Governor Paterson’s 2010-11 Executive Budget carries a hidden New York City personal income tax (PIT) increase for the city’s wealthiest households.

The increase would result from adoption of Paterson’s proposed changes to the state School Tax Relief program, or STAR.   Eighty percent of the $3.1 billion state STAR allocation underwrites property tax breaks, with the lion’s share going to homeowners outside New York City.  The remaining 20 percent pays for New York City income tax breaks–principally, a six percent across-the-board reduction in the city’s PIT rates, which now reach 3.65 percent on taxable incomes over $90,000.

Paterson’s budget would disallow the use of STAR money to finance a city PIT rate reduction for taxable incomes above $250,000.  In effect, this would create a new 3.88 3.85 percent city PIT bracket starting at $250,000. The result: a $143 million budget savings for the state.  Of course, unless the city makes up the difference out of its own funds, that also translates into a $143 million tax increase for high-income New York City residents.

The governor also has proposed eliminating the STAR homestead exemption for residences worth $1.5 million or more. The total state budget savings from Paterson’s STAR changes would come to $213 million, with two-thirds of that amount coming from the New York City PIT adjustment.

A more detailed description of Governor Paterson’s STAR proposals begins on page 33 of the Executive Budget Briefing Book. The legislative language begins on page 221 of the Education, Labor and Family Assistance Article VII Bill.