Cities, Urban Design, Remote Work, Working From Home, Taxes, COVID-19, New York, Los Angeles, San Francisco, Austin, Miami
It doesnâ€™t take very many ultra-wealthy Americans changing their address to wreak havoc on citiesâ€™ finances.
The 1% are on the move. Tom Brady and Gisele BĂĽndchen bought a $17 million teardown on Miami Beachâ€™s ultra-exclusive Indian Creek island. Jared Kushner and Ivanka Trump, who are said to have plunked down $30 million for a lot, may be their neighbors. Recently it emerged that hedge fund Elliott Management Corp. is moving its Manhattan headquarters to South Florida, and that private equity giant Blackstone Group Inc. will open an office there. Goldman Sachs Group Inc. is reportedly considering relocating part of its asset management operations to the region, too. Itâ€™s not just happening on the East Coast. In the last few months, the venture capitalists David Blumberg and Keith Rabois decamped from the San Francisco Bay Area to Miami. All of this prompted Silicon Valley venture capitalist and startup guru Paul Graham to tweet:
I keep hearing about Miami. At first these mentions seemed like outliers, but there are so many it's starting to look more like a trend.
Austin is having something of a moment as well. Elon Musk is trading Los Angeles for the Texas tech hub, where his new $1 billion Cybertruck factory is under construction. Larry Ellison announced that Oracle would move its headquarters there from Silicon Valley. DropBox Inc. CEO Drew Houston and Splunk Inc. CEO Douglas Merritt reportedly took steps to relocate from the Bay Area to Austin, too.
Some residents of pricey cities like New York, L.A. and San Francisco might say good riddance to the uber-rich whom they blame for growing unaffordability and inequality in their cities. But their cities will pay a literal price for their departures. It doesnâ€™t take very many one-percenters changing their address to wreak havoc on citiesâ€™ finances.
When the billionaire hedge funder David Tepper left New Jersey for Miami Beach in 2015, he left a crater in New Jerseyâ€™s budget that experts estimate was upwards of $100 million annually. (Interestingly enough, Tepper recently moved back home to the Garden State.) A whopping 80% of New York Cityâ€™s income tax revenue, according to one estimate, comes from the 17% of its residents who earn more than $100,000 per year. If just 5% of those folks decided to move away, it would cost the city almost one billion ($933 million) in lost tax revenue.
The large differentials in our current system of state and local taxation enable the mega-rich to save millions, and in some cases tens of millions or hundreds of millions of dollars a year, simply by moving from higher-tax states, most of them blue, to lower-tax states, which are typically red. Homesteading provisions like those in place in Florida do not even require them to spend a minimum number of days in the state. They just have to be careful not to spend too many days in the high-tax states like New York and California where their businesses are. New Yorkâ€™s threshold, for example, is 184 days.
Of course, at least in the short term, there are some cities that are benefiting from these migrations. And you canâ€™t really blame the cities and states that are luring these people away. In a place like Miami Beach, where property taxes amount to 1.5-2% of the assessed valuation of a home, someone who buys a $30 million home will pay half a million dollars or more in annual property taxes. But it leaves the losers with large holes in their budgets.
None of this spells the end of superstar cities like New York and San Francisco. In fact, many, if not most, of the New York hedge funders and Bay Area venture capitalists are moving just themselves, not their core businesses. Many of the companies they invested in â€” and their employees â€” will likely stay right where they are. Very little actual work or production is being relocated. Whatâ€™s really changing are the addresses of those who own and control the capital.
In the long run, citiesâ€™ ability to attract new generations of innovative and creative talent will ensure their financial survival. But if policies donâ€™t change, their budgets will suffer in the meantime, and their least-advantaged people and neighborhoods will bear the brunt of it as budget cuts and austerity measures eliminate key services. If things get bad enough â€” as they did in New York in the 1970s â€” it could take them quite a while to restore their budgets.
While the pandemic has helped to accelerate remote work and potentially the geographic flexibility it allows,