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New York To Boomer Business Owners: Get Lost

New York Gov. Andrew Cuomo is, like me, a peak-year Baby Boomer, so he knows as well as I do that destiny is often demographics. But Cuomo and his legislative counterparts lost sight of that fact when they made their back-room tax deal this week.

The package is a masterpiece of artfully mixed political messages. It is in reality a tax increase, focused on the highest-earning New Yorkers (and out-of-staters who work on Wall Street), but it can be sold as a tax cut, which is the only way to get it through the state Senate’s narrow Republican majority. It can be portrayed as a cut in payroll taxes, but it retains the state’s infuriating triple-header of tax compliance burdens, with separate forms, deadlines and payments for income taxes, payroll taxes and, in the New York City region, “transportation” taxes on both business incomes and payrolls.

Most brazenly, the deal’s backers call it a job-creation measure, keying in on the small tax cuts that most of the state’s households will receive and a couple of token initiatives on job training and minority hiring incentives. In the real world, the deal continues the New York tax system’s pronounced bias against private business and business owners. Even Cuomo indirectly acknowledged this, by calling for a longer-term (but undefined) overhaul of the state’s tax structure. Don’t hold your breath.

The overall message to business owners, especially business owners contemplating retirement, is not mixed, however. It is crystal clear: Get out while you can.

I don’t think it is the message Cuomo intended to send, but the governor grew up in a political household and has worked on the public payroll for virtually his entire life. From his point of view, taxes really are a source of jobs, beginning with his own. Not that I think Cuomo is looking to benefit personally from the state’s tax collections; governors only get laid off by the voters. I just think he can’t hear the message that he is sending to private sector counterparts like me.

So I am going to spell it out for him here.

I assume the governor thinks I should be satisfied by the new tax package. Because I make less than $2 million per year, the expiration of the state’s three-year “millionaire’s tax” would mean my marginal tax rate would drop from just under 9 percent to 6.85 percent in 2012. I have never made anything close to $2 million in any year in my life, so I’m not supposed to be concerned about the top rate, which would continue until 2014, with no assurance about what would happen thereafter.

But I am concerned, for several reasons. First, a business founder like me usually hopes to sell his business someday. This creates a one-year spike in income. If the business has prospered for several decades (mine is now 19 years old), it will often sell for several million dollars or more. That’s more than most people ever see, and nobody is complaining, but it represents an additional return on the business owner’s decades of labor, attention, skill and risk. Income tax rates are oblivious to this. So if I remain a New York resident when the business is sold, the state will make itself my 9 percent partner on the sale.

And $2 million just happens to be the latest eligibility threshold for the state’s top rate. From 2009 to 2011 it was only $500,000. It would be silly to assume that the state would hesitate to return to lesser “millionaires” like me for more money if the need arises.

But that’s not all. New York remains in the minority of states that still collect an estate tax, and it does so at draconian rates, reaching 12 percent on estates just over $5 million and 16 percent on estates above roughly $10 million. At the maximum rate, which many successful business owners’ families might pay, the state will have taken roughly 9 cents of every dollar of profit from a business sale in income taxes at the time of the sale, and then nearly 15 cents of that dollar (16 percent of what is left after income taxes) via the estate tax. For the most successful entrepreneurs, New York cuts itself in for about a quarter of the business founder’s lifetime equity.

I can move to income- and estate-tax-free Florida – and I have. But New York’s phenomenally aggressive definition of who is a “resident” means that if I really want to avoid the state’s incursions, I would be well-advised both to get my business out of New York during my lifetime, and to dispose of any New York homes, even something I might own that my relatives occupy.

I can contemplate, then, moving our Westchester office to Connecticut or New Jersey. Those states, where I have never had a domicile, also look attractive as a place to have a metro area residence. My firm’s well-paid New York employees would end up paying most or all of their income taxes to the neighboring state where I relocate our office. In the end, New York stands to lose all the income taxes I would pay for the rest of my life, all of the tax on my estate, and much of the income taxes my employees pay. As a Baby Boomer entrepreneur, I am still young enough to take these steps over a reasonably long period of time, but old enough to know that I should be thinking about these things right now.

That’s how New York’s have-it-all approach to taxation will play out in real life in the private sector. Cuomo may not be able to see it, but it is perfectly clear to me, and to our fellow 50- and 60-somethings who don’t get the taxes we pay returned to us via our pay checks.

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