A recent New York Post article by Carl Campanile and Kate Sheehy, “NY legislature proposes nearly $7B in new taxes on wealthy” reported on the New York State Legislature’s proposals for almost $7 billion in new and increased taxes on businesses and wealthy individuals.

The timing was significant. New York was emerging from one of the most severe economic shocks in its history, yet lawmakers were considering substantial increases in taxation on precisely the individuals and businesses whose mobility gives them the greatest ability to respond to changes in the tax environment.

The Assembly’s March 14 budget announcement confirmed that its one-house proposal contemplated nearly $7 billion in additional revenues. Among the measures were higher personal income-tax rates on high earners, a new capital-gains surcharge, additional corporate taxes and other measures directed at businesses and higher-value property.

The issue is not whether wealthy individuals or profitable businesses can contribute more to the public finances. The more fundamental question is what happens when a jurisdiction continually increases the price of remaining there.

The Reality of Tax Competition

Legislators frequently overlook a fundamental economic reality: capital is mobile, and increasingly so are the people who control it.

When tax burdens become excessive relative to competing jurisdictions, individuals and businesses have an economic incentive to reconsider where they live, invest, employ people and maintain their principal operations. The decision is not always immediate, and taxation is never the only factor, but the cumulative effect can be significant.

New York has particular exposure to this dynamic because so much of its tax base is concentrated among high earners and businesses operating in highly mobile sectors. A December 2020 analysis by the Tax Foundation noted that New York already had exceptionally high individual and business tax burdens and warned that higher taxes could accelerate outmigration in an increasingly mobile economy. The study estimated that New York had already lost nearly one million residents and approximately $51 billion in annual adjusted gross income through interstate migration between 2010 and 2017.

That is the paradox policymakers need to consider. A higher tax rate does not necessarily produce a proportionate increase in tax revenue if the tax base responds by changing its behaviour.

The Wealthy Are More Mobile

The wealthy are particularly sensitive to this issue because they generally have greater geographic flexibility.

A high-net-worth individual may be able to establish residence elsewhere. An entrepreneur may relocate a company. An investment manager may move operations. A family office can be structured across jurisdictions. Capital can increasingly be deployed internationally without requiring the owner to remain physically tied to the jurisdiction in which that capital was accumulated.

This theme has appeared repeatedly in my earlier analysis of wealth migration, including US Taxes Set to Rise, Rich Indians are Set to Leave, and Options for Wealthy Nigerians.

The issue, therefore, is not simply whether New York can extract additional revenue from wealthy residents today. It is whether the state can continue to do so without encouraging some of those residents—and the businesses, employment and investment associated with them—to establish themselves elsewhere.

The Broader Wealth-Tax Debate

The New York proposals also form part of a much broader political movement toward greater taxation of wealth and high incomes.

As I discussed in Democrats Push for a ‘Wealth Tax’, the United States had not historically adopted a conventional annual wealth tax, although the concept had become increasingly prominent in American political debate.

New York’s approach was somewhat different, relying principally on higher income and capital-gains taxation rather than a conventional annual tax on net wealth. Economically, however, the distinction does not eliminate the underlying issue: the more aggressively a jurisdiction taxes accumulated wealth and the income generated by capital, the greater the incentive for highly mobile taxpayers to reconsider their connection to that jurisdiction.

This is especially important where competing jurisdictions impose materially lower taxes.

The Risk of a Shrinking Tax Base

There is a tendency in political debate to view tax increases in isolation: if a new tax is expected to raise $1 billion, policymakers focus on the additional $1 billion.

But the correct calculation is broader.

What happens to existing income-tax revenues if high earners leave? What happens to property-tax revenues if businesses relocate? What happens to employment, consumption, investment and transaction activity? What happens to the professional-services sector that exists because wealthy individuals and businesses are present?

These secondary effects are difficult to measure precisely, but they are economically real.

The Tax Foundation’s analysis made precisely this point in its examination of New York’s fiscal position: the state had a particularly concentrated tax base, with high-income taxpayers responsible for a substantial proportion of income-tax collections. The report warned that policymakers needed to balance immediate revenue requirements against the longer-term consequences for New York’s competitive position.

This is why the argument that “the wealthy can afford it” is incomplete. The relevant question is not simply what a taxpayer can afford to pay. It is where that taxpayer will choose to live, invest and conduct business once the relative cost of doing so changes.

New York’s Competitive Position

New York possesses extraordinary economic advantages: financial markets, human capital, infrastructure, universities, cultural institutions and a deep professional-services ecosystem. Those advantages give the state considerable pricing power.

But pricing power is not unlimited.

The same December 2020 Tax Foundation analysis observed that New York’s financial sector was particularly important to the state’s economy and warned that taxes directed at highly mobile financial activity could shift jobs and tax revenue elsewhere.

The pandemic made this consideration even more important. Remote working demonstrated that many activities previously assumed to require a physical presence in New York could be conducted from elsewhere. For wealthy individuals, entrepreneurs and professional firms, geography had become less restrictive at precisely the moment when tax competition was becoming more significant.

That should have caused policymakers to ask a different question:

“How can New York make itself more attractive to capital and talent rather than progressively increasing the cost of remaining there?”

Taxation and Wealth Migration

The consequences extend beyond New York.

The United States is itself a collection of competing jurisdictions. Florida, Texas and other states without a broad personal income tax provide wealthy Americans with alternatives within the same country, while retaining access to the world’s largest economy and financial system.

For a New York resident contemplating a move, the decision does not necessarily involve leaving the United States. It can simply involve changing state residence.

That makes state-level tax competition particularly powerful.

A jurisdiction can therefore find itself in the unusual position of raising taxes in order to increase revenue while simultaneously making competing jurisdictions more attractive to the very taxpayers it is attempting to tax.

The Strategic Lesson

The lesson is not that governments should never increase taxes.

Governments require revenue, and taxation is an essential part of any functioning state. Nor should every instance of migration be attributed to taxation alone. People move for employment, family, housing costs, quality of life, regulation, security and many other reasons.

The more important point is that tax policy changes incentives.

When a jurisdiction is already expensive and heavily taxed, another increase may have a disproportionately large effect on behaviour at the margin. For a person with substantial wealth, the question is not whether an additional tax is affordable. It is whether the benefits of remaining in that jurisdiction justify the additional cost when credible alternatives exist.

New York’s policymakers should therefore be careful about assuming that the state’s wealthiest residents represent an inexhaustible source of additional revenue.

They are taxpayers, but they are also economic actors.

They can move.

They can restructure.

They can invest elsewhere.

And increasingly, they can choose where they want to live.

NY Beware

New York has spent decades building one of the world’s most sophisticated concentrations of financial capital, entrepreneurship and high-net-worth individuals.

That concentration generates enormous tax revenues.

But it also creates vulnerability.

The very people who contribute disproportionately to the tax base are often those with the greatest capacity to relocate when the economic environment becomes less attractive.

The danger is not that every wealthy New Yorker will leave because of one tax increase. The danger is that policymakers gradually create an environment in which more people decide that leaving makes economic sense.

Once that process begins, it can become self-reinforcing. Capital follows opportunity. Businesses follow capital. People follow businesses and opportunity.

New York should therefore be asking whether another round of taxation will strengthen its economic foundation—or slowly weaken the very tax base on which the state depends.

The answer may determine whether New York remains the destination for American wealth, or becomes one of the places from which that wealth increasingly looks elsewhere.