Plenty of unintended consequences, positive and negative, will be lurking in the fine print of the tax-reform bill unveiled Thursday by House Republicans.
But it’s already clear the plan would clobber Albany’s favorite cash cow: the seven-figure earners who generate more than 40 percent of the state income tax.
In fact, the bill President Trump wanted to call the “Cut, Cut, Cut Act” will actually raise federal taxes by up to 10 percent on the salaries, bonuses and business income earned by the highest-paid New York residents.
That’s because it would retain a top rate of 39.6 percent on incomes over $1 million, while eliminating itemized deductions for state and local income taxes.
As things now stand, the combined state and local income tax rate in New York City tops out at 12.7 percent, second only to California’s 13.3 percent.
For individuals earning at least $1 million, or couples starting at $2 million, the state’s top rate of 8.8 percent is added to the city’s top rate of 3.9 percent — the kind of double taxation Gov. Cuomo has loudly denounced when threatened with the loss of state and local tax deductions.
Private-sector wages and salaries in the city are subject to an added Metropolitan Transportation Authority payroll tax, which effectively brings the top tax rate to 13.04 percent. This is still quite a bit lower than the mid-1970s peak of nearly 20 percent, but above the 10.4 percent low reached in 2001, at the end of the Pataki-Giuliani tax-cutting era. However, through all the tax-law changes enacted in both Albany and Washington over the past 35 years, the impact of federal deductibility has kept New York’s net tax price within narrower boundaries, ranging from roughly 7 percent to the current level of 9 percent.
The tax-reform bill would boost the state’s tax price to as much as 13 percent, by far the highest level ever. This would be truly uncharted territory — providing the wealthiest New Yorkers with a strong added incentive to rethink their presence in the state.
The impact of small shifts could be very large. For example, as of two years ago, there were 2,541 New York resident taxpayers with incomes exceeding $10 million. If even 10 percent of these filers decided to shift their main residence, it would translate into a loss of more than $500 million in state revenues.
Keep in mind that a growing number of state taxpayers in seven- and eight-digit income brackets already have joined what might be called “the 183 Club” — maintaining ties to New York but establishing their main residence in another state and making sure they’re not physically present here for more than 183 days a year.
Nonresidents don’t pay any city income tax, and they owe state taxes only on their “New York source income,” mainly salaries and profit shares from New York businesses. The capital gains, dividends and interest that make up the bulk of their personal earnings are subject only to the tax rate in their home state — which, in the case of Florida and a half-dozen others, is zero.
Nonresidents comprise a growing share of New York’s highest income taxpayers, including fully 60 percent of filers with total incomes above $10 million and half of all state taxpayers with total incomes above $1 million. These are the highest nonresident percentages on record for income millionaires required to file New York tax returns.
Offsetting the next tax hike on the individual income tax, the corporate side of the GOP bill could offer savings to high-income New Yorkers belonging to investment or professional partnerships. But many of the wealthiest city residents are aging baby-boomers, increasingly focused on retirement and estate planning. They don’t need an added push to Florida — or any of the 36 states that, unlike New York, impose no estate tax.
When Mayor de Blasio recently suggested a tax hike on the wealthy to fix subways he was merely reflecting the deep-seated belief among many New York pols that the vast majority of high-earning New Yorkers are oblivious to state and local income tax rates.
If the tax-reform bill passes, those pols are probably in for a rude surprise.
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