The New York Post recently reported that hedge fund manager David Tepper is going to “destroy New Jersey” by moving to Florida. He will do this, the Post reported, by taking his income from high-tax New Jersey to no-income tax Florida. A New Jersey legislative analyst testified that Tepper, though not identifying him by name, makes so much that his departure would measurably reduce the state’s income tax revenue, which makes up 41 percent of its general funds. And it is a more dramatic account of something reported in other area newspapers.

This is the latest version of an old story about taxes driving migration—a fable that can throw policymakers into a panic. But the real story is more complicated – and especially in Tepper’s case.

I don’t believe taxes drive relocation decisions, except on the margin. Yes, according to IRS data more people moved out of New Jersey in 2014 than moved in. But 97 percent of New Jersey taxpayers stay put and that share is consistent across income groups. Plus more New Jersey residents migrate to high-tax New York than to low-tax Florida (although the Sunshine State is second). Even for most rich people the costs of moving--financial and otherwise--overwhelm the tax savings.  

But Tepper may be an exception, and for an unusual reason. First of all, we don’t really know anything about his actual tax bill. But for the sake of argument, let’s assume that his move will cut New Jersey’s income tax revenue by one percent or about $140 million, as the state number-cruncher implied.  That would imply that Tepper had $1.56 billion in annual taxable income (using the New Jersey’s top marginal rate of 8.97 percent).

Is it possible that he had that much? Barclays reported that Tepper took home about $4 billion in total compensation in 2009, but how much was taxable? We can’t know that but for taxes to be driving this we would have to believe he’s suddenly become tax sensitive. Remember, he stayed in New Jersey in 2009, when the state had a top income tax rate of 10.75 percent, almost two full percentage points higher than today.  So why move now?  I have a guess.

In 2017, hedge fund managers must pay tax on pre-2009 deferred compensation parked in offshore accounts. And that upcoming deadline should worry New Jersey and every other state that has both an income tax and a concentration of hedge funds.

Here, in short, is the story: In 2008, the feds blocked hedge funds with overseas operations from parking partner compensation in low-tax countries.  But the law allowed managers to defer tax on amounts attributable to pre-2009 activity until December 31, 2017– 19 months from now. That means that for the 2016 and 2017 tax years, some hedge fund managers may face huge deferred tax bills. They can only do so much to lower their federal tax. But there’s an easy way to avoid state tax—change their legal residence during the year they bring back the money and pay the tax. 

We don’t know how much is parked overseas and we certainly don’t know about any individual’s tax liability. But in 2008, the Joint Committee on Taxation estimated the law would boost federal revenue by a cool $8 billion in fiscal year 2017. A lot of that probably came back just before Congress raised federal taxes for high-income people in 2013, but Tepper’s move suggests there might be more still sitting on the beach somewhere.

This could be a significant blow for states like New York and California where most hedge funds are located.  It will be interesting to see how many hedge fund managers seek refuge in income tax-free states, at least for a year, and whether Mr. Tepper moves back to the Garden State after a brief hiatus in Florida.