New York Gov. Andrew Cuomo is running for re-election this year and President in 2020, and apparently he thinks his killer app is opposition to the GOP tax bill. Judging by his proposals so far, we’d say this is going to be harder than he thinks.
The Governor last week released his 2018 budget along with proposals to “reform” New York’s taxes that on their face appear to conflict. On the one hand, Mr. Cuomo wants to minimize the effects of the GOP bill’s $10,000 state-and-local-tax deduction limit on his state’s high earners. At the same time he’s squeezing them for more dough.
A roaring stock market usually bodes well for Albany’s coffers, yet the state is running a $4 billion deficit this year. Revenues have increased by a mere 4% over the past two years, especially from high earners. The top 1% of earners pay more than 40% of New York’s income taxes, and the top 0.1% account for a quarter.
As the budget notes, “recent weakness in bonuses highlights the risk posed by [finance and insurance] to the State economy and revenues.” Financial institutions scaled back bonuses after the 2008 panic, but they have also shifted some operations out of the Northeast while expanding in lower-tax states.
Between 2012 and 2016, personal income from finance declined by 0.6% in New York while growing 1.5% nationwide, 5.1% in Florida and 6.2% in Utah, according to the Bureau of Economic Analysis. In 2016 Citibank said it would hire 800 more employees at its Jacksonville office and bought a 5,600-employee service center in Tampa.
Mr. Cuomo has doled out billions of dollars in subsidies to revive New York’s upstate rust belt. Yet New York’s manufacturing GDP growth has slipped 0.3% since 2012 while growing 0.7% in the Mid-Atlantic region, 1.2% nationwide and 3.8% in Florida. Overall, New York has averaged 1% GDP annual growth since 2012, half the national average.
While Mr. Cuomo rails that the GOP tax bill is a “dagger at the heart of New York,” its economy and budget could benefit. Banks headquartered in New York are projecting a substantial boost in earnings and have announced bigger bonuses. Though he won’t admit it, even Mr. Cuomo’s budget predicts a nearly 20% increase in business tax revenue over the next two years largely due to surging corporate profits.
But there’s also a danger that New York may miss the party. Businesses may instead invest at the margin in low-tax and low-cost states where they can get a better return on capital. In addition to its punishing tax burden, New York has among the nation’s highest energy prices and employment costs.
The $10,000 deduction cap could also drive high earners in New York City (top marginal rate: 12.7%) and the upper-middle class in the suburbs out of the state. The average property tax bill in Westchester County is $10,000 compared with $4,610 in Bucks County outside Philadelphia and $2,453 in Miami-Dade.
Mr. Cuomo’s finance department issued a report last week outlining myriad ways to mitigate the deduction cap. One idea is a new state payroll tax that corporations could deduct on federal taxes. Mr. Cuomo suggested several variations, all of which would be fearsomely complex. Businesses might have to reduce employee wages by the amount of the new payroll tax, and the state would make them whole with a “wage credit.”
But workers won’t like a cut in take-home pay, which may also be prohibited by labor contracts. Maintaining tax progressivity—as Mr. Cuomo says he’d do—would also be a challenge. This also wouldn’t help high earners with substantial investment income. New York taxpayers making more than $1 million draw on average only a third of their income from wages.
Yet while Mr. Cuomo tries to mitigate the federal tax burden on high earners, he is also taking them to the cleaners. As E.J. McMahon of the Empire Center for Public Policy recently noted, state law allows New Yorkers to conform their federal itemized deductions (aside from a few exceptions such as for state-and-local income taxes) to state returns. Because the GOP tax bill capped the deduction for property taxes at $10,000 and axed others, the state could reap a $700 million windfall. This is a stealthy tax grab that Mr. Cuomo didn’t cite in his budget.
He was less abashed in calling for a 17% “fairness tax” on the carried-interest income of hedge funds, private equity and venture capital. This surcharge would raise the tax rate that New York City investment managers pay on their capital gains to 53.5%. Mr. Cuomo said the surcharge would only take effect if Massachusetts, New Jersey, Connecticut and Pennsylvania do the same. We doubt Bay State Gov. Charlie Baker will sign this suicide pact.
All of which shows that Mr. Cuomo doesn’t understand how tax competition could hollow out his state fisc. He should import low-tax policy to New York, not try to impose high-tax New York on the rest of America.
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