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 - - - Assumes all taxpayers under $55,000 use standard deduction; all others itemize. 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. 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 Assumes all taxpayers under $55,000 use standard deduction; all others itemize. 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. Current Law assumes full implementation of scheduled expansion of Learning Credit for college tuition. 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 - - Assumes all taxpayers under $55,000 use standard deduction; all others itemize. 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. Current Law assumes full implementation of scheduled expansion of Learning Credit for college tuition. 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 - - Assumes all taxpayers under $55,000 use standard deduction; all others itemize 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. Current Law assumes full implementation of scheduled expansion of Learning Credit for college tuition. 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.

EMAIL THIS | PRINTER FRIENDLY CR 15 PDF 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