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Commentary By E. J. McMahon

Ocasio-Cortez’s Tax Plan Would Be Bad News for New York

Cities, Economics Tax & Budget, Tax & Budget

The prospect of a 70 percent top federal income tax rate, floated by newly elected Rep. Alexandria Ocasio-Cortez on “60 Minutes” over the weekend, struck a nerve across the political spectrum.

But Albany Democrats should think twice before cheering her on — because New York, in particular, would have a lot to lose from a return to confiscatory federal taxes on higher earners.

Challenged by interviewer ­Anderson Cooper to explain how she would pay for her ­expensive “Green New Deal” ­vision, Ocasio-Cortez hearkened back to “our tax rates in the ’60s . . . a progressive tax-rate system,” in which “once you get to, like, the tippy-tops, on your ten-millionth dollar, sometimes you see tax rates as high as 60 or 70 percent.”

She added: “That doesn’t mean all $10 million are taxed at an ­extremely high rate, but it means that as you climb up this ladder, you should be contributing more.” The congresswoman never clarified the rates she might have in mind for the lower rungs on the ladder.

Judging by journalistic and ­social media reactions to AOC’s comments, many progressive Democrats are willing to entertain a ­return to what they see as the good, old days of sky-high federal tax rates, which peaked at 91 percent in the early 1960s before JFK’s tax bill cut the marginal rate to 70 percent in the latter half of the decade.

It stayed at 70 percent until Ronald Reagan took office in 1981 and launched his supply-side revolution on the belief, vindicated by subsequent economic history, that lower marginal rates would boost growth, investment and hiring.

AOC and her allies dispute this account of the 1980s. Be that as it may, by focusing on tax rates alone, proponents of super-soaking the super-rich ignore big changes in the federal tax structure over the past half-century.

The Internal Revenue Code of the 1960s was riddled with loopholes that sharply reduced the effective federal-tax bite on the wealthy. In fact, prior to the revolutionary bipartisan tax reform of 1986, the distribution of the federal income tax burden was less progressive.

Effective in 2018, the new federal tax law reduced the top rate to 37 percent from nearly 40 percent, but it also cut taxes on lower earners by much larger percentages.

The biggest budgetary “pay-for” in the Republican tax plan was curtailment of the state and local tax, or SALT, deduction, which will more than offset the ­individual tax cut for most top-bracket filers, ­especially in New York City, where the combined state and city ­income tax rate is the second highest in the country.

When New York’s combined state and city income tax rates last peaked in the mid-1970s, reaching nearly 20 percent, full SALT deductibility assured the net cost to affected taxpayers was less than 6 percent. But the SALT cap has raised the top state-city rate to its full statutory level of 12.7 percent, which means a 70 percent federal rate would translate into 82.7 percent for high-income New Yorkers.

This would pose a huge problem for a state government that relies on the highest-earning 1 percent of New York residents to generate 40 percent of its personal income tax revenue. The SALT cap already is giving those millionaire earners a big added incentive to minimize their exposure to New York state and city taxes. They can accomplish that by moving their main residence practically anywhere else while retaining a pied-à-terre in Manhattan.

It’s by no means safe to assume that a future Democratic Congress willing to impose a 60 or 70 percent marginal tax rate also would resurrect the full SALT deduction.

A possible harbinger of things to come is the Senate Democrats’ $1.5 trillion infrastructure bill, unveiled last year by their minority leader, New York’s own Sen. Charles Schumer. The Schumer-backed plan would be financed largely by rolling back the portions of the new tax law that disproportionately benefit high-earning New Yorkers — without repealing the SALT cap.

There are lots of reasons why a return to a top federal tax rate of 60 to 70 percent would be a bad idea for the country, economically and fiscally.

But putting all other objections aside, Albany Democrats should keep in mind that New York is always destined to be a loser in Washington’s income-redistribution games. SALT or no SALT, a sharp increase in marginal tax rates on the highest-earning households would only accelerate the erosion of New York’s wealth-dependent tax base. There will be nowhere to hide from the ultimate consequences on the state and city budget.

This piece originally appeared in the New York Post

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E.J. McMahon is research director at the Empire Center for Public Policy and an adjunct fellow at the Manhattan Institute.

This piece originally appeared in New York Post