Will They Leave?

Over the years, the Democrats in Albany have regularly made noise about increasing the rates at which New York State taxes the income of its wealthier residents.

With the election of Governor Cuomo in 2010, and with the Party’s supermajority in the State Assembly since then,[i] two of the three components necessary for securing such a tax increase were seemingly in place.[ii] Unfortunately for the Democrats, the Republican Party held a majority of the seats in the State Senate during the first eight years of Mr. Cuomo’s tenure.

That changed when the Democrats took back the State Senate following the 2018 elections.[iii] The Party’s success in New York – and in the House of Representatives – was due, in no small part, to the enactment of the Tax Cuts and Jobs Act[iv] by the Republican-controlled Congress in 2017, and its cap on itemized deductions for state and local taxes, not to mention what was perceived as its pro-big business, pro-wealthy bias.[v]

At that point, the Party seemed poised to enact the desired rate increases; after all, it held a supermajority in the Assembly, a majority in the Senate, and the Governor’s office.

However, New York Democrats encountered some unexpected opposition to such tax increases within their own Party: Governor Cuomo, himself,[vi] who stated he would veto any “tax the rich” legislation because it would drive many of the State’s wealthier residents – along with their considerable commercial activity and taxable income – out of New York.[vii]

In light of Mr. Cuomo’s stance, and probably in recognition of the fact that they lacked a supermajority in the State Senate that could override any veto,[viii] the State Legislature and the Governor danced around the issue of a tax that would target affluent New Yorkers.

A Year to Forget – or to Remember?

As we entered 2020, Democrats across the country – including, of course, the Empire State[ix] – prepared to take on Mr. Trump and the Republican Party in the November elections. What no one could have anticipated was the “assistance” they received from the coronavirus pandemic and, in particular, from what many have characterized as the Federal government’s mishandling of the crisis.

As a consequence of the severe economic disruption that followed the stay-at-home orders issued by governors and mayors across the country in an attempt to contain the spread of the COVID-19 virus, thousands of businesses had to close their doors, and millions of Americans (including approximately two million New Yorkers) suddenly became unemployed.

Under such dire economic circumstances, the public reasonably expected their state and local governments to provide them with a safety net, in the form of various programs and services. However, those same circumstances caused a significant decline in the tax revenues on which state and local governments relied for providing this safety net.

Given their revenue losses, and because of the Federal government’s continuing failure to grant them any meaningful financial assistance,[x] most states – including New York, which faces a budget deficit this fiscal year of approximately $9 billion[xi] – are now faced with some difficult decisions regarding many state-sponsored programs and state-provided services:[xii] either reduce funding for these programs and services, eliminate or scale back some of them, find other sources of revenue to support them, or try some combination of the foregoing.

Tax the Rich

In New York, at least, it didn’t take long for some to identify sources of additional revenue.

There are over 570,000 millionaire households in the State,[xiii] and approximately 120 residents who are billionaires,[xiv] on whom the Democrats have long sought to impose higher taxes, and many of whom have done remarkably well during the pandemic, in contrast to the thousands of households that are struggling to survive or that are dependent upon some form of government assistance.
For example, a State Senate bill (S.7378) introduced earlier this year proposes to increase the top marginal income tax rates as follows: 9.62% for individuals with up to $5 million of taxable income during a taxable year; 10.32% for those with taxable income of up to $10 million; and 11.85% for taxpayers with more than $100 million of taxable income.[xv]

The highest rate now in effect, at 8.82%, applies to individuals with taxable income in excess of just over $1 million. It is worth noting that this rate was enacted as a temporary, three-year, increase in response to the fiscal crisis brought on by the Great Recession over ten years ago. Before then, New York’s top rate was 6.85% for individuals with taxable income in excess of $215,400. Well, since that time, the “temporary” millionaires’ tax has been extended several times; it is now scheduled to run through 2024.

November 2020 Elections

Up until now, over the course of Governor Cuomo’s tenure, such proposals have played well for political effect, but the likelihood of their enactment has been remote because, as indicated earlier, the Governor has opposed such taxes, claiming that they would drive away many of the State’s wealthier residents; in any case, the Democrats in Albany did not have a sufficient number of votes in the State Senate to override the Governor’s veto of any such proposed legislation.

As we know, the political environment changed last month when New York Democrats won a supermajority in both chambers of the State Legislature. This development has already informed the Governor’s stance with respect to increasing taxes, or imposing new taxes, on wealthier New Yorkers.

Last month, Mr. Cuomo indicated that, in the absence of Federal fiscal assistance, the State would have to increase taxes “on the higher end.”[xvi]

Just last week, he stated that tax increases on the wealthy were likely even if Congress approved an aid package for the states, though he did not provide any specifics.[xvii]

Proposed Wealth Tax

Although the Governor may not be ready to discuss the details of the tax increases that he envisions, there are others in his Party who have something very specific in mind.[xviii]

There has been a lot of talk recently about reviving interest in a bill (S.8277-B) that was introduced in the State Senate on May 1st of this year,[xix] and that is now with that chamber’s Budget and Revenue Committee. The proposed legislation – referred to as “the billionaires’ tax” or as the “mark-to-market” tax by its supporters – would impose an entirely new kind of tax,[xx] one that is imposed annually and that is based upon the year-to-year net increase in the fair market value (the unrealized gain) of the assets of a wealthy resident.[xxi]

How Does It Work?

Under this bill, generally speaking, individual New York residents with assets having a net worth of at least $1 billion dollars on the last day of a taxable year will be required to recognize gain as if each such asset was sold for its fair market value on that date.

The net gain from these deemed sales, up to a so-called “phase-in cap” amount –equal to a quarter of  the worth of a taxpayer’s net assets in excess of one billion dollars –  would be included in a resident’s New York gross income and, thereby, be subject to the State income tax. As indicated earlier, the highest individual income tax rate in New York is currently set at 8.82% for that portion of a taxpayer’s taxable income in excess of $1 million.

This process would be repeated every year, after increasing a taxpayer’s basis for an asset by the amount of gain recognized by the taxpayer with respect to such asset in the preceding year.[xxii] If an asset were actually sold by the taxpayer, the gain arising from the sale would be determined using the same adjusted basis.

Of course, there are several elements in this proposal that need to be considered, some of which may offer planning opportunities.[xxiii]


First, who is a resident for purposes of the new tax?

Basically, anyone who is domiciled in New York, or who is a statutory resident of the State.

Both of these concepts have generated volumes of litigation. The question of domicile is inherently subjective. The requirement introduced by the Gaied decision,[xxiv] that a taxpayer have a “residential interest” in a property before it may be treated as a permanent place of abode, has added an element of subjectivity to the statutory residence (day-counting) test – it remains to be seen how the courts will interpret this requirement.

If the proposed tax is enacted, the stakes will become that much higher for an otherwise covered taxpayer who tries to change their resident status.[xxv]

Assets Covered?

Second, what assets would the resident be treated as having sold?

Basically, all of the real property, tangible personal property (for example, works of art), and intangible personal property that is owned by the taxpayer.

Intangibles include shares of stock in any corporation – whether public or private, taxable or pass-through – membership interests in any partnership or LLC, securities, other financial instruments, and “other assets.”

In other words, it appears that no class of assets would be excluded from the reach of the tax.

Where the asset is located would be irrelevant to the imposition of the tax – the asset need not be situated in New York (for example, a ski house in Colorado).

Moreover, the tax would reach assets held by the taxpayer’s spouse or minor child, or by an estate or trust of which the taxpayer is a beneficiary, thereby precluding tax avoidance by taxpayers who would try to drop below the $1 billion threshold by, for example, making gifts of property to a spouse, or by acquiring property in the name of a child or trust.

Even more surprising, assets contributed by the taxpayer to private foundation (basically, a tax-exempt, non-publicly supported charitable corporation or trust described in Section 501(c)(3) of the Internal Revenue Code)[xxvi] with respect to which the taxpayer is a “substantial contributor”[xxvii] would also be considered in determining the individual’s tax liability.

Finally, in what may be described as an extension of New York’s now-infamous three-year claw-back rule,[xxviii] any assets gifted by the taxpayer (whether to another individual, a trust, or to a charitable organization) within the past five years will be accounted for in determining the individual’s tax liability as if the individual still owned the gifted property.[xxix]


As indicated earlier, the taxpayer would be treated, every year, as having sold their assets for an amount equal to their fair market value. The bill explains how these assets are to be valued.

In determining the fair market value of an asset, the bill purports to utilize the standard of the hypothetical willing buyer and willing seller; i.e., what price would a hypothetical buyer and seller agree upon, where both have knowledge of the relevant facts, and neither is under any compulsion to sell?[xxx]

However, the bill immediately eviscerates that standard by stating that no discount will be taken into account for purposes of valuing an asset that represents a minority interest in an enterprise, or an interest that cannot be easily sold.[xxxi]


Just imagine how burdensome it would be to administer, and to comply with, this mark-to-market tax. Consider how many different types of assets a covered taxpayer probably owns. Consider how many assets such an individual must own. Consider the challenge of determining the fair market value of such a taxpayer’s real properties and of their interests in non-publicly traded businesses.

Anyone who has any experience in buying and selling closely held businesses, or in advising the owners of such businesses as to their gift and estate tax planning, knows how difficult it is to establish the fair market value of such an asset.

They are also familiar with how drawn-out and expensive the process may be for defending one’s reported value for an asset against the government’s asserted value for the asset.[xxxii]

And how will these assets and their values be reported every year? It will require an army of appraisers and accounting professionals to handle the reporting, substantiation, and other compliance requirements for the tax.[xxxiii]

Then there is the State’s enforcement of the new tax. Notwithstanding there are “only” 120 billionaires in New York, the State will likely have to dedicate considerable resources if it is to establish a system that will facilitate the collection of this never-before-tried tax.


The easiest, most practical way to avoid the proposed wealth tax will be to abandon one’s New York domicile, and to establish a new domicile elsewhere.

If the taxpayer maintains a permanent place of abode in New York, they will have to demonstrate that they were not present in New York for more than 183 days during any taxable year.

Yes, the taxpayer can remain in New York and willingly, but begrudgingly, pay the tax. Or they can engage in annual valuation contests with the Department of Taxation and Finance, but that’s not much of a plan – it’s more like torture.

Alternatively, the taxpayer can try to give away appreciating assets, perhaps by selling – rather than gifting – them to trusts of which the taxpayer is treated as the owner for tax purposes (a grantor trust), and which are held for the benefit of their adult children, in exchange for interest-bearing notes, thereby avoiding a taxable gift, the five-year claw-back rule, and a taxable sale.[xxxiv]

By shifting an asset’s potential for appreciation to the beneficiaries of the trust, while also freezing the value of the taxpayer’s own assets at the face amount of the notes, the taxpayer may be able to reduce the amount of tax owed.

At the same time, even though the beneficiaries of these trusts may, themselves, be subject to the tax, query whether it may be possible to “multiply” the benefit of the phase-in cap by spreading assets among family members or trusts, thereby reducing the overall tax imposed upon the family unit.[xxxv]

The Reality Is . . .

How will New York’s approximately 120 billionaires react to yet another tax, especially one as complex, as intrusive, and as expensive as this tax promises to be?

Yes, these individuals are billionaires, they can afford anything. By the same token, they can also choose to live anywhere. Do the bill’s sponsors really believe that these taxpayers would so readily give away their property – or, perhaps more accurately, that they would allow others to simply take it?

Or perhaps the sponsors believe these billionaires will do anything for the “privilege” of remaining in New York and, in particular, in New York City?

I wouldn’t count on it. After all, why would I want to remain in a place where I am resented for having succeeded, notwithstanding my contributions to the State in terms of the amount of income tax I pay, the amount of estate tax I will pay, the charitable contributions I make, and the dollars I spend as a consumer which keep many others gainfully employed?[xxxvi]

Where would it stop?

Which brings me to the real issue: what is to keep the State from extending the tax beyond billionaires?

This threshold for application of the proposed tax is arbitrary, and politically motivated. If the goal is to make the “rich” pay their “fair share,” why limit the target population to 120 individuals? How much of a difference would such a tax make in the grand scheme of New York’s $190 billion 2021 budget?[xxxvii]

However, there are approximately 570,000 millionaires in New York. The math is pretty straightforward – the State and, according to some, the goal of “fair” taxation would be better served by imposing the proposed tax on both billionaires and millionaires. In other words, it would be only a matter of time before the tax was extended to also cover these taxpayers.

How would these folks react? What would happen to the State’s economy if large numbers of them left for friendlier tax environments?

The top 1% of New Yorkers reported over $130 billion of income on their tax returns in 2018. They paid 47% of all income taxes in the State.[xxxviii] They were also major benefactors of the State’s many charities, hospitals and institutions of higher learning.[xxxix] How does one replace this support?

The reason these folks are in New York, and have been willing to pay a premium for being here, is because of the cultural attractions, restaurants, and other amenities it offers – or should I say offered? When will these once again become a staple of life in New York?

An estimated 420,000 New Yorkers – many of the affluent – left their New York City apartments for more suburban areas when the pandemic hit the City. As these individuals and their families have acclimated to working remotely, Mr. Cuomo has asked them nicely to return to the City or to the State, while many Democratic lawmakers have pressed him to tax them rather than coddle them.[xl] Query how many have returned? Or plan to return in the face of higher taxes and social unrest?

They Were Already Leaving

Wealthy New Yorkers have long been relocating to other states in order to escape the State’s already high income and estate taxes. For example, Carl Icahn moved to Florida last year, before COVID-19 and the current condition of the City; others have announced their intention to do so, while still others have stated they will be moving their business away from New York.[xli] How will the introduction of a wealth tax influence those who, thus far, have been on the fence about moving?

In recognition of the “out-migration” from New York to Florida that has occurred to-date, and of what is expected to be the continued flow of wealthy individuals from North to South, Goldman Sachs is said to be considering South Florida as the new home for its asset management division.[xlii]

What will the introduction of a wealth tax do?

Hello, Albany? Are you listening? Is anyone there?

[i] Indeed, New York Democrats controlled the State Assembly for many years prior to Mr. Cuomo’s election.

[ii] “Two out of three ain’t bad,” as Meat Loaf sang, but it’s not enough if you have a legislative agenda to pass.

[iii] For the first time since 2010.

[iv] P.L. 115-97.

[v] Specifically, the Act was perceived by many as benefitting primarily the wealthy and big business. Witness, for example, the doubling of the Federal unified gift and estate tax exemption amount, and the reduction of the corporate income tax rate from a top rate of 35% to a flat rate of 21%.

What’s more, its $10,000 temporary cap (through the end of 2025) on the itemized deduction of state and local taxes was especially bothersome for higher income New Yorkers, who already pay some of the highest taxes in the country.

It’s ironic, isn’t it, that the Democrats want to increase taxes on the “wealthy” in New York, while also supporting the removal of the cap on the itemized deduction of those taxes at the Federal level. Because most itemizers are relatively affluent, this change would effectively shift some of the New York tax burden borne by more affluent New Yorkers to individuals living outside the State. In other words, the Federal government would partially subsidize the increased New York tax. https://www.taxlawforchb.com/2020/11/new-yorks-post-election-tax-environment-for-business-owners/.

[vi] As I write this, it has been reported on many of the national news services that Mr. Biden is considering Mr. Cuomo for U.S. Attorney General. https://www.forbes.com/sites/tommybeer/2020/12/12/biden-reportedly-considering-gov-andrew-cuomo-for-attorney-general/ . Should Mr. Cuomo be nominated, and then approved by the Senate, New York’s Lieutenant Governor, Kathy Hochul, would step into the governor’s office. Query whether she shares Mr. Cuomo’s position with respect to taxing the rich.

[vii] In 2019, Mr. Cuomo responded to calls for additional taxes on the rich: “Tax the rich. Tax the rich. Tax the rich. We did that. God forbid the rich leave,” he said. https://buffalonews.com/news/local/serious-as-a-heart-attack-cuomo-warns-of-falling-state-revenue/article_7dcb9125-1e1c-5d36-8c7c-89b085a909bb.html .

In 2020, after the State began to feel the effects of the pandemic, a number of State and NYC lawmakers urged the Governor to support tax increases for the wealthiest New Yorkers. In response, the Governor said that he did not support the idea, claiming that the ultra-rich would just leave New York. https://gothamist.com/news/cuomo-refuses-raise-taxes-billionaires-because-theyll-just-move-next-door .

[viii] An override requires a two-thirds vote of the Assembly and a two-thirds vote of the Senate.

[ix] I’m surprised that the same folks who have defaced or called for the removal of many public monuments, or who have sought to expunge or rewrite history, have not yet demanded that the State drop its nickname, “The Empire State,” because it evokes the era of American expansionism, which they believe should be condemned, and for which the country should apologize.

[x] Yes, the McConnell-Pelosi standoff continues into its ninth month; the former will not sign off on aid to state and local governments, and the latter will not consent to protecting employers from Coronavirus-related litigation. They have irresponsibly ignored the more practical members of their respective parties.

[xi] A projected deficit of $59 billion through 2022. https://www.wsj.com/articles/new-york-faces-59-billion-revenue-shortfall-11603198313 .

[xii] Some of which, it must be said, are more important than others – at least in the eyes of some, and therein lies the issue; what is important to one group may be wasteful to another.

[xiii] Second to California in the country. https://www.kiplinger.com/slideshow/investing/t006-s001-millionaires-america-all-50-states-ranked/index.html .

[xiv] First in the country. https://www.thecity.nyc/2020/10/13/21515162/proposals-to-tax-the-rich-new-york .

As an FYI: there are 52 billionaires in Florida, and approximately 430,000 millionaire households.

[xv] https://www.nysenate.gov/legislation/bills/2019/s7378 .

[xvi] https://www.foxbusiness.com/politics/ny-cuomo-income-tax-hikes-federal-aid .

[xvii] https://www.foxbusiness.com/politics/cuomo-ny-tax-hikes-congress-aid .

[xviii] AOC ramps up her crusade on billionaires by backing tax on New York’s richest residents | Daily Mail Online.

[xix] May Day. Mere coincidence?

[xx] The first of its kind in the nation, and one that shares features with Ms. Warren’s wealth tax proposal.

For purposes of our discussion, let’s set aside the very real possibility that the proposed tax is unconstitutional.

[xxi] https://www.nysenate.gov/legislation/bills/2019/s8277 .

[xxii] Speaking of accounting for taxes already paid, the bill is silent as to its interaction with New York’s estate tax (with its top rate of 16%), which is calculated on the basis of the fair market value of a deceased taxpayer’s assets. Query whether a deceased taxpayer’s estate will be entitled to a break, for purposes of calculating the decedent’s New York estate tax, for the income taxes paid by the taxpayer during their life on the appreciation in the value of their assets. After all, the estate tax is based upon the fair market value of an asset, and the proposed income tax is based upon the annual increase in the fair market value of the asset.

[xxiii] Hope you’re sitting down.

[xxiv] Gaied vs Tax Appeals Tribunal, No. 26 (N.Y. 2014).

[xxv] If this bill ever becomes law, Carl Icahn will certainly be among the “former” New York billionaires to whom the State will seek to apply the tax by claiming that he failed to abandon his New York domicile and to establish a new domicile in Florida.

[xxvi] IRC Sec. 509(a).

[xxvii] IRC Sec. 4958 (the intermediate sanctions rules).

[xxviii] Which generally brings back into a resident decedent’s New York gross estate any property gifted by the decedent during the three-year period ending with their date of death. This rule applies through the end of 2025.

[xxix] You probably need to take a deep breath at this point, but wait – there’s more.

[xxx] The same standard applied for purposes of the Federal estate and gift tax.

[xxxi] So much for using valuation discounts to get below the $1 billion threshold.

[xxxii] The only winners would be the tax attorneys (myself included), the appraisers, and the accountants.

[xxxiii] It should be noted that the bill was intended to apply beginning in 2020. The taxpayer could elect to pay the tax for that year over a five-year period, with a high rate of nondeductible interest.

[xxxiv] Mr. Biden’s tax plans may put an end to the beneficial interplay of the grantor trust and gift/estate tax rules. Oh Georgia!

[xxxv] If this tax is ever enacted, I’m certain New York would eventually eliminate this option.

[xxxvi] One of these affluent individuals may even don a costume, as Bruce Wayne did, in order to fight crime.

[xxxvii] Signed yesterday by Gov. Cuomo. Budget and Actuals | OpenBudget.NY.Gov .

[xxxviii] https://www.thecity.nyc/2020/10/13/21515162/proposals-to-tax-the-rich-new-york .

[xxxix] Those in the top 1% of the income distribution provide about a third of all charitable dollars given in the U.S., and the wealthiest 1.4% are responsible for 86% of the charitable donations made at death. https://www.philanthropyroundtable.org/almanac/statistics/who-gives .

[xl] New York needs to raise taxes to plug $8.7billion black hole due to COVID-19, Gov. Andrew Cuomo says | Daily Mail Online . That makes perfect sense, right? “Please come back so I can tax the crap out of you.”

[xli] Paul Singer’s Elliott Management, for example. https://www.nytimes.com/2020/10/22/nyregion/paul-singer-florida.html .

California is facing a similar challenge: (1) Last week Elon Musk announced that he was changing his residency from California to Texas. (2) Similarly, Oracle announced that it was moving its headquarters from California to Texas, citing California’s high taxes, steep living costs, and the shift to remote working. (3) Earlier this month, Hewlett Packard announced it was moving its headquarters from California to Texas.

[xlii] https://dailyvoice.com/new-york/nassau/news/covid-19-goldman-sachs-eyes-move-to-florida-in-latest-business-blow-to-ny-amid-pandemic/799203/ .