A “one-house budget” is the way the optimists in Albany are describing the plan by the Speaker of the Assembly, Sheldon Silver, and his fellow Democrats to raise by 1 percentage point taxes on New Yorkers who earn a million dollars a year or more. News of the plan was broken Thursday by the New York Times and the New York Post. The reason people are calling it a “one-house budget” is the reckoning that Mr. Silver is advancing the idea precisely because he knows he can’t get it past the governor and the leader of the majority in the Senate, Joseph Bruno. But we wouldn’t put our money on the optimists. Our Jacob Gershman, who predicted this situation two months ago, is reporting this morning that Assembly Democrats are calculating that in the end, Mr. Spitzer “will have no choice,” as Mr. Gershman characterizes it, “but to yield to political and budgetary pressures” and agree to a tax increase on the state’s highest earners that clocks in at something like 12%.
This couldn’t be a more important juncture for Mr. Spitzer, who ran for office promising no new tax increases, and for New Yorkers, rich and poor. Our city and state, not to mention our country, is at a fork in the road. The pace of economic growth is slowing sharply. We are in the midst of a financial and monetary crisis, and protectionist sentiment is stirring within the national Democratic Party, with both its contenders threatening to pull out of the North American Free Trade Agreement that is a centerpiece of President Clinton’s legacy. Our city is in a fight with London in respect of which is a better working environment for the risk-takers who power our financial sector — and for some of our entertainment figures as well. A real estate boom of historic proportions in the city is coming off its peak, with some of the biggest players being forced into retreat.
This is not a time when it strikes us as logical to launch an attack on the highest earners in our state. According to a cable sent to us yesterday from E.J. McMahon, the fiscal sage of the Manhattan Institute, there were, as of 2004, just fewer than 47,000 tax filers with adjusted gross income of more than $1 million. That number includes what Mr. McMahon says are 20,000 nonresidents of New York, such as regular commuters from Connecticut and New Jersey and “superstar nonresident earners like A-Rod, David Letterman, etc.” All these filers paid, Mr. McMahon says, $7.96 billion of the $26.1 billion in state income taxes. “In other words,” Mr. McMahon points out, “taxpayers earning more than $1 million made up less than 0.8 percent of all filers, but generated 30 percent of the ‘tax after credits’ in 2004.” And Mr. McMahon reckons the share in 2007 was “undoubtedly higher — probably closer to 33 percent.”
One thing Mr. McMahon points out is that a one percentage point increase would raise the marginal rate — the rate on the next dollar earned — to 11.25% in New York City. The combined top marginal rate of city and state taxes of 10.25%, Mr. McMahon says, is “already the highest in the nation,” with Vermont and California following close behind. Making the tax “a point higher, especially at this time, really raises the ante for footloose investors and firms who will be looking to reduce their overhead,” Mr. McMahon says. “The city surely will be epicenter of any ill-effects from such a tax increase.”
To those who argue that the increase won’t hurt the economy because the temporary hikes effective between 2003 and 2005 didn’t hurt the economy, Mr. McMahon points out that those increases “took effect the very same week as the big Bush tax cut of 2003, which accelerated rate cuts on wage income and slashed rates on capital gains and dividends.” We would add that this time around, the mischief being hatched by Albany Democrats could well coincide, should the Democrats accede to the White House in January 2009, with the enormous new tax increases both Senators Clinton and Obama are eying. In other words, there’s a kind of perfect storm brewing for the New York City taxpayer that could have many of those who pay the biggest share of our taxes looking for another place to live and work.
We don’t mind confessing that the editors who conduct these columns are not immune to a national mood that includes a sense that the middle class in this country is paying a radically higher proportion of its income as taxes than the super-rich are paying of their income. A sentiment of dismay, a sense of absurdity, is, we sense, starting to build that, irrespective of the cold logic of incentives, the proportions the middle class is paying of its income is just way too high. It’s higher than the richest pay and higher than the poorest pay, if they pay anything. But the way to address this injustice, if it is that, or absurdity, if it is that, is to move to a flatter system altogether. Here the wisdom lies with such flat tax advocates as Steve Forbes. We are not gaining a sense of that kind of thinking from any of the leaders in Albany, so that the only thing standing between the error being advanced by Mr. Silver and the taxpayers are a governor and a majority leader who talk about all this in the usual way and not in terms of economic principle.
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