Southern comfort: Millionaires fleeing ever-higher New York tax smack

New York elected officials are scrambling to spin their disastrous population losses as something that can easily be reversed with just a few tweaks to the business environment, more federal aid and more spending from Albany and City Hall.

Sorry, the municipal-bond market appears to disagree.

For years, city and state bureaucrats had some decent weapons to paper over various fiscal ills. New York’s financial markets and real estate firms, which generate some of the highest incomes and tax revenues in the land, could be counted on to finance the bloat that came out of Albany and City Hall.

Despite constant bashing from class-warfare-obsessed progressives, those much-maligned millionaires and billionaires generate most of the city’s and state’s tax revenues. Rich people were willing to pay high taxes and subsidize this largesse because the Big Apple was still the cultural center of the world, and because under Mayors Rudy Giuliani and Mike Bloomberg the streets remained safe.

It didn’t hurt that rich New Yorkers could also deduct much of their city and state tax payments from their federal levies. They got another tax break by socking away their wealth in tax-free municipal bonds.

Then voters elected as mayor — not once, but twice — comrade Bill de Blasio, who took spending to another level. He also let the city slide into chaos as he freed criminals and bashed the police, even before it was fashionable among those on the utopian left.

And in 2018 President Trump capped at $10,000 a year the Blue State socialism subsidy known as SALT — the state and local tax ­deduction on federal returns. Suddenly many of those rich people who stayed in the city, sucked up the cost of living, paid most of the taxes and financed the debt began to bolt.

Wall Street giants began opening offices in places like Florida and Texas with no state income tax, and the rush for the exits continued. Census figures through 2019 show that millionaires have been leaving New York at an alarming pace.

As E.J. McMahon of the Manhattan Institute recently wrote: “In 2019, according to just-released data from the Internal Revenue Service, the number of New York tax filers with adjusted gross incomes above $1 million dropped to 55,100 from 57,210 in 2018. That 3.7% decrease came even as the number of millionaire filers nationally was growing to 554,340 from 541,410, an increase of 2.4%.”

And that was before the pandemic hit.

Who made it worse?

Of course, during COVID, de Blasio made things even worse. He shuttered the city and turned Manhattan into a playground for criminals and the criminally insane homeless, from which it still hasn’t recovered even under new Mayor Eric Adams. That caused many more rich New Yorkers to seek shelter outside the state.

Yet bean counters like State Budget Director Robert Mujica are still trying to spin what’s happening before our eyes as a nothing-burger to a compliant, left-leaning media. The rich are leaving not because of high taxes or high crime, as if the Census number are lying. 

But there’s a place where reality can’t easily be spun, and that’s the municipal-bond market.

A little background on munis: They don’t often follow the same set of rules as other types of debt, which rise and fall based on broad economic trends and interest rates.

That’s because municipal bonds are a tax haven. Even when rates rise and other bonds fall, rich people in high-taxed places (i.e. New York) can often be counted on to keep buying city and state debt.

That appeal is now eroding, traders and investment bankers who specialize in New York State and City bonds tell me. The most logical explanation isn’t simply too much supply or higher interest rates. The appetite from millionaires should still be there: City and state taxes continue to hit the wealthy harder than ever. 

Plus there’s no immediate worry of budget shortfalls and bond-rating downgrades that depress prices ­because both city and state coffers are flush with federal COVID-relief money.

Less need for NY munis

The only explanation, market professionals tell me, is a growing number of rich people who no longer need to seek New York ­munis as a tax haven — because they now live in Florida.

The Bear Traps Report, a research platform, crunched some numbers for me and came up with the following: Yields on Florida munis have often been higher than those from New York because there was more demand for the Empire State debt and less demand for tax-free bonds in a low-tax state like Florida.

That began to shift over the years, but most significantly in early February of this year. Now New York bond yields are higher than Florida’s just as the Empire State’s rich-resident tax base has significantly thinned.

As one bond trader told me: “The muni market right now is pretty heavy; there is a sell-off in bonds because of higher rates but demand is definitely off from the 3 million rich people who have decamped to Florida.”

The problem, if it persists, isn’t good for either Mayor Adams or Gov. Hochul, who so far have shown little inclination to properly address the millionaire-population drain.

Both talk a good game on crime, but neither has fully reversed the defund-the-police policies of their predecessors. They also talk a good game about keeping rich people here but continue to tax them out of the state.

If history is any guide (see the 1970s fiscal crisis) it won’t end well. Once the federal COVID-relief money dries up, Hochul and Adams will be looking at a shrinking tax base, much higher debt-service costs and big budget problems — just what the markets are foreshadowing. Politicians may spin, but municipal-bond prices don’t lie.