The tentative tax-hike package (updated**)

by E.J. McMahon |  | NY Torch

Governor Andrew Cuomo and legislative leaders have just announced a deal on a major increase in the state income tax rates compared to what is scheduled under current law — i.e., the official breaking of the Cuomo promise not to raise taxes.

A quick look at the new bracket structure [*updated from official version to tell the full story] for married-joint filers (single filer income levels are one-half):

The top rate would expire at the end of 2014 — the next gubernatorial election year, as it happens — at which point it’s anyone’s guess whether the governor will agree to extend the tax hike yet again, or draw a real, hard line against further tax increases, as he said he would do until recently.  A third possibility is that some other changes to the tax code will be made between now and the end of 2014, pursuant to recommendations by a New York State Tax Reform and Fairness Commission (13 members, controlled by seven gubernatorial appointees including the chair), creation of which is also part of the deal.

So, for the next three years, New York will continue to have one of the nation’s six seven highest top tax rates. States with higher rates as of 2011 include Hawaii and Ohio (11 percent), California (9.3 percent) Iowa (8.98 percent), New Jersey (8.97 percent) and Vermont (8.95 percent), all of which apply their “millionaire tax” to incomes well below $1 million.  For New York City residents, the combined state-local top rate will be 12.5 percent, highest in the country.

In contrast to other states with higher rates, but as in the current temporary law, the top rate apparently will not be a marginal rate, applying to added dollars of income above the $2 million threshhold.  Rather, it will be a flat tax, applying to 100 percent of taxable income above a narrow phase-out range of $50,000.  New York will retain its unique “benefit recapture” provision, introduced 20 years ago, which phases out the benefits of graduated rate brackets for all taxpayers (regardless of filing status) with incomes between $10,000 and $150,000, converting the tax into a flat tax above that income level.

No mention in today’s release of standard deductions, exemptions, credits or other aspects of the code, so presumably they are left unchanged.  However, the income tax rates are to be indexed to inflation (at last–a good thing!), and legislative sources suggest the standard deduction will be, too. That leaves personal exemptions, which also should automatically adjust to inflation to make this a comprehensive indexing approach, as we have had in the federal code since the early 1980s.

The middle class tax cuts are valued at $690 million, generating average savings of $157 spread across 4.4 million taxpayers. The maximum savings will be $600 for the most affluent households, those with incomes between $150,000 and $300,000.  For a typical family of four, with income of 65,000, the tax cut will save $222.

The net revenue impact is put at $1.9 billion, but it’s not clear whether this includes the amount it will raise in the final three months of the current fiscal year.

Of that amount, $250 million will be used to reimburse the Metropolitan Transportation Authority (MTA) for the reduction or elimination of the MTA payroll taxes on small businesses, sole proprietors, private and parochial schools in the MTA region.  Another $50 million will go to Tropical Storm Irene flood relief, and $62 million to targeted inner city youth unemployment job creation credits.  All of which would appear to leave Cuomo with perhaps $1.5 billion towards closing his projected budget gap of $3.4 billion.

Other pieces of the pie include $10 billion accelerated (not additional) infrastructure expenditures, goosed by a blanket statutory  authorization for “design-build” contracts (another good thing). The press release mentions an expectation of up to $1 billion will be raised through “public-private partnerships,” including money from pension funds, but this won’t be in any bill — it’s something Cuomo plans to pursue.

The bottom line:

It’s basically a modified extension of the existing tax, raising a little less than half the revenue, which plugs about 40 percent of next year’s budget gap without solving the structural budget imbalance in the long term.  Cuomo will continue to face pressure for a much bigger tax hike from public-sector unions and other spending advocates, who wanted to raise $4 billion to $5 billion more and who will keep pushing for much higher taxes throughout coming years, not waiting for the expiration of this increase.

A temporary tax-hike extension confined to fewer payers is a less awful result than a permanent tax or an extension of the entire current tax, but even the temporary law will reinforce a negative impression about New York’s commitment to becoming more competitive and reining in spending.  And for the wealthiest New York City residents, of course, it means three more years with a rate in the neighborhood of 12.5 12.7 percent — really, really high, by national standards.

Oh, and sometime during the three years, no matter who prevails in next year’s national elections, the federal government in all likelihood will be raising taxes on the same people.  Congress will perhaps eliminate all or part of their state tax deduction as well — which would increase the net cost differential for New York, from their standpoint.

- E.J. McMahon is the President at the Empire Center for Public Policy.