Ronald Reagan liked to tell the story of a little boy who was such an extreme optimist that, when led into a room full of horse manure, the kid happily climbed to the top of the pile and started digging.

“What do you think you’re doing?” he was asked.

“I know there must be a pony in here somewhere,” the boy replied.

For New York taxpayers, the closest thing to a pony in the latest state budget is a personal-income-tax cut that will permanently extend — and expand — previously temporary rate reductions for “middle-class” brackets, broadly defined by Albany as ranging from $27,750 to $321,050 for married couples.

When fully implemented in 2025, the plan will have reduced current rates by 10 to 15 percent, on top of the 3 to 6 percent cuts adopted in 2011.

For a family of four with income of $100,000, the added annual savings will come to roughly $500 — hardly a life-changing number to be sure, but still big enough to make this New York’s biggest and broadest income-tax cut since the mid-1990s.

The new package, pushed by Senate Republicans as part of the recent budget deal, has the added benefit of perpetuating middle-class tax relief without automatically triggering the renewal of a temporary 29 percent surtax on individuals earning at least $1 million and couples earning at least $2 million.

First enacted (at a slightly higher rate) under Gov. David Paterson in 2009, New York’s so-called “millionaire tax” has been extended twice by Gov. Cuomo, despite his 2010 campaign pledge to let it expire. It now raises $3.7 billion a year and is scheduled to terminate at the end of 2017. Meanwhile, compared to current law, the new tax cuts are projected to save middle-class households a total of $4.2 billion a year by 2025.

That sets up an obvious new fiscal challenge: Even if Cuomo continues to hold spending growth to 2 percent a year, the reduction in revenue from lowering taxes on middle-income brackets could shove the state budget into the red by the end of the decade.

So, how to pay for it?

For Assembly Speaker Carl Heastie and other Democrats, the answer is easy: Don’t just extend the millionaire tax, but raise taxes even higher on New Yorkers who earn $5 million or more.

In fact, Cuomo and the Legislature could pay for tax cuts aimed at middle- to upper-middle-income brackets without raising rates at the very top.

One way they can do it is by pulling the plug a year ahead of time on temporary property-tax “rebate” credits for homeowners. That would save a total of $2.3 billion in 2019 and 2020, enough to cover the impact of the extended new cuts in those two years. Unlike the property-tax credit, an income-tax cut offers permanent, recurring savings to a much larger number of New Yorkers, including renters and most small-business owners.

Further revenue can be generated by eliminating New York’s plethora of business-tax loopholes and subsidies — starting with the $420 million-a-year Film Tax Credit, which is due to expire after 2019.

Filling revenue gaps with tax reform is preferable to keeping New York’s temporary top rate of 8.82 percent. It’s already among the highest in the country — nearly a full percentage point above the top rate when Gov.
Mario Cuomo left office back in 1994.

New York is currently collecting 42 percent of its personal-income taxes from the highest-earning 1 percent of tax filers, which is a heavy dependence on a relatively small number of households with volatile incomes. Among other things, it means revenues can nosedive if just a few thousand high-income earners have a bad year in the stock market — or if more of them decamp for income-tax-free Florida.

Albany still has a lot of tax reform work to do before New York can claim to have a truly competitive, fair and stable state tax structure.

But for now, at least, millions of New Yorkers have been presented with a new pony.

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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