Some financial advisers said Ohio’s taxes are too burdensome and have resulted in ultra-wealthy residents leaving the state. They support cutting taxes, and Gov. John Kasich has proposed reducing the state income tax by replacing that revenue with severance taxes on the oil and gas industry.
“Ohio remains a high tax state, and we want to lower the income tax,” said Rob Nichols, a Kasich spokesman. “For us, the high taxes are an impediment to job creation.”
But some policy analysts said research shows taxes do not cause outmigration, and they object to the governor’s proposed tax cut because they say it will mostly benefit the wealthy. Taxation of the wealthy has been a contentious national issue, and it is one of the primary points of disagreement between the White House and the Republican-controlled House in negotiations over the fiscal cliff.
About 60,280 ultra high net worth people worth at least $30 million live in the United States, up 4 percent from 58,030 in 2011, Wealth-X said.
Wealth via markets not salaries
About 1,330 of those ultra-wealthy residents live in Ohio, and the state has more members of this affluent population than all but eight other states, which include California (10,335), New York (8,595), Texas (5,890), Florida (3,650) and Illinois (2,780). About 33 states saw their ultra-wealthy populations increase in the last year.
The growth in the wealthy population is largely driven by equity market performance, said Judy Yeo, spokeswoman for Wealth-X.
“Specifically for Ohio, the performance of Ohio-based publicly traded firms and Ohio gross domestic product are main drivers,” she said.
Ohio’s real GDP grew 1.6 percent to $419 billion in 2011, and it is projected to grow by almost 3 percent this year and 3.5 percent in 2013, according to an August report by JPMorgan Chase.
This region has more wealth than most people realize, and more wealthy people live within a two-hour drive of southwest Ohio than do Washington, D.C., said Patrick Dolle, senior vice president with the Hawthorn PNC Family Wealth office in Cincinnati.
Hawthorn’s typical clients are worth about $80 million, and the firm manages about $23 billion in assets. Dolle said about three-fourths of his clients have wealth that is self-made instead of inherited.
“The money here is a little bit different here than you would see in New York or San Francisco: New York is a money-center area, and you’ll see more wealth that is created through financial services, and in San Francisco, you’ll see more wealth created through tech-type businesses,” Dolle said. “In this area, you’ll see wealth created through a combination of service businesses and manufacturers.”
The growing ultra-wealthy population is good for Ohio because most of these individuals are small-business owners who contribute to the economy and make valuable investments in their communities, said Wayne Essex, owner of Essex and Associates, a regional accounting firm in Dayton.
Ultra-wealthy people choose to live in Ohio because their businesses are located here or they want to be near their children and families, Essex said. Despite their considerable means, many ultra high net worth individuals lead fairly frugal lives, driving pickup trucks instead of luxury cars and buying unassuming homes instead of McMansions, he said.
“You wouldn’t know they were high net worth if you came into contact with them,” said Essex, whose clients have included professional athletes, lottery winners and a man who is worth $100 million and owns about nine small businesses.
But Essex said some ultra wealthy people move out of Ohio because they want to escape the state’s income tax.
“I have noticed that some of the high net worth folks, as they get a little older, relocate to states that don’t have state income tax,” he said. “If you are generating $50 million and the state of Ohio wants to take 5 or 6 percent of it, you can move to Florida or Tennessee or Texas, or at least claim residency there, and then you can save a significant amount of money.”
Some financial advisers said Ohio’s tax system is unfavorable to ultra-wealthy residents, and members of this group often choose not to live here for financial reasons.
Ohio, which is the seventh most populous state, has a lower proportion of mega-rich residents relative to its population than 33 states, Wealth-X said.
Ohio has about 11.5 million residents, which works out to about one ultra high net worth individual for every 8,647 residents. By comparison, California has one high net worth individual for every 3,377 residents. Texas has about 4,207 residents for every ultra-wealthy resident.
“The income tax in Ohio is a problem,” said Dolle, with Hawthorn PNC Family Wealth. “But Ohio has done some things that have been friendly toward business, such as changing some of the trust laws.”
The state has eliminated the estate tax, and Ohio’s effective tax rate has fallen in the last five years, advisers said. Ohio ranked 20th in the nation of its state and local tax burden in fiscal year 2010, the best level in 16 years, according to the conservative Tax Foundation, a tax research group based in Washington, D.C.
According to the foundation’s migration calculator, Florida was the top destination for Ohio residents. Between 2000 and 2010, “208,784 Ohioans renounced their citizenship and became residents of Florida, taking more than $8 billion of Ohio’s tax base with them.”
Kasich seeks tax cuts
Kasich spokesman Nichols said the governor wants to continue to cut taxes to make the state more business friendly. He said the governor plans to increase the severance tax on oil and gas extraction to pay for state income tax cuts.
“All the money that is raised off that severance tax, we want to use it to drive down everyone’s income tax,” Nichols said. “The bulk of small businesses in Ohio remit their taxes through the personal income tax, so if you can drive down the income tax, that is a shot of adrenaline into every small business in the state.”
But research indicates that the ultra wealthy do not choose where to live based on a state’s tax levels, said Amy Hanauer, executive director of Policy Matters Ohio.
“People make decisions about where to live based on where their families are, where their jobs are, and where they will enjoy their lives the most, which includes climate, the economy broadly, the quality of schools and services and other intangibles,” she said. “State taxes are a very small part of this equation, particularly for the wealthiest.”
The liberal think tank Center on Budget and Policy Priorities said higher state taxes actually bring more revenue, not more migration. “The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial new gain in revenue,” the group said in a 2011 study.
Hanauer said Kasich should increase the state’s severance tax to pay to restore some of the cut that were made to Ohio’s schools, safety forces and infrastructure. But she does not support the proposal to cut income taxes because she said it would mostly benefit the most affluent residents.
Income taxes are the fairest form of taxation because they generate revenue from the residents who benefit most from the economy and can afford the payments, Hanauer said. She said Ohioans making between $32,000 to $49,000 per year would get about $42 from the tax cuts, while the wealthiest 1 percent of income earners would get about $2,300.
Hanauer said she supports making the top tax rate 7.5 percent on Ohio taxpayers earning $250,000 or more, who account for about the top 1.5 percent of tax filers. She also supports creating a new 8.5 percent tax bracket for taxpayers who earn more than $500,000 per year. She said this would generate about $650 million per year for the state.
“Generating this revenue, from those who have benefited most and can most afford it, would allow us to invest in our people, make our communities stronger, and improve our economy,” she said.
The Ohio Farm Bureau also opposes increasing the severance tax to pay for income tax cuts. The organization said the money generated from raising taxes on oil and gas extraction should pay for local government funding, infrastructure needs, and local and state economic development.
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