Tax flight: Millions lost as wealthier residents leave Maryland

Originally published in the Capital Gazette

MPPI in the News Tom Marquardt | Special Correspondent Oct 20, 2013

Wealthy by most standards, they lived in a waterfront home on Kent Island and enjoyed crabs at local restaurants and boating on the Chesapeake Bay. During colder months, they relaxed under sunny skies at their condo in Bonita Springs, Fla.

Then, as Dave passed retirement age, he turned his business over to his son and thought about how much he could save if he just changed his address to Florida.

So, five years ago, the Snells extended their Florida stay to six months and a day, changed their legal domicile to that state — and deprived Maryland of taxes on a sizable nest egg.

“Even though I only wanted to spend five months in Florida, I stayed considerably longer just to avoid exorbitant taxes in Maryland,” Snell says. Eventually, the Snells sold their Maryland home and moved entirely to the Sunshine State.

They are not alone. According to the Tax Foundation — a nonpartisan tax research organization based in Washington, D.C. — only seven states lost more taxable income than Maryland between 2000 and 2010.

Relying on figures from the Internal Revenue Service, the foundation calculated the net loss of taxable income to Maryland in that decade as about $5.5 billion. Assuming this was taxed at a modest 6 percent, it would mean an annual revenue loss of $330 million.

No one knows how much of the tax flight is among senior citizens, but the anecdotal evidence is piling up.

Brokers, tax consultants and real estate agents report a throng of their clients moving out of Maryland to save money on taxes and leave more to their children. This is costing the state millions in tax revenue.

“No doubt about it,” says Ed Mullen, a partner and CPA with Mullen, Sondberg, Wimbish & Stone in Annapolis. “The number has increased significantly in the last three to five years.”

Some retirees are keeping their homes in Maryland but establishing legal residency in other states. Others have sold their houses here. But both groups are having a substantial impact on the state’s tax revenue.

The numbers are particularly glaring among Maryland taxpayers older than 65 who have reported a next taxable income of more than $500,000. According to the Maryland Comptroller’s Office, the number of taxpayers in this category declined steadily between 2007 and 2010 — from 2,161 to 1,543.

It’s not known how many of those taxpayers dropped out of the elite category because of a loss of income from the recession. But it is known how much money left Maryland during that time — so the recession doesn’t account for all of it.

The difference in net state taxes was more than $79 million during that period. As the economy improved, the numbers greatly improved in the 2011 tax year, but still did not reach the level of 2007.

Although the Tax Foundation report shows more people leaving Maryland than moving into it, their ages or the reasons for their departure haven’t been studied. Those reasons could include job opportunities, better weather — or a more favorable tax climate.

“Who knows why they are leaving? But is it something that caught my eye? Yes,” says state Comptroller Peter Franchot. His office is responsible for collecting taxes in Maryland.

Mullen says younger, less wealthy clients have moved to Delaware to stay close to Maryland but spare themselves its income tax.

But wealthy retirees with no business ties to Maryland, he says, have moved to warmer states. Florida is their top choice, according to IRS figures. Residents have to live in a state 183 days to declare it their legal domicile.

The savings to taxpayers can be substantial — unlike Maryland, states Florida has not income tax and neighboring Delaware generally has lower income tax rates. Maryland’s tax on higher incomes is more than 8 percent, when Anne Arundel County’s piggyback tax is included.

Also, Maryland is one of only two states with both an inheritance tax and an estate tax. The estate tax rate varies, but the state says it averages 9.9 percent on most estates exceeding $1 million. It can be as high as 16 percent.

Bill Hufnell, owner of Bay Point Wealth Management in Annapolis, says the issue is on the agenda of nearly every one of his clients.

Hufnell says it is particularly significant for clients who wish to cash in pensions or exercise stock options when they leave a company. They can save a lot of money by moving to a state without an income tax before they make those moves.

Mullen says some of his clients have saved $15,000 to $20,000 a year in income tax by moving. The savings in estate taxes are even more substantial because Maryland didn’t follow the IRS in 2012, when the federal government raised the minimum level for a taxable estate to $5.12 million.

Mullen says some of his clients have saved $15,000 to $20,000 a year in income tax by moving. The savings in estate taxes are even more substantial because Maryland hasn’t followed the federal estate tax laws over the past several years, which have  raised the minimum taxable estate to $5.25 million in 2013. In Maryland, taxes are paid on any individual estate greater than $1 million and $2 million for a married couple.

In Maryland, taxes are paid on any estates greater than $1 million — and such estates aren’t unusual in the state. In fiscal 2012 the state collected nearly $197 million in estate and inheritance taxes.

Franchot agrees that Maryland’s attitude toward these taxes is worrisome. “How could you look at this with any degree of common sense and say we don’t have to make an adjustment?” he says.

House Speaker Michael E. Busch, D-Annapolis, says Maryland’s top ranking in education and high level of services come at a price.

“There are tons of people still floating into Maryland because of the quality of life, education and health care systems,” Busch says. “If you are very wealthy and can go to Florida for six months and come back here to live, people have that option. But that’s like 1 percent of Maryland residents.”

Franchot, pointing to the recent increases in gas and alcohol taxes, says the state needs to stabilize its tax policy instead of changing it every year.

Even though the General Assembly in 2007 raised the sales tax from 5 percent to 6 percent, revenue rose just 0.7 percent last year. Maryland’s collective tax burden — 10.2 percent, according to a Tax Foundation analysis — is the 12th-highest in the nation.

Last year the governor approved a bevy of fee increases, plus higher taxes on gasoline and alcohol.

Although Franchot wants retirees to keep their money in Maryland, he says the jobless rate concerns him more because it may be forcing younger people out of the state. He points to withholding receipts, which he uses as a barometer of the job market and state’s fiscal health.

These fell short of budgeted amounts by more than $171 million in fiscal 2013. This fiscal year they are being written down by more than $324 million.

The state’s unemployment rate is usually far better than the national average, but the gap closed recently. As of June, it was 7 percent in Maryland versus 7.3 percent in the nation as a whole.

“This is what keeps me up at night,” Franchot says. “We have to focus on quality of life and good-paying, middle-class jobs.”

Hufnell says his clients are often emotionally torn between saving money and leaving a state they love.

“These are people who are born in Severna Park, lived all their lives in Severna Park, love Maryland and are true Orioles fans,” he says. “But they get that tax return and see the numbers. It breaks their heart.”

Because Maryland has the highest median income in the nation, legislators may be less concerned about tax migration. Eight of those on the Forbes 400 list of wealthiest Americans are from Maryland.

In 2012 the legislature wrestled with Gov. Martin O’Malley’s proposal to raise taxes on millionaires. It found that the state has more than 5,000 millionaires of all ages with an average taxable income of $2.6 million — but that number had dropped from a high of 6,899 millionaires in 2007.

The legislature approved a 5.75 percent rate on taxpayers who earn more than $500,000 a year.

Christopher Summers, president of the Maryland Public Policy Institute, says Maryland had an enviable tax policy prior to 2007, but changes gave the state a “perception of a toxic tax environment” in which businesses and wealthy individuals are eager to leave.

“They are pushing accumulated wealth out of the state. People are willing to work here, but not dumb enough to die here.”