JD Montgomery, a California investment advisor whose clients have an average net worth of $75 million, was popular in the days after the November election, receiving about a dozen calls from clients about taxes and whether to leave the Golden State.
The reason for their desire to exit? Multiple higher federal taxes combined with rising levies in states including California. The higher levies taking effect are pushing some top earners to buy properties across state lines, move businesses, change the jurisdiction of trusts and reduce gifts to charity.
“It’s a double whammy,” Montgomery, managing director at Newport, California-based Canterbury Consulting, said of increased federal and state taxes facing some top earners. “We are at a tipping point.”
California and New Jersey along with the U.S. government and France have turned to tax increases on high-income residents to plug budget holes. While higher rates haven’t caused a mass exodus historically, the current rates are leading golfer Phil Mickelson to say he’s thinking about making drastic changes and have caused French actor Gerard Depardieu to cross the border. Other top earners have already made moves or are calculating with their advisors whether they should.
The groundswell of frustration that is turning into action so far is most apparent in California, where voters in November approved a tax increase retroactive to Jan. 1, 2012. The tax rate on income exceeding $1 million jumped to 13.3 percent, the highest of any state, from 10.3 percent.
That means wage earners in California will pay a top marginal rate of more than 50 percent when adding in federal tax increases that lawmakers passed Jan. 1, and those taking effect as a result of the 2010 health-care law.
Congress increased the top income-tax bracket to 39.6 percent from 35 percent and applied it to taxable income exceeding $450,000 for married couples or more than $400,000 for individuals. High earners also face limits on the value of their deductions and exemptions, pushing up their rates, and an added 0.9 percent health-care surtax on wages.
“The cumulative effect of multiple increases, summing up to be significant, should concern policy makers,” said Joseph Seneca, an economics professor at Rutgers University’s Edward J. Bloustein School of Planning and Public Policy in New Brunswick, New Jersey.