The Ravitch Commission is said to be mulling a payroll tax to help close large deficits faced by the state Metropolitan Transportation Authority (MTA).   Other elements of the package reportedly would include fare increases and the acquisition and tolling by the MTA of the city’s East River and Harlem River bridges.  From the Thanksgiving Day story in the Times:

The tax on payrolls, expected to be less than one half of 1 percent, would apply to businesses in the 12-county area served by the authority [which, in addition to the five boroughs of New York City, includes of Nassau, Suffolk, Westchester, Rockland, Putnam, Dutchess and Orange counties]. It would be paid by businesses, not employees. The tax would be designed to raise $1 billion a year or more. [emphasis added]

That “paid by businesses, not employees” line is a mere technicality.  The consensus of most economists, left and right, is that a payroll tax  is ultimately borne by workers. Because a payroll tax would not allow for personal exemptions or deductions, any given payroll tax rate would be the equivalent of a marginal state income tax rate two or three times as large for many wage-earners.

The commission, chaired by former MTA Chairman Richard Ravitch, is due to formally report this Friday to Governor David Paterson.  No further details of the commission’s likely tax proposal had been released as of Sunday, but based on 2007 state Labor Department data, and arbitrarily assuming a 50 percent decline in Wall Street wages since last year’s peak, a payroll tax rate of 0.34 percent would be necessary to raise $1 billion in a year from private employers in the MTA region.   A payroll tax in the “$1 billion or more” neighborhood initially would appear to be the largest single element in the Ravitch Commission bailout plan.

That still leaves plenty of questions.  Would the tax apply to wages paid by government agencies (such as the MTA itself) and non-profits?  What about sole proprietors and the self-employed?   Would the tax be imposed uniformly on all wages, or would there be exemptions for business below a certain size, or workers earning less than some wage threshold?  If there is a wage cutoff, the rate on remaining workers would have to be much higher.  For example, in a 2004 report, the Regional Plan Association suggested that $820 million could be raised by a 1 percent tax — which it called a “mobility fee” — on all wages above $50,000.

It’s also still unclear whether the Ravitch Commission will push the governor to seek any additional operating efficiencies from the authority, which the governor controls through his board appointees.  For example, how about opening MTA bus routes to competitive bids by private carriers, which could save $345 million a year, according to a 2002 Manhattan Institute study?  And if the MTA is going to raise fares, impose tolls on more bridges and tax wages throughout the metropolitan region, including those paid to workers who never go near any mass transit, will any sacrifices be demanded of the MTA’s voracious employee unions?

Since the 1999 expiration of New York City’s 0.5 percent commuter tax, which was collected directly from employees, there has been no payroll tax imposed anywhere in New York State.  Local payroll taxes are imposed elsewhere around the country — in the cities of Ohio, Pennsylvania and New Jersey, for example.  Unlike New York, however, cities with payroll taxes in other states do not also impose local income taxes on resident businesses or individuals.

This much is clear: The MTA already is the recipient of significant funding from dedicated taxes imposed throughout the 12-county region, including a 17 percent surcharge on all business taxes and a 0.375 percent added sales tax.  The MTA also receives over half the petroleum business tax receipts deposited in the state mass transit operating assistance fund, which is fed by motorists throughout New York State.

A payroll tax would require state legislative approval.  It could be one of at least four income and wage tax hikes kicking around Albany early next year, since the state Assembly has already passed two versions of an income tax increase for filers earning over $1 million a year, and Mayor Bloomberg may seek both a city income tax increase and revival of the commuter tax.

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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