screen-shot-2013-04-10-at-45717-pm-2003612

President Barack Obama’s proposed federal budget revives his proposal to cap the value of itemized income tax deductions for the highest-earning 3 percent of taxpayers, a category starting at $200,000 of taxable income for single filers and $250,000 for married filers.

Under current law, if you’re in the 39.6 percent tax bracket, you get a 39.6 percent discount on the cost of items for which you claim deductions, assuming you’re not subject to the Alternative Minimum Tax (and if you make enough to be in that bracket, you’re probably beyond AMT range). Obama would reduce it to 28 percent, the highest tax rate in lower brackets.

By far the largest deduction claimed by high-income taxpayers, especially those earning $1 million and more, is for state and local taxes.

So guess which state’s tax base (with the possible exception of California’s) would be hit hardest by this change?

I answered the question in this op-ed last December:

Deduction curbs would hit New York harder … 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 … 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.

The idea of curtailing itemized deductions for high-income taxpayers was backed by Mitt Romney in last year’s presidential election and was being seriously discussed as part of Obama’s “fiscal cliff” deal with congressional Republicans late last year—but when the bill emerged from the Senate, that provision was nowhere to be found.

What influential senator from a high-tax state, which also benefits inordinately from the tax-exempt treatment of municipal bond interest, might have had a hand in that change?  Oh, yeah—him.  But can Chuck Schumer effectively block his president’s wishes and get away with killing the deduction cap again?

You may also like

Highlights of Albany’s Bloated and Belated Budget

The state Legislature approved the last of nine budget bills Thursday evening, 38 days after the start of the fiscal year. Here are some highlights of the fiscal impact of final spending plan: Top lines Read More

Forcing Homes to Switch to Electric Heat is not a Good Policy

  New York has some of the most ambitious climate goals in the country: electric school buses by 2035, zero emissions electricity by 2040, etc. Why New Yorkers, who already consume less energy per capita than any state (other than Rhode Island), s Read More

After Tariff Shock, Albany Should Face its New Fiscal Reality

This year, for once, state lawmakers' failure to pass a timely budget could prove to be a stroke of luck. When President Trump rolled out his on April 2, Albany leaders had not agreed on a spending plan for the f Read More

New York’s Proposed ‘MCO Tax’ Would Generate a Fraction of What Lawmakers Expected

The Hochul administration's proposed "MCO tax" would generate far less than the $4 billion in extra federal aid anticipated by state lawmakers when they approved the concept this spring, according to documents obtained by t Read More

Hochul Hides the Specifics of a Looming Tax on Health Insurance

The Hochul administration has requested federal approval for a multibillion-dollar "MCO tax" on health plans without announcing the move or providing details to the public. As by l Read More

New Yorkers’ Health Costs Spiral as Officials Take Credit for ‘Savings’

The latest round of health insurance premium hikes announced by New York regulators adds to evidence that state policies are drowning consumers instead of helping them. Late last mo Read More

Budget Deal Slows Medicaid Growth But Plants Seeds for Future Spending

The growth of New York's Medicaid spending is projected to slow but not stop as Governor Hochul and the Legislature effectively split their differences over health care in the newly enacted state budget. Read More

Albany Lawmakers Push a $4 Billion Tax on Health Insurance

Legislative leaders are proposing an additional $4 billion tax on health insurance plans in the upcoming state budget – but withholding specifics of how it would work. Read More