Don’t look now, but a quick deal to sidestep the federal government’s fiscal cliff could end up pushing New York state to the edge of its own precipice. Yet top New York officials seem oblivious to a wave of federal tax hikes due to hit the state’s tax base as soon as next month.

If President Obama and Republican leaders can’t agree on a way to avoid the automatic spending “sequesters” and higher taxes set to kick in Jan. 1, the consequences will be dire for the whole country. But any compromise relying heavily on soak-the-rich tax increases seems likely to draw a bulls-eye on the Empire State.

It doesn’t help that New York’s congressional delegation is dominated by cheerleaders for higher federal tax rates on the state’s own high-income earners. Then again, not even New York’s top Democrat in Washington, Sen. Charles Schumer, is fully comfortable with Obama’s definition of “wealthy,” which starts at $200,000 for singles and $250,000 for couples.

A year ago, Schumer joined Senate Majority Leader Harry Reid in proposing an alternative — a surcharge aimed at incomes of $1 million or more. But such limits wouldn’t lessen the impact on New York. Quite the contrary: The higher the income cutoff, the bigger the relative hit on Schumer’s own state.

As of 2010, New Yorkers earning $1 million or more generated 14 percent of the entire nation’s federal individual income taxes in that bracket, according to IRS data. So, 14 percent of any tax rate increase targeted solely at these top earners would come from New York.

Of course, since the federal income tax is inherently redistributive, any federal deficit-reduction deal relying on income-tax hikes is likely to hit harder in New York and other states with large pockets of wealth.

But Obama isn’t just out to raise marginal tax rates for high-income earners. He also wants to limit their itemized deductions. And while GOP leaders oppose any tax rate hike, they’re open to raising revenue by more tightly capping or even eliminating deductions in the top brackets.

Deduction curbs would hit New York harder than any state because, thanks to their heavy state and local taxes, New York’s highest-income taxpayers claim higher deductions than their counterparts elsewhere.

Say, for example, that the feds tightly limit or even kill the state and local tax deduction for taxpayers with incomes over $1 million. In that case, IRS stats indicate that New York residents alone would pay nearly a quarter of the resulting tax hike.

That’s not all. Counting commuters from other states who are taxed by Albany on wages and bonuses earned here, New York’s tax base accounted for 30 percent of all the deductions for state and local taxes claimed by Americans earning $1 million or more as of 2010.

Any deal to squeeze or drop that tax break would have huge implications for New York. Thanks in part to Gov. Cuomo’s extension last year of a “millionaire tax” surcharge, New York filers with incomes above $1 million are expected to generate 40 percent of state income taxes in 2012, or nearly $15 billion. If federal tax hikes prompt even a small number to leave New York, the state will lose hundreds of millions a year in revenues.

Obama’s approach to raising taxes — including a deductions cap — is most likely to prevail if the GOP caves quickly to a deal before year’s end. It would be far better for New York if the current tax law were extended for one more year, allowing more time to craft a bipartisan deficit-reduction deal that, at the very least, does a better job of limiting the damage to the nation and New York.

Meanwhile, Schumer and Cuomo need to realize that in pushing for 100 percent federal reimbursement of a padded Superstorm Sandy recovery bill, they’ll be increasing the deficit-ridden federal government’s need for still more revenue. In the long run, every dollar in storm recovery aid received by New York will take more than a dollar — perhaps much more — out of New York’s already stressed tax base. (Memo to New Jersey Gov. Chris Christie: this goes for you, too.)

Near the end of his career, New York’s late U.S. Sen. Daniel P. Moynihan proposed “less activism in Washington in return for more revenue at home, for whatever active measures recommend themselves to the state or municipality in question.”

His successor as New York’s senior senator would be wise to heed that advice.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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