TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, January 14, 2018

Will Law Firm Partners In L.A. & NYC Move To Their Firms' Houston Or Miami Offices Because Of The New Tax Law?

Mark Herrmann (Vice President & Deputy General Counsel, Aon), Predictions For 2018 And Beyond: Taxes, M&A, Cordray For Veep, Etc.:

I considered predicting that, in 2018, a surprising number of partners would move from the New York, Chicago, San Francisco, and LA offices of big firms to those firms’ Houston or Miami offices. Here’s why:  As David Lat has noted, the new tax law will dramatically raise the taxes of rich law firm partners who live in states with high state and local taxes. (Those partners can currently deduct state and local taxes on their federal returns. Under the new law, that deduction is capped at $10,000. Partners who are making two or three million bucks (or more) a year are paying a lot more than $10,000 in state and local taxes, so their tax bill is going way up.)

How do you fix that? If you work at a firm with multiple offices, and if you have a national practice, move to an office located in a state with no income tax! Houston or Miami, here I come!

But, no. First, you’d have to take another bar exam if you moved — neither Texas nor Florida offers reciprocity. But Tennessee! Open an office in Memphis or Nashville, waive into the bar, and take advantage of extraordinarily low state taxes!

But, no. Folks living in New York could already live in low-tax states if they cared to. And those folks are choosing to spend several hundred thousand dollars (or more) to buy homes in New York that would cost much less in other cities. If you don’t choose to live in Houston to save on the cost of real estate, would you really choose to live there to reduce your taxes?

There are other problems, too. Although it makes no sense, a lawyer located in New York generally commands a higher billing rate than the identical lawyer located in a different city. New York lawyers might kill their practices by moving to Houston. And for many lawyers (those in firms that remain pure partnerships, rather than LLCs, I think), partners pay taxes based on where the firm as a whole earns income, rather than where an individual partner lives. (For years, I lived in Cleveland, but paid taxes in New York, California, Illinois, Georgia and many other states. I think that’s because my firm was a pure partnership, although I’m sure I’ll hear from you if I’m mistaken.)

Anyway, for those reasons, among others, I’m not predicting a stampede of people changing offices from New York City to Houston.

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Texas offers admission on motion as long as certain criteria, primarily involving experience, and an ABA law school degree are met. No bar exam necessary. This information is freely available across the web, but as a definitive authority see the website for the National Council of Bar Examiners.

Posted by: Tim Kelly | Jan 14, 2018 9:02:37 AM

Mr. Herrmann is right. In general, not gonna happen.

Posted by: Mike Petrik | Jan 14, 2018 2:21:50 PM

The partner, though living and working in Houston or Miami, would still be allocated a pro rata share of the firm's income from its offices in high-tax states and pay taxes to those states.

Posted by: Edward Purnell | Jan 14, 2018 6:11:35 PM

The new tax law could even REDUCE the exodus of high-income people from high-tax states. First, market forces will increase pay in high-tax states, partially offsetting the increased federal taxes. Second, long-time homeowners in high-tax states now face unprecedented capital gains tax rates on the sale of their homes. The federal tax rate will be between 23.8 and 25.8 percent (the latter occurring in the AMT exemption phaseout range), plus a non-deductible state tax rate as high as 13.3 percent in California.

High-income long-time California homeowners virtually all have unrealized inflationary gains exceeding $500k on their modest $1 million homes. Taxes of more than 1/3 on the excess gain create a high exit penalty. People will choose not to move rather than done hundreds of thousands of dollars to the government.

I predict that the inventory of expensive houses for sale in high-tax states will continue to decline, ironically forcing expensive home prices even higher. That in turn will promote more strident complaints about housing inequality. What a mess of unintended consequences.

Posted by: AMTbuff | Jan 15, 2018 8:24:40 AM