Tuesday, February 28, 2006

Snowbird Flies, Taxman Cries: A New York Tale

This morning’s BNA Daily Tax Report includes this little gem, an administrative law judge’s decision holding a former partner in the New York firm of Coudert Brothers, who retired to Florida, was not subject to tax on retirement payments he received from his former firm. The decision is found here:


Despite the fact that retirees earn the money for their retirement in the states where they worked all their lives, federal law (4 U.S.C. § 118) preclude the states from reaching out and taxing that income for a nonresident. This allows retirees who are rational utility maximizers to make some decisions about where they retire based on the marginal tax rates in that state. Fortunately for the snowbirds, Florida doesn’t have an income tax, making this decision easier for many folks. (I doubt all the New Yorkers would move to North Dakota just for tax savings, with no offense intended to the North Dakotans among our readers. My point is simply that it is very cold in the winters there.)

This heightens tax competition for the retiree. Some might think it unfair that the rust belt states, such as Ohio and Michigan, effectively lose tax dollars to the sunbelt. But Congress has spoken: no soup for you if your citizen moves elsewhere. Keep in mind that, in addition to all of the property and sales taxes a senior citizen generates, they also generate, on average, significant medical spending, some of which comes in the form of federal medicare dollars. So, the savvy competitors might take this into account in considering how much they can get from attracting retirees to their tax haven.


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