to reassess what they’re paying in New Jersey versus what they would be paying in Pennsylvania or New York. For many families, that’s a meaningful number.”

Even if high-earning clients don’t depart the state, they’ll be looking for ways to save on their taxes, said Cynthia Meyer, founder of Real Life Planning in Gladstone, New Jersey. The latest tax hike comes on top of the limitations on deductibility of state and local taxes ushered in by the 2017 federal tax reform law.

“New Jersey residents have gotten hit pretty hard by taxes,” Meyer said. “There’s going to be a bigger focus on tax minimization now.”

Those tax savings discussions could include making adjustments in retirement plans, matching capital gains against taxes and looking for tax breaks in areas such as real estate, she said.

Among the tax-saving options Cordaro outlines for his clients — other than departing New Jersey themselves — is relocating income-producing assets to tax friendly states. For instance, a client recently created a trust in South Dakota for a business interest so that when he sold it, he would avoid New Jersey taxes. South Dakota does not levy an income tax.

“My job as an adviser is to understand my clients’ values and quantify the different choices they have,” Cordaro said. “They have to make the decision.”

The New Jersey tax hike is not earth-shaking for the wealthy, said Andy Panko, owner of Tenon Financial in Iselin, New Jersey. But he has mixed feelings about the tax because much of the revenue will go to rebates for those in lower tax brackets.

“The tax itself is okay,” Panko said. “If you’re making multi-millions a year, this doesn’t feel that bad to me. What I don’t like is how they’ll use it. It’s not doing anything to help the budget. It’s an effort to redistribute wealth from the high-income earners to the low-income earners.”

Whether clients are upset or sanguine about the new tax, it’s important to reach out to them, Meyer said.

“If somebody has a client in New Jersey, they should call them today or tomorrow and say, ‘Let’s talk about it,’” she said.