NEW York voters who accept the in evitability of an Eliot Spitzer governorship risk creating a second inevitability: that the state will continue to limp along hobbled by some of the highest income taxes in the nation. Spitzer's opponent, John Faso, offers at least a faint hope of altering that course.
New York's state and local income taxes rank No. 1 in America, according to the Tax Foundation. The state's top rate, nearly 7 percent, hits couples with gross incomes starting at about $55,000 (with taxable income of $40,000). This rate is among the top quarter nationwide, and it snares a good chunk of a New York family's income: more than $4,000 a year for a family earning just shy of six figures.
High income taxes also punish New York's jobs and tax base by encouraging high-income and aspiring high-income entrepreneurs to start their businesses elsewhere: Why start a new company near Buffalo when you can launch it in Texas or Florida, at an income-tax rate of zero?
Faso recognizes that high income taxes are a serious problem for New York, and he's got a straightforward way to fix it: Cut them.
If elected, Faso would push the Legislature to slash the top income-tax rate by nearly a tenth, from 6.85 to 6.25 percent on families who earn gross incomes starting at just under six figures (with corresponding cuts for single people). He'd cut marginal rates even more dramatically, up to 24 percent, for couples earning in the mid- to high five figures.
Most radically, Faso would eliminate taxes altogether for couples earning under $50,000 and for singles earning under $25,000. He'd also index all tax brackets to inflation - so people don't find themselves in higher tax brackets just because their salaries have kept up with rising costs. (The federal government adopted indexing decades ago.)
The cuts would mean real savings: A family of four earning $90,000 would save more than $2,000, or at least half of a month's mortgage for many families in the metro area, while a single person earning $35,000 would save nearly $1,000.
There's more. To create a climate for new business investment, Faso would eliminate New York's capital-gains, dividends and estate taxes - making the state far friendlier to capital investment. And to attract higher-income earners, he'd kill an obscure provision that levies the top rate on all their taxable income - effectively giving them an added tax cut.v
To be sure, Faso's plan has one serious flaw: Based on available IRS data, it would leave some 5 million taxpayers - those couples earning up to $50,000 and singles making up to $25,000 - no longer paying state income taxes at all.
This shift would alter the political landscape in a way that could have dire fiscal consequences - for it would leave a significant chunk of the electorate with little reason to worry about state spending. And unchecked spending must lead to deficits - and then to higher taxes for everyone. (In the recent past, Albany has plugged its deficits by hiking both income and sales taxes.)
Faso's elimination of taxes for so many New Yorkers has a second fiscal drawback: It would narrow New York's tax base. By forcing the state to rely even more than it does today on its top earners, Faso would make New York's budget even more vulnerable to the rise and fall of the fortunes of the very wealthiest taxpayers, whose incomes fluctuate wildly with Wall Street profits.
Faso would do better simply to cut tax rates for all New Yorkers, rather than eliminating income taxes for many voters, leaving the vast majority of New Yorkers with a continued stake in future income-tax cuts (and hikes).
Despite this, the plan at least addresses one of the state's biggest problems: its job-killing income taxes. Plus, any flaw can be addressed in the course of a rigorous debate. Unfortunately, Spitzer has had nothing to say on the issue - so there has been no such debate.
When Spitzer talks taxes, he does so only to advocate for a vast expansion of Gov. Pataki's STAR program, which gives homeowners some relief from skyrocketing local property taxes. But this is not really a tax cut, just a tax shift - for the state pays for STAR with revenues from its income tax.v
Faso also has a STAR expansion plan, one not much better than Spitzer's. But the two candidates clearly do differ on their approach to the income tax, and the difference matters to New York's future.
As my colleague E.J. McMahon noted in testimony before the Legislature last year, "Over the past 45 years, New York State's strongest relative economic performance has come when [income-tax] rates were falling," including parts of the Carey, Cuomo and Pataki administrations.
Unless the media and voters seize the chance for a debate on the income tax that Faso has presented, New York will have elected its next governor with a mandate not to work to cut income taxes at all - a terrible omen for the Empire State's future.
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