Advocates of the misnamed “millionaires tax” enacted in New York state last year claimed that it would restore “fairness” to a tax code that favored the rich. But thanks to the complex interplay of federal and state tax rules, Albanys share of all income taxes paid by New Yorks wealthiest residents has actually been rising since the 1970s. And it will soon rise to its highest level ever -- unless President Obama and congressional Democrats reverse course.
Obama won office on a promise to return the tax rates on the top two income-tax brackets (now 33 percent and 35 percent) to the levels in effect in 2000 (36 percent and 39.6 percent) -- and his latest budget still promises to let those Bush-era tax cuts expire next year.
So the state couldnt have picked a worse time to enact yet another “temporary” income-tax hike -- yet thats precisely what Gov. Paterson and the Legislature agreed to do last spring, as part of the 2009-10 state budget. This hike has raised the top state rate to 8.97 percent on filers with taxable incomes of more than $500,000 (and to 7.85 percent for those starting as low as $200,000).
It hasnt raised as much money as they hoped for, though: Revenue from New Yorks tax hike on high earners was coming in $400 million below the governors original estimate for this year even before he announced Wednesday that income-tax collections in January had fallen another $1 billion short of projections -- a result, in part, of investment banks decision to shift some bonuses from cash to stock options. Simply squeezing harder on higher earners wasnt such a smart strategy, it seems.
On the face of it, New York states top rate is still much lower than the all-time high of 15.35 percent reached in the mid-70s. But, thanks to changes in federal deductibility, the effective rate is actually higher now than it was 35 years ago.
And current tax trends in Washington will push New Yorks net income-tax cost -- the difference between earning income here and in a no-tax state, such as Florida or Texas -- further beyond 70s levels, even if the higher state rate expires on schedule in two years.
The reasons lie in the complex way that the state tax code interacts with the federal one. Back in the 70s, the top federal income-tax rate was 70 percent. But itemized deductions for all taxpayers -- including deductions of state and local taxes -- were unlimited, which effectively meant that those state and local taxes were discounted by 70 percent.
So, when New Yorks top income-tax rate hit its 15.35 percent peak, the effective marginal rate after federal deductibility (that is, the rate of taxation that the feds didnt shield taxpayers from) was a much lower 4.6 percent.
Thus, while the total tax burden was staggeringly high in the 70s, federal deductibility gave high-tax states like New York some shelter against competition from low- or no-tax states like Florida and Texas.
The next two decades brought major changes. By 1997, after 20 years of tax cutting under both Democratic and Republican governors, New Yorks top state income-tax rate had hit a 40-year low of 6.85 percent.
Federal rates also fell significantly. But, starting in 1990, the feds also introduced new limits on the deductibility of state and local taxes for top-bracket taxpayers.
The paradoxical result of all this was that New Yorks effective top rate rose. In other words, the net-tax cost of living in New York compared with a state with no income tax is now higher than it was 30 years ago. As of 2010, the effective rate stands at 5.8 percent statewide.
And now the Bush tax cuts are due to expire at the end of this year. That includes Bushs phase-out of the cap on state and local tax deductions. Indeed, Obama wants to further limit these deductions.
The result, we estimate, will be to push up New Yorks effective tax rate to 7.3 percent -- its highest level ever.
In New York City, the combined effective rate of state and city income taxes will be almost 10 percent -- and the total federal, state and city income-tax bite will exceed 50 percent for the first time in more than a quarter-century.
Impending federal tax changes also are likely to shrink the pool of taxable income for both the state and city governments, since top-bracket earners faced with steep increases in federal tax rates will have more incentive to shelter some income or move to a state with lower taxes.
The specifics remain unsettled. But the trend in federal tax rates and rules is deeply unsettling for New Yorks economic and fiscal outlook -- and at the worst possible time for New Yorks battered economy.
Original Source: http://www.nypost.com/p/news/opinion/opedcolumnists/ny_taxes_headed_for_new_high_IEEVoyCPCC7x6vXfMJIAFP