The tax increases proposed by the State Legislature to pay for new spending in the 2003-04 budget are huge by historical standards, easily exceeding even the biggest tax packages enacted under Governor Mario Cuomo during the recurring fiscal crises of the early 1990s.

The total value of the Legislature’s tax package adds up to nearly $5.4 billion[1] over the next three years, based on a conservative interpretation of published estimates. That’s $1.8 billion more than the total amount of new taxes imposed during the last five years of Cuomo’s tenure as illustrated in the chart that follows.

New York State Tax Increases (in millions)

Sources: Division of the Budget, Department of Taxation and Finance, Assembly Republican Ways and Means staff

The Legislature is seeking to raise state personal income, business and sales taxes by $3 billion[2] in 2003-04 alone. By comparison, the largest tax hike enacted under Cuomo was less than half as large—valued at $1.25 billion in 1990-91.[3]

If enacted, the Legislature’s revenue bill also would have the dubious distinction of:

• raising New York State’s marginal income tax rate for the first time 1969, and
• increasing New York State’s sales tax rate for the first time since 1971.

Widening the gap with neighbors

The legislative package will also widen the disparity in tax rates and tax burdens between New York and its neighboring states. The chart below illustrates how New York State’s income tax rate will compare to those of the most economically competitive neighboring states before and after the proposed hikes.

Highest Marginal State-Local Income Tax Rate

As shown above, the increase will also have the effect of boosting the combined state and local income tax in New York City to 12.15 percent, including a city income tax increase also approved by the City Council and the Legislature. This would make New York City’s income tax rate the highest in the nation—nearly double New Jersey’s, and well over double the rates in other states bordering the greater metropolitan area.

Because of differences in tax brackets and structures, a surface comparison of state income tax marginal rates typically understates the extent to which New York State income taxes exceed those of neighboring states for filers in high-income brackets affected by the Legislature’s package.

The Legislature’s package, which includes a quarter-percent increase in the sales tax rate, would raise the combined state-local sales tax in New York as high as 8.5 percent in New York City. In neighboring states, the maximum rates are 5 percent in Massachusetts, 6 percent in Connecticut, New Jersey and Vermont, and 7 percent in Pennsylvania.

The likely result

New York has endured two cycles of major tax increases during the past 35 years—first during the late 1960s and early 1970s, and again in the late 1980s and early 1990s. In both cases, efforts to plug budget gaps with new revenues merely compounded severe and lasting economic downturns far worse than those experienced in the rest of the country. Similar results would be sure to follow the enactment of the Legislature’s latest tax increase package.

Originally Published: FISCALWATCH MEMO

Notes

1. Valued over a three-year period, the legislative package includes income taxes of $3.6 billion, corporate taxes of $750 million, and a net sales tax increase of $372 million (since the temporary rate increase is offset by a delayed renewal of the sales tax exemption on clothing purchases of less than $110), plus $630 million in insurance tax and business tax increases already proposed in the Governor’s budget. Not included are projected revenues from fees, video lottery terminals and stepped-up enforcement of existing sales tax laws as applied to gasoline and tobacco sales on Indian reservations.
2. 2 This figure includes income taxes of $1.68 billion (as reportedly estimated by the Legislature), sales taxes of $543 million, corporate taxes of $248 million, plus $561 in sales, insurance and business tax increases already proposed by the Governor.
3. In relative terms, Cuomo’s 1990-91 tax hike represented 3.4 percent of state funds spending at the time, while the current legislative tax package represents about 4.9 percent of the state funds budget, including proposed additional spending.