First Foundation Inc. had no interest in expanding beyond California until last November.
That’s when Proposition 30 passed, bringing a tax hike to households throughout the state with more than $250,000 in annual income. The increase wrought by the measure tops out at a bump of 3 percentage points on income of more than $1 million a year, to a rate of 13.3%.
Follow the money to get an early gauge on the effects of the proposition.
Or check First Foundation, which has done just that.
The Irvine-based financial services firm is set to open next week in Las Vegas, where many of its high-net-worth clients from California have settled or are contemplating relocation, primarily because of growing frustration over taxes here.
“We’ve had quite a few clients that had either already exited California or were considering it with the introduction of Proposition 30 last year,” First Foundation Chief Executive Scott Kavanaugh said. “When it was introduced, I started seriously thinking about the consequences and what that meant to us. We had never thought about branching out of state until that happened.”
Kavanaugh said many of the inquiries about taxes and moving are from the affluent in Orange County, roughly split between retirees and business owners.
First Foundation operates through an advisory unit, an insurance division and a bank that has about $891 million in assets. It has seven offices throughout Southern California.
“We still see huge opportunities in California, but we also recognize the trend of businesses and high-net-worth individuals making decisions on whether they should stay or go,” Kavanaugh said. “That’s what really motivated us to look at Nevada as a market,” where there is no state income tax.
Proposition 30 passed after a run of years when the state had annual budget deficits of $10 billion or more. Backers of the measure billed it as a way to bring a $6 billion annual increase in tax revenue. That projection was based on a static analysis that didn’t take into account the possibility that some wealthy residents might leave the state rather than pay the higher rate.
Proposition 30 took effect on a retroactive basis to cover 2012 and is slated to run through 2018.
“Weather Tax”
The prospect of rich residents fleeing the state runs counter to tradition. California’s wealthiest have long been willing to pay extra for the many natural benefits of life in the Golden State.
“It’s the ‘weather tax,’ ” said Dryden Pence, chief investment officer of Pence Wealth Management in Newport Beach (see related story, page 1; “OC’s Wealthiest” Special Report, starting on page 41).
The proposition appears to have passed the limit for some, including business owners who can see a sale or other extraordinary gain in the near future.
“These taxation issues become a tipping point on the scale,” Pence said. “We now have clients in 37 states. A lot of that is people who originally lived here and moved.”
Most wealthy residents are reluctant to talk about their view of Proposition 30. The cold reception the public gave golfer Phil Mickelson earlier this year when he hinted that he might be leaving California to avoid higher taxes has added to the chill when it comes to public comments or any debate.
Conversations with a number of wealthy residents in Orange County—all of whom requested anonymity—indicate frustration not only remains but is growing. Many question the long-term wisdom of the proposition, which could boost revenue for the state for a few years but could also be a drain for decades ahead. Also unknown: how much entrepreneurial activity that once would have sprouted in California might shift to lower-tax states.
“Many of my wealthy … friends have already left the state, and [there are] many more to follow,” said one source. “The retro tax bill will cause many more to leave out of principle. In my opinion, it will have a lasting negative impact on the state and generate less tax receipts. You capture an extra 3% for a year or two, then you lose the next 30 years of taxes at 10%. … I know of a number of people who make between $25 million and $100 million a year. They are pissed.”
Manuel Ramirez, chief executive of RJI Ramirez Jimenez International CPAs in Irvine, said he has seen “dozens [of] very influential people” leave the state in the eight months since the passage of Proposition 30—with the bulk moving from “affluent areas like OC.”
The tax made the idea of moving a routine consideration for his clients, many of whom have between $100 million and $1 billion in net worth.
“This is not what I call a loophole; it’s a standard business practice now for those multimillionaires who don’t want to be subject to a 13% tax,” Ramirez said. “It will be interesting to see how many more Californians will leave the state.”
California law considers individuals to be nonresidents if their presence in the state does not exceed six months within a year, they maintain a permanent home outside of the state, and they do not engage in any activity here other than as a guest or tourist.
The California Franchise Tax Board considers various factors in regard to the establishment of residency, including location of investments, location of vehicle registration, origination point of financial transactions and location of social ties.
“These are just the preliminary items necessary to start that conversation,” Ramirez said. “The reality is this test is done on a fact-and-circumstances basis by the state of California. You may meet the technical definition of a tax home, but it’s far more involved than just meeting a days-count and hitting a check list. The state of California has become very aggressive in pursuing these individuals who have left.”
Incline Village
The Franchise Tax Board, for instance, has monitored home addresses in Incline Village in Nevada, on the north shore of Lake Tahoe, “to see how often people collect their mail,” said Tom Campbell, dean of the law school at Chapman University in Orange.
Campbell served as one of the three members on the Franchise Tax Board in 2004 and 2005, when he was director of the state Department of Finance in the Schwarzenegger administration. He left the state’s principal tax authority to return to his post as dean at the Haas Business School at University of California, Berkeley.
“Anecdotally speaking, Incline Village has many Californians who are there six months and a day,” Campbell said. “That’s in order to establish residence in the state of Nevada. Since Nevada doesn’t have an income tax, that’s huge.”
Another state without an income tax, Wyoming—which also doesn’t have estate or corporate income taxes—is a beneficiary of California’s increased dun on the wealthy.
Silas Matthies, a Wells Fargo wealth adviser in Jackson Hole, said he has seen the influx of ex-Californians to the region since about a year ago.
“They considered the tax environment burdensome, but the issue is also what it’s going to look like down the road,” said Matthies, a 32-year veteran at Wells Fargo.
He said he has heard newcomers to Jackson Hole cite various reasons for moving, such as “the beauty, the culture, the skiing”—along with being “done with taxes.”
“I don’t have any clients who are trying to cut corners [in the process of moving] or sneaking into the state,” Matthies said. “They want to play by the rules. They know they’re not going to fool anybody. There are ways to do that. You can definitely see [the movement of people]. They’ve also had an impact on housing here. There has been some supply soaked up.”
Dave Spackman, an associate broker at Sotheby’s International Realty in Jackson Hole, said some recent arrivals “can actually pay for their home in the first year in what they save in taxes” by becoming a resident.
“A lot of people will come here to do their estate planning,” said Spackman, a Jackson Hole resident for more than 30 years.
His career has spanned development of commercial and residential properties, as well as golf communities.
“These are people who have family businesses. A lot of people here have been heads of major corporations, and they come here and establish residency before they sell. They don’t have to physically be [at their businesses] as much, and [by the time] they do retire or sell their business, they are residents here,” he said.
No Stampede
There’s no stampede at this point, according to Patricia Soldano, who heads the Western U.S. region of Palm Beach, Fla.-based GenSpring Family Offices LLC.
Soldano said she’s had conversations about moving with many of her clients, but “virtually none” has gone through with it.
“People give it a long and hard thought, but few of them actually do it,” Soldano said. “When they realize what it’s going to take, they usually don’t want to pay the price. When parents and grandparents see, ‘I’m not going to get to see my grandchildren, I’m not living in the climate I want to live in, I’m not going to see my friends,’ they really weigh whether it’s worth it.”
And some have tried life outside California and decided to return even after Proposition 30’s passage.
Kathy Gardarian, founder and chief executive of general-merchandise distributor Qualis International Inc., certainly did her share of exploring.
“I had a lot of advice from investment people who said … we can actually operate from anywhere … because we ship nationwide, to Puerto Rico, the Virgin Islands, all over the place,” said Gardarian. “It doesn’t have to be California. And we really considered it.”
Qualis, which has nine employees and nearly $30 million in annual revenue, had been in Rancho Santa Margarita for 13 years and currently operates in Riverside. It recently considered a move to Las Vegas, where Gardarian leased a condo for a year to see if moving the company there could work.
“It wasn’t like a P.O. box,” she said. “I had an office there, a high rise … this beautiful condo on the 18th floor. And we were doing a lot of research about who wants to live here, how we could make this work. But we realized a couple of things: Nobody wanted to live there.”
That included her.
“I just think that because of my mindset and the way I see the world, I had to put in the equation the quality of life. And where you live and how you live—it’s just more important to me.
“We pay a lot of taxes … and I’m not content,” Gardarian said. “Everything I pay is big numbers. I don’t have the blinders on as I’m staying in California. I’m simply trying to keep in the equation my quality of life, friends and family. I love the ocean. It’s the lifestyle you’re paying for. We feel that’s our trade-off.”
Gov. Jerry Brown has bet California will get the better end of the deal as businesses consider their future and Proposition 30. His Office of Business and Economic Development points to several studies to back up its outlook, although none of the data it sent in response to a request for comment on this story offered timely comparisons.
It’s more likely to take several years to get a firm grip on the effects of the proposition.
The one clear growth market in the meantime seems to be firms that specialize in financial services for the wealthy.
Irvine-based financial advisory firm FMV Opinions Inc. recently opened an office in Salt Lake City to serve former Californians, among others, according to Craig Primo, a managing director.
It provides capital-raising services, acquisition search and sell-side representation for companies.
“With business owners, moving is something they’ve been thinking about for years, but it happens in stages,” Primo said. “It’s been more of an evolution. It’s not so much moving out of the state [all at once], but many of our clients chose to expand outside of California first over several years.”
