New York’s economy and tax base, already sagging in a deep recession, would take another huge hit under Rep. Charles Rangel’s plan to impose a surtax on high-income households to finance a new government-run health plan.

Rangel and his House Democratic colleagues want to begin voting as soon as this week on a plan to raise the federal income-tax rate by 5.4 percentage points on individuals with incomes above $800,000 and couples earning more than $1 million, and by 1 to 1.5 percentage points on individuals with incomes starting at $280,000, all effective in 2011.

And those lower rates will double by 2013 if the plan doesn’t yield the projected health-care savings.

Taken together, the House health tax, President Obama’s own tax plan and Albany’s recent, supposed “temporary” tax hike would bring New York’s effective marginal tax rate on top earners to nearly 57 percent, compared to just over 45 percent only a year ago, according to the Washington-based Tax Foundation.

For New York City residents, it would be closer to 59 percent, the highest in the nation.

The impact wouldn’t be limited to Park Avenue swells. Much of the taxable income in the highest brackets is reported by owners of and investors in small businesses. Higher income taxes will drain the working capital of small firms, sapping the resources they’ll have to add jobs and recover from the recession.

And small businesses who fail to offer health insurance to their employees will be slapped with another tax — an 8 percent payroll tax — under the House plan.

If enacted, the House bill would be an economic double whammy for Rangel’s home state, with its high average incomes and disproportionately large share of the nation’s wealthiest households — because Obama already intends to raise taxes on the very same people at the same time, undoing tax cuts enacted starting in 2001 under President George W. Bush.

The Bush cuts, especially investment-tax breaks and accelerated rate cuts passed in 2003, were a major tonic for New York’s economy in the days after 9/11 and the stock-market slump earlier in this decade. By contrast, the health-care tax hike, especially in combination with Obama’s plan, is likely to have the opposite effect.

This would all come in the wake of a $4 billion state income-tax hike passed as part of the budget deal between Gov. Paterson and the Legislature. Higher state taxes are kicking in at incomes as low as $200,000 for individuals and $300,000 for married couples. (And their net cost will increase in a few years if Obama also implements his plan to further limit itemized deductions in the top brackets.)

While Rangel says his surtax on top brackets would represent “the least amount of pain on the least amount of people,” the ripple effect of a shrinkage in the state and city tax base would be felt by many more New Yorkers.

Because the Empire State is home to such a large concentration of successful and wealthy investors and business owners, its entire economy benefits when federal tax policy is focused on economic growth and wealth creation. By the same token, a policy geared to income redistribution will drain the resources needed to rebuild our own economy.

By the middle of the next decade, many more New Yorkers may be receiving free subsidized health coverage — while wondering what happened to their jobs.

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

Hochul Tells It Like It Is

Presenting her budget this week in Albany, Gov. Kathy Hochul delivered more than just a financial plan. She gave the state a refreshing dose of fiscal honesty. “The truth is,” Hochul said, “we can’t spend like there’s no tomorrow, because tom Read More

Putting Hochul to the test: Will the governor use her budget powers to protect New York’s fiscal future?

“We will not be raising income taxes this year,” Gov. Hochul declared in January at the opening of New York’s 2023 legislative session. Read More

NY must prune its bloated Medicaid program — and focus on improving low-quality care

The coronavirus pandemic exposed a fundamental imbalance in New York’s approach to health policy: Albany spends too much money on its bloated Medicaid plan but neglects the public-health programs that used to be the Health Department’s main focus — Read More

What Gov. Hochul must do to prevent a coming fiscal crash

The pandemic and its fiscal aftermath have given rise — temporarily — to a state budget trend unique in New York’s history. Read More

Bear market spells big trouble for NY state and city budgets

Wall Street generates an outsized share of New York’s tax revenue, so the recent drop in stock prices should worry both Gov. Kathy Hochul and Mayor Eric Adams. Read More

Kathy Hochul will have to prove she can hold the line on state spending

Hochul’s specific priorities were lowest-common-denominator stuff: “combating” the spread of COVID-19 linked to the Delta variant, pushing billions in stalled federal rent relief out the door to tenants (and ultimately their landlords) and “beginning to change the culture in Albany.” Read More

Calling Tax Cut “Theft,” Cuomo Continues to Push For Federal Bucks With Phony Math

The results of this week’s Georgia Senate runoffs, assuring Democrats will soon control both houses of Congress, as well as the White House, had to come as a huge relief to Gov. Andrew Cuomo. Read More

Students Need Reforms, Not HEROES

Families and businesses are watching their bottom lines and stretching each dollar. But House Democrats are pushing a plan to prevent America’s schools from doing the same thing. Read More