When lawmakers in New Jersey heard the news two years ago they became very upset – and with good reason. After all, David Tepper had decided to leave the state and move to Florida.
Presumably most, if not all, of those officials did not know Tepper personally – but they certainly recognized his name. A hedge fund billionaire, Tepper was the state’s richest resident. Between 2012-2015 he earned a very cool $6 billion, and by virtue of this income also was the state’s biggest taxpayer. And therein lies the rub, because he was tired of bearing that burden.
For 20 years he had been paying the top rate in the state’s income tax, now 8.97 percent. But this was just part of his bill because he also was paying the highest property taxes, the highest estate taxes, and the highest inheritance taxes.
In a word, Tepper got fed up (okay, two words) with paying all these taxes. And that’s why he decided to move to Florida, which bills residents exactly zero dollars in state taxes. By simply changing his zip code he was able to save hundreds of millions of dollars each year.
Leaving New Jersey had obvious financial benefits for Tepper, but his departure meant there was a huge gap in the state’s budget. Even worse for the state is that many other people were thinking along the same lines as Tepper, and they too left the state.
Zero Hedge reports that “According to the New Jersey Business and Industry Association, the State of New Jersey lost a whopping two million residents between 2005 and 2014, earning a combined $18 billion in net adjusted gross income – income that would have been taxed by the state” had they decided to remain there.
So this is one case where the very wealthy and ordinary people had something in common: they felt they were being taxed excessively, got mad as heck, and decided they weren’t going to take it anymore. And that is why they all moved, many of them to no-state-tax Florida. The Sunshine State never looked so good to so many people.
All those people were sending a message that should have been obvious to New Jersey: Taxes were too high. But somehow it got garbled, because the state came to a very different conclusion: it decided that taxes on the residents remaining there needed to be raised.
New Jersey residents making more than $5 million will now have to pay 10.75 percent in state tax, up from the current 8.97 percent. And the corporate rate on businesses making more than $1 million profit was raised from 9 percent to 11.5 percent; in case this doesn’t seem like a big deal, consider that it translates to a 27 percent higher tax bill.
These new rates give Jersey the dubious honor of having the nation’s fourth-highest tax rate on individuals, and the second-highest corporate rate.
As a matter of information, New Yorkers also feel taxed to the max and are voting against it with their feet. In the 12 months that ended July 1, 2017, New York lost a net 190,508 residents (bringing the total loss to 1 million people since 2010 – the largest of any state in this time period).
Meanwhile, wealthy people in California are now paying a whopping top state tax rate of 13.3 percent, and some have had it. Each year from 2011 to 2015 an average of 60,000 Californians have left for Texas, another state with no income tax. People need the services and protection governments provide, but they don’t want to be pushed into bankruptcy to get those.
When Backs Are Against The Wall
Some states have raised their tax rates from very high to even higher, but that might be nothing compared to what lies ahead. Pension plans in numerous states are shockingly underfunded, and if the economy or the markets tank they could need a major cash infusion.
Last year, according to a state commission, the Illinois state’s pension plan was underfunded by $130 billion – more than $10,000 for every person in the state. Private estimates put the shortfall at $250 billion. Whatever the number, when there’s a shortfall in pensions, states know how to get more revenue: They raise taxes.
Many states are facing shortfalls in their pension plans. Why? Here’s how USA Today answered this question. “States are supposedly the providers of education, roads, parks, mass transit, and public safety, among other services to their residents. But their real purpose in many instances has been to appease militant public-sector labor unions.” And they do that by lavishing benefits on them.
Alaska, California, Colorado, and Nevada lead the other states as measured by the benefits they give. The average worker gets more than $60,000 in a pension, and many take in six figures or more. The states with the worst shortfalls are Illinois, Kentucky, Connecticut, Alaska, and Kansas.
Roughly a quarter of the entire Illinois budget in recent years has gone to funding pensions, USA notes. And yet, all this money has done is slow the rate of decline of its financial outlook.
Pension plans in many states are on the ropes. What will happen to them if the economy tanks or the market drops sharply? In many cases, states will try to raise income tax and property tax and other fees. But a growing number of people are opposed to higher taxes of any kind. So what will happen? We may learn the answer to this question in the coming months. Hopefully, we won’t have to learn it the hard way.
Gerald Harris is a financial and feature writer. Gerald can be reached at email@example.com