New York’s higher tax rates, proposed in the state budget plan, would apply to wealthier residents’ total taxable income, not just the amount exceeding their tax bracket threshold, as state officials have said.
The $131.8 billion budget agreement revealed Sunday includes plans to raise $4 billion through increases in “the marginal state personal income-tax rate for higher-income filers,” New York Governor David Paterson and the Division of Budget said in a press release.
The statement wasn’t consistent with New York’s so-called tax benefit recapture rules, which deny wealthier individuals the benefit of lower tax rates on the first dollars they earn. Instead, all their income after deductions is taxed at the highest rate.
“The tax benefit recapture rules mean that New York actually collects more than other states with the same tax rate,” said E.J. McMahon, director of the Empire Center, an Albany-based group that analyzes the state’s economy, taxes and spending. “For those with high incomes, the state charges a flat tax at the highest rate.”
For a married couple filing a joint return with an adjusted gross income exceeding $350,000, the new 7.85 percent tax rate would apply to all their income, after deductions. If the new tax was a “marginal” rate, as the governor and Division of Budget said in their March 29 press release, the same couple would have paid rates of 4 percent to 5.9 percent on income between $16,000 and $40,000; 6.85 percent on income between $40,000 and $300,000, and 7.85 percent on the remaining $50,000.