Partner/Managing Director, NewEdge Wealth
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If you are a successful business owner in California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York or Washington, you might want to consider an out-of-state move in the next year. That may sound like an extreme course of action, especially if you love where you live, but I believe this is a pivotal moment for high-net-worth individuals—and one that could require decisive action.
What You Need To Know About New Tax Legislation
This January, a group of lawmakers from eight states introduced legislation to raise taxes on wealthy residents. The details of each bill vary from state to state. Some are similar to the “wealth tax” supported by Senator Elizabeth Warren in her 2020 presidential run, which would require very wealthy people to pay annual taxes on their assets, not just their income.
California, for example, would add a 1% tax for people with net assets of more than $50 million and a 1.5% tax for people whose net assets exceed $1 billion. If a California resident moved their permanent residence to another state after the new legislation is signed into law, the tax would continue to apply for four more years on a fractional basis. Other states, including Connecticut, Hawaii, Maryland, Minnesota and New York, plan to increase capital gains taxes or change the structure of estate taxes.
If your business is located in one of these eight states, it’s important to understand the short- and long-term implications of these bills. I’m reading the writing on the wall, and it seems to say that these lawmakers are serious about permanently fencing wealthy people into a high tax structure. And it looks like there will be a limited window for you to move to another state without facing financial repercussions.
Things To Consider As A Business Owner
Take a close look at your business and personal circumstances and ask yourself the following questions:
1. Do I need to be here?
For some businesses, location is key. If you work in tech and being headquartered in Silicon Valley is a critical component of your work, for instance, then moving out of California probably isn’t feasible. But if it isn’t materially important for your business to stay in your current state, moving is an option worth considering. Talk to your financial advisor about which factors you should assess and which locations would be more favorable from a tax or general business standpoint.
You obviously don’t want to make the decision to move in a vacuum. Weigh other important considerations, such as the housing market, family needs, schools, community and cultural connections, weather and overall quality of life. Be honest about what you need, and evaluate whether you’d be willing and able to start fresh in a new place.
2. Is the cost manageable?
You have to think carefully about costs when you run a business, not just in the immediate future but also in the long term. Analyze your business finances from the past five or 10 years. If you continued on the same trajectory, with similar profits or returns, for the next 10 years, how would the new tax legislation affect you? What if in the coming decade, the economic environment is more challenging, and the rate of return drops by 50%, or your profits decline while inflation drives up your fixed costs? Could your business sustain a higher tax structure for the foreseeable future?
Ultimately, you will need to decide whether the benefits of staying in your state outweigh the costs. The pandemic has already shown us that where you live is not as fixed as it once was. From July 2020 to July 2021, the nation’s largest metropolitan areas had declining populations, while smaller metro areas and non-metropolitan regions demonstrated significant population growth. I believe this trend will continue as more people question where they want to work and live, and opportunities continue to expand.
Now is a critical time that will shape the financial future of your business. Look at the facts and figures, and make a decision about where you want to be.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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