New York’s Legislature should avoid adding any tax increases to the proposed 2011-12 state budget, E.J. McMahon of the Empire Center for Public Policy testified today before the Joint Legislative Fiscal Committees.

McMahon noted that the state has enacted more than $7 billion in tax and fee hikes over the past two years, including a temporary 31 percent increase in New York’s marginal income tax rate. He said permanent enactment of last year’s temporary personal income tax increases “will harm New York’s economic growth prospects and further undermine the stability of its revenue base.” The Legislature should commit to phasing out the tax hike on schedule in 2011, he said.

In addition to avoiding new tax hikes, McMahon said, the Legislature should immediately “index” the state’s income tax brackets, deductions and exemptions to rise with inflation, as the federal government has done since the early 1980s. This, he said, would protect state taxpayers from further unlegislated tax increases resulting from inflation-driven “bracket creep.”

McMahon also urged the Legislature to “start planning for further tax reforms and reductions that can promote stronger economic growth in New York.”

“Over the long term, the state should be aiming for a combination of broader tax bases and lower tax rates in its major tax categories—personal income, corporate and sales taxes,” he said. “The enactment of Governor Cuomo’s local property tax cap, while not directly a state revenue issue, also would be a significant step towards improving the overall tax climate in New York.”

The state also needs to adjust its estate tax to reflect the recent agreement by Congress and President Barack Obama to restore the 35 percent federal estate tax, McMahon said. While the federal tax exempts estates under $5 million, the state tax is imposed on estates worth more than $1 million. As a result, New York’s effective estate tax rate has been estimated at 45.4 percent, tied for sixth highest in the nation, while retirement havens like Florida, Georgia, South Carolina and Virginia have no estate taxes.

“We should adjust our exemption to the $5 million federal level and commit ourselves to accommodate federal changes after 2012 in ways that do not penalize the estates of New York residents, including many family-owned businesses whose future in the Empire State may be jeopardized by our current policy,” McMahon said.

The Empire Center is a non-partisan, independent think tank. McMahon’s complete testimony can be downloaded here.