Will Millionaire Taxes Send UHNW Clients Packing?

If you can’t eat the rich, tax ‘em.

As states grapple with tighter budgets, driven in part by federal cuts to programs like Medicaid, education and food assistance, lawmakers are increasingly looking to their wealthiest residents for revenue. That has sparked familiar speculation about whether high earners will flee to low-tax states like Texas or Florida. But advisors say relocation is rarely the first, or best, response.

“This is all just proposed, so until we know what the final legislation is, we don’t know if it’s going to affect our clients or not,” said Scott Schwartz, CFP, at OnePoint BFG. “We’re telling clients to just not react to it.”

The Taxman Cometh

The obvious reality is that wealthy people have a lot of money — shocker. While higher taxes are never welcome, proposed hikes are unlikely to upend millionaires’ finances, Schwartz told Advisor Upside. “I pay a lot of money in taxes, my clients pay a lot of money in taxes,” he said. “I don’t like it, but I don’t think about it. It’s just part of life.”

Some of the state tax hikes include:

• California’s Billionaire Tax Act, which would impose a one-time 5% tax on residents with net worths of at least $1 billion. 
• Rhode Island’s proposed 3% surtax on incomes of more than $640,000.
• Washington Governor Bob Ferguson’s potential 9.9% tax on personal incomes over $1 million. 

If a client wants to manage taxes more effectively, Schwartz first looks to options such as increasing charitable donations. “I’m certainly not going to recommend a client leave their family and friends and move to Texas just to save,” he said.

What’s My Motivation? Some advisors even worry that these tax policies could dampen ambition and innovation if taken too far, said Gabriel Shahin, founder of Falcon Wealth Planning. He told Advisor Upside he suspects there will only be a few people “who want to change the world regardless of the impact on personal wealth.”

Others worry these proposals are just the first dominos to fall toward higher taxes on the middle class. “It looks like a ‘Trojan Horse’ for broader taxation,” said Marcos Segrera, a CFP with Evensky & Katz Wealth Management.