New York’s state tax base would take another huge hit under U.S. Rep. Charles Rangel’s plan to impose a surtax on high-income households to finance additional health care spending over the next 10 years.

Our special report last fall on the tax plans of the presidential candidates explained that changes in federal tax rates have a direct impact on the income tax revenues of New York State, and of New York City as well.

New York State and New York City jointly levy their own income taxes, which apply largely to same taxable incomes that New Yorkers report on their federal returns. Thus, their revenues can be significantly affected by any federal tax changes that lead to changes in the taxable income base.

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, and by choosing from a wide variety of legal strategies for shifting or sheltering income in tax-exempt investment. Conversely, when marginal rates fall, upper-bracket taxpayers have less incentive to hide or shift income.

Our conclusion: Changes in taxpayer behavior induced by Obama’s plan to restore the pre-2001 income tax rates in the top two brackets would reduce New York State personal income tax revenues by $800 million to $1.1 billion.  New York City would see its income tax revenues shrink by $144 million to $285 million during the same period.

Depending on whether health care “savings” targets are met, Rangel’s proposal alone could raise tax rates as much as Obama’s budget plan, with effects similar to those described above — just in time for the projected explosion of state budget gaps in 2011.

The Tax Foundation estimates New York State’s top effective tax rate–federal and state–could reach nearly 57 percent if Rangel’s proposal is enacted in combination with the scheduled rise in top bracket rates in 2011.

P.S. — And, also per the Tax Foundation, the effective top rate in New York City would rise to just under 59 percent.   Yow!

About the Author

E.J. McMahon

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

Read more by E.J. McMahon

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