Let me tell you where you live

Posted by Marc Hodak on November 20, 2007 under Unintended consequences | Read the First Comment

Derek Jeter says he lives in Florida, just because he’s there, oh, most of the time. New York says he is “domiciled” there because his Manhattan apartment, in which he spends about 30 days a year, contains “certain personal items near and dear.” You can’t make this stuff up. This matters because New York wants Jeter’s money. (Actually, they want more of his money than they’re already getting, but let’s stay on point.)

The opportunity cost for New York in this tax case is so high precisely because it’s income taxes are so high. That’s why New York is unusually aggressive in pursuing people who try to claim out-of-state residency. I guess this has worked for New York so far because wealthy people still flock there, don’t they? Well, Jeter, it turns out, has some well-off neighbors down there. Those famous New Yorkers George Steinbrenner, A-Rod, Joe Torre, and many other Yankees live in Florida. Much of the major league, and a good part of the rest of the entertainment world lives in Florida or Texas or Nevada or other states that have no income tax. That’s because rich people have an unusually high number of options about where they can live and spend their time.

The tax authorities are basically counting on “the people” regarding Jeter as greedy because he’s behaving exactly as any of us would if we were in his position. He’s legally choosing to decide for himself where to spend his money rather than voluntarily give up that decision to one of the most venal and corrupt legislatures in the country. But because headline writers can’t resist a rhyme, they have taken to calling Jeter a tax cheater, which a normal person would consider libelous under the circumstances, but public figures are expected to simply take it with a grin.

Let’s strip away the b.s. and look at the economics.

To some extent, New York is attractive to wealthy people, so they will buy homes here and shop here and go to our shows and benefits, etc. However, if New York gets too costly, the wealthy will find other places to spend more of their time and, therefore, their money. The tougher New York chooses to deal with the rich, the more worthwhile our state makes it for them to spend more time (and money) in Florida. Or in London or Dubai or Hong Kong. So, to get an extra million of income taxes, we might chase away $10 million of local spending or even more in investment. The economically illiterate will scoff and say, “No wealthy person is going to avoid New York just because of taxes”–the famous all-or-nothing fallacy that ignores the fact that all decisions are made at the margin, and all decisions, especially among the most financially successful, have an economic component.

“The people” lusting after taxes can call the wealthy selfish without a hint of irony. The press plays to the mob. The government can pretend that they can go after someone’s money without any consequences, but that game can only go on for so long. The moving vans basically go loaded in one direction between New York and Florida. The grasping hands of New York’s tax authorities is just a finger in the dyke, and an example to others to be more careful about how much time (and money) to spend in the city. For now, New York’s aggressiveness is causing the wealth to spread to lower-tax areas. (Thanks New York!) Eventually, New York will have no more choice than the Yankees or its players, and it will have to compete.