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Civic Report
No. 15 October 2000


Campaign 2000 Tax Proposals: What They Mean for New Yorkers

Appendix A: The Income Tax and “The Fisc”

“A near quarter century of data analysis has pretty well established that New York’s balance of payments deficits is structural… It is not the result of one administration, one party, one business cycle, whatever. In good times it only gets worse, owing to our high tax brackets which in measure reflect our high cost of living.”

        Senator Daniel Patrick Moynihan
        In “The Federal Budget and the States”
        Fiscal year 1998

As the state’s then-junior U.S. Senator began documenting in detail nearly a quarter century ago, New York perennially sends billions of dollars more in taxes to the federal government than it gets back in the form of spending.

New York’s “balance of payments deficit” with the federal government stood at $15 billion as of 1998, according to the latest version of Daniel Patrick Moynihan’s annual study of the issue, now produced with the Taubman Center at Harvard University’s John F. Kennedy School of Government.

The Empire State’s gap, fourth largest in the nation, has gotten wider since Moynihan and his collaborators began assessing “the Fisc” on a consistent, 50-state basis in the early 1980s.

Real per-capita federal spending in New York actually increased by about 10 percent between 1983 and 1998—but federal taxes from New York grew almost twice as fast. Result: the state’s balance of payments deficit nearly doubled.

Other comparative measures of income flows between the federal government and the states have consistently confirmed Moynihan’s analysis. According to the most recent Tax Foundation estimate, the federal government spends 86 cents in New York for every dollar in taxes generated within the state.

A major explanation for this trend has been the increasing progressivity of the federal income tax—which accounts for over 40 percent of federal receipts, including most federal revenue in the non-Social Security, “on-budget” category.

Tracking the Trend

New York’s share of the nation’s population, employment and personal income all declined between 1978 and 1998. But its share of the federal income tax burden did not drop; after peaking at just over 9 percent in the late 1980s, it remained above 8 percent as of 1998. For much of this 20-year period, New York’s share of personal income taxes exceeded its share of the nation’s personal income (a trend explained only in part by occasional bursts in capital gains, which are not measured as part of personal income).

On a per-capita basis, New York’s federal income tax burden was virtually equal to the national average in 1978; by 1998, it was 23 percent above average.

New York’s relative tax burden grew considerably heavier with the enactment of President Reagan’s historic tax cut, the Economic Recovery Tax Act (ERTA) of 1981. The resulting increase in tax receipts from New York was part of what the Congressional Budget Office later called “a very significant revenue response among taxpayers at the very highest income levels” to the reduction of the top rate from 70 percent to 50 percent. High-income taxpayers began working harder and abandoning otherwise unproductive activities to earn more income in taxable forms—all of which tended to increase revenues from New York.

Five years later, as the Reagan Administration and Congress worked to hammer out a major reform of the Internal Revenue Code, congressional representatives from New York and neighboring northeastern and industrial states were able to block proposals to repeal the deductibility of state and local taxes. The resulting Tax Reform Act of the 1986 simplified the Internal Revenue Code, eliminating many tax shelters and loopholes while dropping the top rate to 28 percent. However, the law also introduced a quirk that became known as “the bubble”—a higher effective marginal rate of 33 percent, designed to phase out the benefits of lower brackets for the wealthiest taxpayers (“wealth” in this case, being defined as taxable income of $78,400 for joint returns, in 1989 dollars).

Unfortunately, the 1986 law also increased taxes on capital gains—a classic goose-strangling exercise that arguably choked off part of a strong revenue source while undermining New York’s vital financial sector and its exceptionally large and active investor class.

Subsequent federal income tax changes, enacted in the name of deficit control, were explicitly designed to wring even more revenue out of high-income taxpayers.

The Omnibus Budget Reconciliation Act of 1990 imposed a higher top marginal rate of 31 percent13  and new limits on itemized deductions and personal exemptions for high income taxpayers.

President Clinton’s first budget package featured the Omnibus Budget Reconciliation Act of 1993, which tacked on two more upper-income tax rates of 36 percent and 39.6 percent14  and increased the taxable portion of Social Security benefits. It was the largest peacetime tax hike in the nation’s history—and it was targeted like a laser at high-income states.

The 1990 and 1993 tax increases couldn’t have come at a worse time for New York. While the nation was enduring a relatively brief and shallow recession in 1991, New York State experienced its most severe economic downturn since the Great Depression.

Between 1989 and 1993 New York State lost 500,000 private sector jobs, many of them in and around New York City. Compounding the impact of federal tax hikes, both New York State and New York City enacted significant tax increases of their own during this period. The state under Governor Mario Cuomo repeatedly postponed scheduled income tax rate reductions and imposed a special higher marginal rate on incomes above $100,000; the city under Mayor David Dinkins enacted a pair of surcharges that further raised its local income-tax rate by 26 percent.

Beyond their macroeconomic effects, the federal, state and local tax hikes of the early 1990s did not represent a seamless, dollar-for-dollar revenue boost for government. After all, the Reagan tax cuts had conclusively demonstrated the link between marginal rate changes and taxpayer behavior, especially at high income levels. Indeed, many economists concluded that even relatively small rate increases can have pronounced negative effects on the tax base.15  And just as the 1981 tax cut spurred an increase in receipts from high-income taxpayers, the 1990 and 1993 federal tax increases almost surely suppressed growth at the upper ends of the tax base.

According to one of the more conservative estimates of such effects, presented in a recent working paper by U.S. Treasury Department staff, changes in taxpayer behavior may have reduced revenue federal gains from the 1993 tax hike by as much as 39 percent.16  Since the New York State and City income taxes conform closely to the federal tax, it is likely that their revenues also suffered.

In purely static terms, with no accounting for behavioral changes, our tax model indicates that New York State’s federal income-tax burden today is at least $6.7 billion higher—an 8 percent premium—as a result of the 1990 and 1993 tax hikes.

Fixing “The Fisc”

Confronted each year with fresh evidence of the state’s balance of payments deficit, New York’s elected officials usually react by pledging to work that much harder to bring home more federal dollars. But history suggests they are spinning their wheels—and probably making things worse for their constituents in the bargain. At current distribution ratios, every added dollar in spending for New York comes at a tax cost of $1.16.

“Anything that grows the size of the Federal government will grow the deficit of New York and other such states,” Senator Moynihan points out. “Hence Political Economy 101—when you are in a hole stop digging.”17 

Moynihan has suggested “a Grand Compromise” between liberals and those congressional conservatives who, in his view, are content to denounce liberal spending programs while diverting New York’s federal tax dollars to their own favored constituencies:

    The Compromise goes as follows. Liberals must somehow come to see that the Federal government is draining resources from just those regions and states which were the source of so much liberal social policy. As these states and regions decline, so does the vitality of liberalism. Anyone wishing to deny that?… It is time to trade. Less activism in Washington in return for more revenue at home, for whatever active measures recommend themselves to the state or municipality in question. Conservatives can then bring about or watch being brought about a genuine shrinkage in the size of the national government.”18 

Backfilling the Hole

Once we stop the digging, how about doing something to fill the hole back in?

A good place to start is by recognizing how different approaches to income-tax policy affect the balance of “the Fisc” and its impact on New York.

Assuming surpluses materialize as projected, some sort of federal income tax cut is inevitable in the coming years. But all tax cuts are not created equal, from New York’s standpoint. Indeed, the wrong kind of tax cut could simply make the hole deeper.

Appendix B: Methodology and Sources

We used the most recent IRS Public Use File, which is based on a statistical sample of all taxpayers, as the foundation for a model of the taxpaying population in New York. The model was grown to 2000, based on official indicators of economic growth and growth trends for specific components of New York adjusted gross income (AGI) reported in the 2000-01 New York State Executive Budget. Tax variables were further checked against more detailed data reported for resident taxpayers in The Analysis of Personal Income Tax Returns for 1997, published by the state Department of Taxation and Finance, and against data in the March 1999 Current Population Survey of the U.S. Census Bureau.

The model was used to calculate current New York income-tax liability and the impacts of changes in rates and deductions proposed by the candidates. Since most of the new or expanded targeted tax credits proposed in the Gore and Clinton plans originated in President Bill Clinton’s FY 2001 budget, official estimates of these proposals by the Office of Management and Budget (OMB) were used to extrapolate New York share, based on the state’s proportion of the relevant taxpaying population. An official 10-year “scoring” of Bush’s plan by Congress’ Joint Committee on Taxation was the basis for our estimates of the likely New York share of his proposed spousal-income exemption and increase in the child credit. The Tax Expenditures section of the President’s FY 2001 Budget also provided an important reference point for computing and checking estimates of tax-cut values.

It should be emphasized that none of the tax-cut proposals examined in this report are actually supposed to go into effect all at once; each, in fact, presents a moving target, heavily dependent on shifting taxpayer behavior over a period of years. The Bush income–tax-cut plan is to be phased in starting in 2001 and would not be fully effective until 2006; the Retirement Savings Plus provisions that make up the bulk of Gore’s plan would not be fully implemented until 2010. Similarly, Mrs. Clinton’s plan contains provisions that would not be fully effective until 2005, while the payroll-tax deduction that is the single most important element of Congressman Lazio’s plan would not be fully effective until 2011. Any attempt to project the impact of these plans on New York State in line with their actual implementation schedules over the next decade would require a complicated and elaborate set of projections that would make direct comparisons difficult, if not impossible. Since it is commonly accepted practice to illustrate impacts on representative taxpayers compared to current law, as if effective all at once, we took the same approach to illustrating their impacts on an entire state. We defined current law to include both provisions effective in 2000 and provisions scheduled to go into effect in the future, such as the expansion of the learning credit.

Appendix C: Tax Rates Under Current Law and Bush Plan

Single Taxpayers

Current Code

 

Bush Plan

For taxable incomes between

Tax rate is

 

For taxable incomes between

Tax rate is

0……….

…….26,250

15%

 

0…………..

……...6,000

10%

26,250…

…….63,550

28%

 

6,000……...

…….26,250

15%

63,550…

……132,600

31%

 

26,250…….

…...132,600

25%

132,600..

……288,350

36%

 

Over 132,600

 

33%

Over 288,350

 

39.6%

 

 

 

 

Heads of Household

Current Code

 

Bush Plan

For taxable incomes between

Tax rate is

 

For taxable incomes between

Tax rate is

0……….

…….35,150

15%

 

0…………..

…….10,000

10%

35,150…

…….89,150

28%

 

10,000…….

…….35,150

15%

90,800…

…...147,050

31%

 

35,150…….

…...147,050

25%

147,050..

……288,350

36%

 

Over 147,050

 

33%

Over 288,350

 

39.6%

 

 

 

 

Heads of Household

Current Code

 

Bush Plan

For taxable incomes between

Tax rate is

 

For taxable incomes between

Tax rate is

0……….

…….43,850

15%

 

0…………..

…….12,000

10%

43,850….

…...105,950

28%

 

12,000…….

…….43,850

15%

105,950…

…...161,450

31%

 

43,850…….

…...161,450

25%

161,450…

……288,350

36%

 

Over 161,450

 

33%

Over 288,350

 

39.6%

 

 

 

 

Appendix D: Extended Analysis of Tax Cut Plans

Single Taxpayers
No Dependents or College Tuition Expenses

 

Total Tax Cut

Incomeab

Tax Liability
Under Current Law c

Gore

Bush

Lazio

Clinton

 

 

Base

RSP*

 

 

Base

RSA*

25,000

2,520

-

1,000

300

233

38

500

30,000

3,270

-

1,000

300

279

38

500

35,000

3,952

-

500

302

333

45

250

40,000

5,352

-

500

452

694

70

250

45,000

6,752

-

500

602

781

70

250

50,000

8,152

-

-

752

868

70

-

55,000

8,166

-

-

753

955

-

-

60,000

9,748

-

-

923

1,042

-

-

65,000

10,910

-

-

1,047

1,128

-

-

70,000

12,072

-

-

1,172

1,215

-

-

75,000

12,814

-

-

1,251

1,302

-

-

80,000

13,948

-

-

1,373

1,323

-

-

85,000

15,157

-

-

1,569

1,353

-

-

90,000

16,413

-

-

1,812

-

-

-

95,000

17,668

-

-

2,055

-

-

-

  1. Assumes all taxpayers under $55,000 use standard deduction; all others itemize.
  2. Assumes all taxpayers make tax-deductible savings deposit commensurate with maximum RSP credit; for current law and other candidates, savings are presumed to be in IRA.
  3. Current Law assumes full implementation of scheduled expansion of Learning Credit for college tuition.

* Gore Retirement Savings Plus and Clinton Retirement Savings Accounts matching tax credit.

Heads of Households
Two Children, Ages 8 and 4, Youngest Child in Day Care

 

Total Tax Cutd

Incomeab

Tax Liability
Under Current Lawc

Gored

Bush

Lazio

Clintond

 

 

Base

RSP*

 

 

Base

RSA*

25,000

(1,296)

1,194

1,500

-

-

1,523

750

30,000

400

1,066

1,500

400

400

1,395

750

35,000

1,393

600

1,500

1,393

326

653

750

40,000

2,143

480

1,500

1,740

372

533

750

45,000

2,893

360

500

1,770

419

413

250

50,000

3,568

240

500

1,800

465

295

250

55,000

3,961

120

500

1,909

590

120

250

60,000

5,123

-

500

2,243

1,042

-

250

65,000

6,285

-

500

2,418

1,128

-

250

70,000

7,447

-

500

2,592

1,215

-

250

75,000

8,609

-

-

2,767

1,302

-

0

80,000

9,743

-

-

2,888

1,323

-

0

  1. Assumes all taxpayers under $55,000 use standard deduction; all others itemize.
  2. Assumes all taxpayers make tax-deductible savings deposit commensurate with maximum RSP credit; for current law and other candidates, savings are presumed to be in IRA.
  3. Current Law assumes full implementation of scheduled expansion of Learning Credit for college tuition.
  4. Gore and Clinton tax cuts as shown in excess of tax liability are refundable or increase existing refund.

* Gore Retirement Savings Plus and Clinton Retirement Savings Accounts matching tax credit.

Working Couples
Two Children, Ages 15 and 19, Oldest Child in Private College

 

Total Tax Cut

Incomeab

Tax Liability
Under Current Lawc

Gored

Bush

Lazio

Clintond

 

 

Base

RSP*

 

 

Base

RSA*

45,000

1,168

1,018

2,000

1,168

636

1,018

1,000

50,000

1,918

1,018

2,000

1,400

683

1,018

1,000

55,000

2,368

800

2,000

1,430

512

800

1,000

60,000

2,840

800

1,000

1,460

558

800

500

65,000

3,463

800

1,000

1,490

605

800

500

70,000

4,092

800

1,000

1,527

658

800

500

75,000

4,834

800

1,000

1,902

1,049

800

500

80,000

5,968

800

1,000

2,053

1,622

800

500

85,000

7,602

1,300

1,000

2,175

2,195

1,300

500

90,000

9,236

1,800

1,000

2,296

2,687

1,800

500

95,000

10,870

2,300

1,000

2,418

2,774

2,300

500

100,000

12,504

2,800

-

2,539

2,861

2,800

-

105,000

14,478

2,100

-

2,751

2,948

2,100

-

110,000

15,612

1,400

-

2,872

3,035

1,400

-

115,000

16,996

700

-

3,244

3,121

700

-

120,000

18,380

-

-

3,615

3,208

-

-

125,000

19,764

-

-

3,987

3,295

-

-

  1. Assumes all taxpayers under $55,000 use standard deduction; all others itemize.
  2. Assumes all taxpayers make tax-deductible savings deposit commensurate with maximum RSP credit; for current law and other candidates, savings are presumed to be in IRA.
  3. Current Law assumes full implementation of scheduled expansion of Learning Credit for college tuition.
  4. Gore and Clinton tax cuts as shown in excess of tax liability are refundable or increase existing refund.

* Gore Retirement Savings Plus and Clinton Retirement Savings Accounts matching tax credit.

Working Couples
Two Children, Ages 8 and 4, Youngest Child in Day Care

 

Total Tax Cut

Incomeab

Tax Liability
Under Current Lawc

Gored

Bush

Lazio

Clintond

 

 

Base

RSP*

 

 

Base

RSA*

25,000

(1,296)

2,243

3,000

-

305

2,243

1,500

30,000

(243)

1,623

2,000

-

305

1,623

1,000

35,000

688

818

2,000

688

543

818

1,000

40,000

1,438

698

2,000

1,438

590

698

1,000

45,000

2,188

578

2,000

1,870

636

578

1,000

50,000

2,938

458

2,000

1,900

683

458

1,000

55,000

3,388

120

2,000

1,930

512

120

1,000

60,000

3,860

3,268

1,000

1,960

558

-

500

65,000

4,483

-

1,000

1,990

605

-

500

70,000

5,112

-

1,000

2,027

658

-

500

75,000

5,854

-

1,000

2,402

1,049

-

500

80,000

6,988

-

1,000

2,553

1,587

-

500

85,000

8,122

-

1,000

2,675

2,113

-

500

90,000

9,256

-

1,000

2,796

2,687

-

500

95,000

10,390

-

1,000

2,918

2,774

-

500

100,000

12,364

-

-

3,129

2,961

-

-

  1. Assumes all taxpayers under $55,000 use standard deduction; all others itemize
  2. Assumes all taxpayers make tax-deductible savings deposit commensurate with maximum RSP credit; for current law and other candidates, savings are presumed to be in IRA.
  3. Current Law assumes full implementation of scheduled expansion of Learning Credit for college tuition.
  4. Gore and Clinton tax cuts as shown in excess of tax liability are refundable or increase existing refund.

* Gore Retirement Savings Plus and Clinton Retirement Savings Accounts matching tax credit.

 


Center for Civic Innovation.

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WHAT THE PRESS SAID:

What Bush Should Have Said About Tax Cuts by E.J. McMahon Jr., The Wall Street Journal, October 19, 2000
Rick, Hill & Tax Cuts For N.Y. by E.J. McMahon, New York Post, October 18, 2000
What Gore Means for N.Y. Taxpayers Start spreading the news by Deroy Murdock, National Review, October 17, 2000
Lazio Tax Cut Is Better for State, Conservative Group Says by Clifford J. Levy, The New York Times, October 12, 2000
Study: Bush Plan Better for NY 3 times the tax savings, conservative group says by James T. Madore, Newsday, October 12, 2000
Al's Middle-Class Tax Targets by E.J. McMahon, New York Post, October 11, 2000

SUMMARY:
This analysis compares the competing Bush, Gore, Clinton, Lazio tax cut plans with respect to how they affect middle class New York families and the state as a whole. The conclusion? Both the State as a whole and most middle-class families will get more tax relief under Governor Bush's and Congressman Lazio's plans.

TABLE OF CONTENTS:

Introduction

Summary of Results

Gore v. Bush

Chart 1: Bush Plan Saves New Yorkers $11.1 Billion

Clinton v. Lazio

Chart 2: Lazio Plan Saves New Yorkers $4.2 Billion

Methodology

Analysis of The Tax Cut Proposals

Bush and Gore: Statewide Impact

BUSH TAX CUTS: SUMMARY AND IMPACT

GORE TAX CUTS: SUMMARY AND IMPACT

Bush and Gore: How Their Plans Affect Middle-Class New Yorkers

Effects on Middle-Class Families with A Child in Day Care

Chart 3: Bush Plan Provides More Base Tax Relief to Families With A Child in Day Care

Chart 4: Itemizers Get Less Under Gore’s Plan

Effects on Middle-Class Families With a Child in College

Chart 5: Bush Plan Gives More Base Tax Relief To Families With a Child in College

Chart 6: Gore Plan Favors Private Colleges

Chart 7: Singles Who Do Not Save for Retirement Get No Tax Cut from Gore
Effects on Single Taxpayers

Lazio and Clinton: Statewide Impact

LAZIO TAX CUTS: SUMMARY AND IMPACT

CLINTON TAX CUTS: SUMMARY AND IMPACT

Lazio and Clinton: How Their Plans Affect Middle-Class New Yorkers

Effects on Middle-Class Families With A Child in Day Care

Chart 8: Families with a Child in Day Care Get More Base Tax Relief From Lazio Plan

Chart 9: Lazio Plan Provides More Base Tax Relief to Itemizers

Effects on Middle-Class Families With A Child in College

Chart 10: One Child in College

Chart 11: Clinton Plan Favors Private Colleges

Effects on Single Taxpayers

Chart 12: Tax Relief for Singles Varies Widely With Income

Conclusion

Appendix A: The Income Tax and “The Fisc”

Tracking the Trend

Fixing “The Fisc”

Backfilling the Hole

Appendix B: Methodology and Sources

Appendix C: Tax Rates Under Current Law and Bush Plan

Appendix D: Extended Analysis of Tax Cut Plans

Endnotes

 


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