Gov. Cuomo and the Legislature reportedly are cooking up something like areprise of their December 2011 “tax reform” charade — which combined a $2.5 billion tax hike for million-dollar earners with small income-tax cuts for middle-class households.

This time around, as part of the 2013-14 budget, the governor and legislative leaders may tie a further extension of the state’s top personal-income-tax rate to some added tax breaks for businesses and the middle class, along with a minimum-wage hike.

None of this seemed to be in the cards when Cuomo unveiled his budget two months ago — but it’s not exactly a surprise, either, since it so neatly fits the political agendas of the Capitol’s major players.

The current version of New York’s supposedly temporary “millionaires tax,” first enacted in a broader form in 2009, isn’t due to expire until the end of 2014. Extending it now will conveniently close a bit of the budget gap projected for fiscal 2014-15, an election year for both the governor and the Legislature.

In what had been shaping up as another austere budget cycle, a preemptive extension of the tax hike will also give the Legislature more leeway to make promises now that will have bigger costs in two or three years.

Details won’t become apparent until just before the final budget bills are voted on — if then. But assuming it all comes together, it’s not too hard to predict the resulting spin:

Assembly Democrats will take credit for raising spending and the minimum wage.

Senate Republicans will position themselves as business-friendly tax cutters.

Cuomo will proclaim it all to be another triumph of progressive reform.

No one will worry much about the implications for the state’s economy. Most likely, Cuomo and leaders in both parties will try to sell their latest tax-and-spend package as boosting New York’s growth prospects. (We’ll hear every possible variation of the phrase “job-creating budget for the middle class.”)

The tax changes may still technically be classified as temporary — with an expiration date of, say, 2017. But for all intents and purposes, the state will have taken a big step toward permanently raising the effective income-tax burden on New York’s wealthiest households to the highest level since the 1980s.

For now, the state’s top income-tax rate, kicking in on singles at $1 million and couples with incomes of $2 million, is 8.82 percent—well above the permanent-law rate of 6.85 percent. Only two of New York’s economic peers — California and New Jersey — impose higher taxes on the wealthy.

And New York City residents in the new top bracket pay 12.7 percent, the second-highest rate in the country. In the wake of December’s federal tax hike, the city’s highest earners get hit by a combined marginal rate above 50 percent.

Further extending higher state taxes certainly won’t boost New York’s competitive position compared to states with lower income taxes or no tax at all. Worse, it may not stop there.

Two of the four contenders for the Democratic mayoral nomination, Public Advocate Bill de Blasio and city Comptroller John Liu, back an increase in the city income tax. Assembly Speaker Sheldon Silver supports the idea, too.

Just last week, even as reports emerged of a possible soak-the-rich tax extension in Albany, US Senate Democrats in Washington unveiled a budget proposal calling for $1 trillion in further federal income-tax hikes on “the top 2 percent” — roughly, incomes of $250,000 or more. House Republicans oppose federal tax-rate hikes but not new limits on the deductibility of state and local taxes for the same high-income households — something that would further drive up the net tax price of living and doing business in New York.

The last time federal and state income-tax rates were moving in the same direction was back in the 1980s — and that was a bipartisan push, in both Washington and Albany, for lower rates and base-broadening tax reform.

Now, by contrast, New York state and the federal government have raised income taxes almost in tandem — something unseen since the Great Depression. And there’s more pressure to go higher at both levels.

Keep these worrisome trends in mind in the next week, even as Cuomo and legislative leaders join in another chorus of “Happy Days Are Here Again.”

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

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