Mamdani’s Audacious Estate Tax for New York

In a stunning political development, Zohran Mamdani has emerged as the most popular politician among Democratic voters in New York State, in large part because his campaign to tax the rich resonates everywhere within New York City and Albany, except with Governor Kathy Hochul who still frets that his full array of proposed corporate, business, and “mansion taxes” (extra taxes on sales of expensive residential realty) sought to close the City’s huge $5.4 billion budget gap will drive away the very people on whom the City’s economic development depends. Yet throughout this warped political debate, the Mayor acts and speaks as if he can have his cake and eat it too. His view is that higher taxes will fuel “the economic engine” of New York, by increasing public investment, so that no pretended tradeoff between growth and redistribution poses an obstacle to the City’s growth.

Governor Hochul is, of course, correct, and so too is the Washington Post when it joins the chorus of Mamdani boobirds by noting that “America’s most famous mayor wants to give retirees another reason to flee his city.” The object of controversy is Mamdani’s new, seemingly inexhaustible proposal to triple the New York estate tax, which will attract the support of the “tax-the-rich” crowd but will also spark fierce opposition from the minority of well-heeled citizens who may be prepared to vote with their feet if it is enacted. The new proposal states:

New York City Mayor Zohran Mamdani wants to slash New York state’s estate tax exemption threshold by almost 90%, from a more than $7 million limit to $750,000, and raise the top estate tax rate from 16% to 50%. 

That statement is not quite correct because the New York estate tax currently also has a “cliff” by which the stated exemption is removed entirely once the taxable estate exceeds the allowable exemption by five percent, so for high net worth individuals, New York imposes a flat tax of 16 percent, which covers not just New York residents but also any former resident who leaves behind real and personal property inside the state.

This movement runs counter to the general trend on estate taxes; today, only 12 states have an estate tax. The effect of his proposal on the combined federal and state taxes would be (once the federal estate tax kicks in at $15 million per person) 70 percent. The first fifty percent to the state, followed by a forty-percent tax on the remaining fifty percent. The Mayor provides no economic analysis to support his proposal, but it is delusional to think that a tax increase of this magnitude will not spark a significant exodus of high-net-worth individuals from the state. Thus, in 1982, California abolished its estate tax because interstate competition from Nevada, which did not have one, led many California residents to move there to avoid the tax. When they left, California also lost all the revenues from income, property, and sales taxes generated by its departed residents, so the California countermeasure stemmed the exodus. New York and California have both apparently forgotten that lesson because they lead the nation in lost residents, where a toxic array of other regulations and taxes have driven citizens to the more hospitable climes of Florida and Texas.

Those movements are just a foretaste of what is likely to follow. Ordinary people do not pick up stakes en masse simply because taxes and regulations are more attractive elsewhere. There are many local advantages that are not transferable to other locations, including everything from the weather to educational systems to cultural amenities, as well as a dense network of family, friends, and business connections at their current location. It therefore follows that the shortfall in local public attributes must be sufficient to offset those nontransferable assets. And just that is the case with a tax that could increase the burden on a person, say, with a $25 million estate, give or take, who finds that this state death tax could be an additional $12.5 million. 

At this point, all the wheels turn faster. It is an open secret that many business types, including academics, will pick up and move their stakes to a state with no income or estate tax once their children are grown, either to continue working or to retire outside the grasp of New York and other high-tax venues. As such, the states face a double loss: current income, sales, and property taxes, as well as the future estate tax. Of course, there is always a risk that some miscalculation will trap persons who want to delay their departure until the last moment, after which it may be too late to do much estate planning. But there are steps that they can take before death. They can increase the level of tax-exempt gifts (currently $19,000 per donor/donee for all children, grandchildren, and other favored individuals during life). They can pick up additional support obligations that also transfer wealth outside the estate tax. They can set up their charitable giving to siphon off additional funds. They can enter into various family joint ventures, where the wealth may be gently skewed toward younger individuals or those who live out of state, so that the decline in the tax base continues. Of course, many people will not pursue these options, but high-wealth individuals will, so again, the revenue loss will minimize their exposure both during life and after death.

It is also possible to find ways to mitigate exit costs, for people need not leave a state solely as a result of uncoordinated individual decisions. When Ken Griffin decided to relocate Citadel from Chicago to Miami, he took with him a large portion of the firm that had once lived and worked in Illinois. When Goldman Sachs moved a large fraction of its business to Texas, the same thing happened. Thus, the exit of firms need not be an all-or-nothing proposition, but it can proceed in stages. At the same time, the entry of new businesses into New York is likely to slow dramatically, as any business that hopes to grow would hardly choose New York when the rest of the business is moving in the opposite direction. These are dynamic forces that charismatic Mamdani will be able to hold back with the same success that King Canute had in holding back the tides. There is a deep bipartisan lesson here: in the end, the only states that will continue to generate unsurpassed wealth know that individuals and firms respond to incentives that will minimize their exposure to higher taxes and regulations when they receive nothing in exchange. Trump has given his back-handed recognition of the force of these evasive measures by postponing some tariffs, reducing others, and adding costly subsidies for some groups, like farmers, who have been hammered in the export markets.

Politicians like Mamdani are often as incorrigible to legislative correction, so quickly the discussion turns to questions about constitutional constraints that can kick in to stop political majorities. These are welcome for tariffs whose capacity to disrupt ordinary business and financial markets is clear, and for all estate and inheritance taxes, which have the capacity to disrupt the orderly transmission of intergenerational wealth. And it is the same culprit in both cases, namely, the imposition of artificial constraints on property rights. The first of these was raised in late nineteenth and early twentieth century Supreme Court cases as Magoun v. Illinois Trust Co. (1898) and Knowlton v. Moore (1900) that together stand for an accepted position at the time that “[t]he right to take property by devise or descent is a creature of the law, and not a natural right.” That definition is utterly at variance with the traditional accounts of ownership, to include the right to possess, use, and dispose during life or at death, so that the law does not create a gap in ownership into which the state (and even the federal government) can assert its own brand of property rights.

Once that correction is made, the state cannot simply announce that all formerly private property is its own, but must, as I have long argued in Takings, instead give some normative account, which is the direct consequence of repudiating the Lockean position that the state does not create property rights, but instead uses its derived power from the governed to protect them by giving to the parties taxed benefits in kind greater than the tax imposed.  The strong objection to forming a democracy, as opposed to a republic, in the early days of the country was that a bare majority could vote to confiscate the wealth of a minority unless institutional constraints were put in place. The resumption of this long-term debate is set in motion by Mamdani’s audacious proposal. It is up to cooler heads to see that his wild ambitions can never be converted into law.

Richard Epstein is a senior research fellow at the Civitas Institute at the University of Texas at Austin.