Few Albany policy fights in recent memory have generated more heat and less light than the dispute over whether to extend higher state income-tax rates on high-income households. Now Gov. Cuomo has blown a cloud of smoke into the mix.

After insisting for more than a year that any tax hikes would harm New York’s economy, Cuomo has signaled his willingness to raise taxes for the supposed purpose of improving the economy.

In the next few days, if the governor can quickly hammer out the kind of deal he’s reportedly seeking, the Legislature will return to Albany for a special session to extend at least part of the substantial temporary income-tax hike imposed on high-income households in 2009 and due to expire at the end of this year.

This will most likely come under the guise of a broader tax-code overhaul that also includes an array of middle-class tax cuts and targeted business-tax breaks (sure to be described by all concerned as “job-creating.”)

Cuomo began laying the groundwork for this change of course over a month ago, seizing on everything from the Eurozone debt crisis to the congressional deficit-reduction super-committee’s failure as evidence that New York’s “fiscal course” has “dramatically changed.” He even described the state’s revenues as “collapsing quickly”—exaggerating what’s actually been a modest slump in collections, compared to the sickening plunges of 2001-02 and 2008-09.

If Cuomo and lawmakers pass a big tax bill in a December special session, the timing will be unusual. Major tax initiatives are usually launched as part of the Executive Budget, due in mid-January for a fiscal year that starts April 1. While the current rates are due to expire at the end of this month, that’s not a deadline. In fact, every major change in New York’s personal income taxes over the last several decades has been enacted as part of a budget in spring or summer, retroactive to Jan. 1.

Apparently, Cuomo—having closed a $10 billion state budget gap without tax hikes in his first budget—is either unable or unwilling to propose the further cuts needed to avert a $3.4 billion shortfall projected for the fiscal year that starts April 1. That would explain why he’s pressing for a tax hike a full month before presenting his budget.

But what makes him think he has a shot at reaching a quick, pre-budget deal with Senate Majority Leader Dean Skelos, who’d like to maintain the pretense that he and his fellow Republicans are fiscally conservative, and Assembly Speaker Sheldon Silver, whose Democratic conference would prefer higher taxes than Cuomo needs or the Republicans could stomach?

The answer: reapportionment.

Heading into a legislative election year, members of both houses are obsessed with the subject. Cuomo’s maximum political leverage extends to mid-February, when the Legislature needs to secure his agreement to a new map.

Avoiding specifics, the governor used a long radio interview last week to stress that he’s approaching a potential revenue shortfall as “an economic problem, not a budget problem.” This at least sets him apart from “millionaire tax” advocates who would rather pretend that higher taxes are justified as a matter of “fairness.”

But there’s no escaping the contradiction at the heart of Cuomo’s spin on taxes. As he put it last week, “How do you create jobs in this state at a time when you have this national economy and the national current is running against you?”

The answer is surely not a permanent marginal-income-tax hike for a footloose class of investors, employers and economic decision-makers. Even (yet another) temporary hike would send a negative signal to the rest of the country.

In the long run, higher taxes won’t make New York more competitive. Neither will structured financial gimmickry to pay for infrastructure, or an expansion of gambling, or more economic development subsidies or a new government jobs program for unemployed youth—all included in a clump of trial balloons floated by the governor yesterday in an effort to change the subject. Prospects for another miraculous boom on Wall Street are also slim.

Ironically, while Cuomo is already inviting criticism for reneging on his promise not to raise taxes, the tax changes he’s considering won’t raise nearly enough revenue to silence his biggest critics—including the public-employee unions that are both spearheading and bankrolling the soak-the-rich tax-hike movement.

When the smoke clears from this tax battle, the political war over scarce resources will continue, spawned by unsustainable levels of spending that Cuomo has, so far, only temporarily slowed. Will this week mark his surrender?

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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