As expected, President Obama’s latest deficit-reduction package calls for a return to pre-2001 income tax rates and new limits on itemized deductions for filers with incomes starting as low as $200,000 — essentially the same thing the president proposed two years ago.

Back to the future for NY?

For high-income earners, Obama’s proposed combination of federal rate hikes and deduction limits would raise New York’s net (i.e., post-deduction) state and local income tax rates their highest levels ever — higher, even, than after Nelson Rockefeller jacked up New York’s top rate to 15 percent in the early 1970s, as Josh Barro and I explained in this 2010 City Journal article. By curtailing the interest deduction on municipal debt, the Obama plan would also raise the cost of borrowing for state and local governments — an especially important for heavily indebted states like New York.

Then there’s the not-so-little matter of the elasticity of income in response to a big federal tax hike, and the resulting impact on the state’s revenue:

Economists and tax-policy analysts have long recognized a link between taxpayer behavior and changes in marginal rates, especially in higher income brackets, where taxpayers have more control over the timing and nature of their incomes. When rates rise sharply, taxpayers respond by working and earning less, by shifting their “domicile” (or main residence for tax purposes) to lower-tax jurisdictions, and by using legal strategies to shift or shelter income in tax-exempt investments. Conversely, when marginal rates fall, upper-bracket taxpayers have less incentive to hide or shift income.

Based on a U.S. Treasury Department analysis of taxpayers’ responses to the Bush tax cuts, a 200[8] report by the Manhattan Institute’s Empire Center for New York State Policy estimated that a return to the pre-2001 top federal tax rates would lead to annual revenue losses of $400 million for New York State and $72 million for Gotham. An econometric model developed for the Manhattan Institute by Boston’s Beacon Hill Institute predicted a slightly larger loss for the state but a smaller one for the city.

We are still awaiting the details of Obama’s reported plans to propose an added levy on incomes above $1 million, but the forthcoming “Buffett Rule” seems likely to include some further limitation on deductions for filers with incomes of seven-figures or more — which, needless to say, are more numerous in New York than in most other states.

In addition to all this, there’s the plan to finance federal health care reform law with other tax increases, including an added Medicare wage tax of 0.9 percent on earnings above $200,000 for individuals and $250,000 for married couples, and to slap another 3.8 percent on interest and dividends collected by higher-income couples.  These changes also will have a disproportionate impact on states like New York, adding to the likely revenue losses projected in Empire Center’s 2008 report.

About the Author

E.J. McMahon

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

Read more by E.J. McMahon

You may also like

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

As migrants flow to NY, so does red ink 

The influx of foreign migrants to New York could cost the state $4.5 billion more than expected next year, Governor Hochul today warned.  Read More

The Bill Arrives: NY Faces $9B Budget Gap Next Year 

New York’s outyear budget gaps, the shortfall between planned state expenses and state tax receipts over the next three years, has exploded to more than $36 billion, just-released documents show.  Read More

NY school spending again led US, hitting all-time high in 2020-21

Public elementary and secondary school spending in New York rose to $26,571 per pupil in 2020-21, according to the latest Census Bureau data Read More

A Tale of Two Levies

New York school districts are getting record levels of state aid. But how many are using it to cut taxes? Read More

Albany’s Belated Budget Binge 

State lawmakers have begun passing the bills necessary to implement the state budget for the fiscal year that began April 1. Read More

Courts set a limit on NY’s tax reach

Just in time for tax season, New York State's tax agency just lost a major legal challenge to its policy of pursuing maximum income tax payments from wealthy vacation homeowners—even when they live elsewhere. Read More