From New York’s standpoint, the best that can be said of last week’s federal tax hike is that it could’ve been worse.

Taxes on the wealthy went up, but “wealthy” was defined as an adjusted gross income starting around $500,000 for married couples, instead of at the $250,000 level favored by President Obama. At least 150,000 New York state households, including small business owners, were thus let off the rate-hike hook — for now, at least.

Congress also rejected Obama’s proposal to disallow a significant chunk of itemized deductions in the top bracket, which would’ve hit New York’s tax base harder than any state’s. But the last-minute tax deal reimposed a less stringent limit on tax deductions, the so-called “Pease” provision, which was phased out under the Bush tax-cut law between 2006 and 2010.


This limit hits couples with gross incomes starting at $300,000 — although New Yorkers with incomes just above that level will hardly notice the difference, since most of them are also hit by the Alternative Minimum Tax, which doesn’t allow anydeduction for state and local taxes.

A small bit of good news in the deal is that it permanently linked the obnoxious AMT to inflation, which at least will prevent it from hitting any more people than it already does.

Meanwhile, the president clearly isn’t done pushing for higher taxes as part of future federal deficit-reduction packages. After the deal was sealed, Obama said he’d only agree to spending cuts that “go hand-in-hand with further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.”

In other words, he’ll continue to target tax breaks most heavily used by high-income New Yorkers — even though he just agreed to a tax bill that renewed several highly questionable loopholes, including a motion-picture-production tax credit and full deductibility of gambling losses.

The tax-hike deal reportedly will raise about $600 billion over 10 years. That’s barely half the amount Obama had sought to raise in added taxes — but still plenty big enough to perceptibly squeeze the relatively small number of high-income households that generate an outsized chunk of New York’s state and city revenues.

Although the Empire State is home to just over 6 percent of the nation’s federal-income-tax filers, it appears that about 16 percent of the revenue raised by the feds’ tax-rate hike in the top bracket will come from New York’s tax base, including nonresident commuters who work here.

By contrast, New Yorkers will pay their proportionate share of the revenue from the expiration of the temporary 2 percentage-point cut in the federal payroll tax, which applies to the first $113,700 of all wages and salaries.

For taxpayers in New York state’s own temporary “millionaire tax” bracket, the new federal tax law will drive the combined federal and state marginal tax rate to within a percentage point of 50 percent — its highest level in 27 years.

And for New York City’s highest earning residents, the combined federal-state-local income-tax bite will now consume more than half of every added dollar of income for the first time since the mid 1990s.

Only million-dollar earners in California will now face a higher combined marginal tax rate than New York City’s 51.7 percent — including a newly increased federal Medicare tax, as well as the impact of the Pease deduction limit plus state and local taxes.

As their financial advisers will undoubtedly remind them, high-income New Yorkers who don’t like the idea of paying more than half their total income in federal, state and local taxes have no shortage of options for reducing their tax bills going forward.

They can, for example, rely more on income from long-term capital gains and dividends, which will now be taxed at a federal rate of up to 23.8 percent — 1 1/2 times the prior rate, but still considerably less than the new federal marginal rate of more than 40 percent on wages and income from self-employment.

They might also shelter more of their earnings in tax-free municipal bonds, or plow it into other tax-preferred investments like movies — which offer the added advantage of skirting or minimizing state and city tax.

Last but not least, the richest New Yorkers can always move to a place with lower state and local taxes — of which there are plenty of choices.

That’s something state and city officials ought to keep in mind as they weigh their own fiscal options in the new year.

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

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

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

Washington shouldn’t fund NY’s “normal” budgets

With the coronavirus lockdown continuing to erode tax revenues, Gov. Andrew Cuomo has turned up the volume on his demands for a federal bailout of the New York state budget. In a weekend briefing, the governor repeated his estimate that the Empire State will need help closing a deficit of $10 billion to $15 billion. “I don’t have any funding to do what I normally do,” he said. Read More

Cuomo’s Plate Spinning

Governor Cuomo’s license plate design contest was a PR ploy masking a nickel-and-dime revenue raiser. Read More