The sharpest fight in this year’s budget battle: Whether to renew the income tax surcharge on the highest-paid New Yorkers.
Taxing the rich is overwhelmingly popular with voters. A February Siena poll found that renewing the current surcharge was favored by a 2-to-1 margin, 65% to 33%, and other polls have found similar results. But the measure faces an uphill battle in Albany.
Enacted in 2009, the surcharge will expire at the end of 2011 unless action is taken to extend it. Latest figures from the State Division of the Budget estimate that it brings in about $4.5 billion per year. With the State facing a $10 billion budget gap, giving up the surcharge will mean deeper cuts in public services – in order to give a tax break to the highest-paid 3% in the state.
The surcharge applies to taxable income above $200,000 for individuals and above $300,000 for married couples. It adds an additional 1% to the tax rate, and another 1.12% for taxable incomes above $500,000.
While these higher rates affect about 3% of New York taxpayers, not all of their income is affected. The surcharge is paid only above the threshold – for example, a married couple with taxable income of $320,000 would pay the additional 1% on only $20,000. And the thresholds are set in terms of taxable income – in other words, after subtracting all personal exemptions, deductions and adjustments.
Taxpayers affected by New York’s surcharge “just received a four percentage point decrease in their federal income taxes for 2011 and 2012, thanks to the extension of the Bush tax cuts,” the Fiscal Policy Institute (FPI) points out. Supporters of the surcharge question whether the richest New Yorkers need to get a State tax break, too – especially when such deep cuts in public services are under consideration.
Other progressive revenue measures proposed this year include a “bonus recapture tax,” proposed by FPI and the Center for Working Families (CWF), which note that the current high bonuses and profits on Wall Street were made possible by a taxpayer bailout of historic size. The bonus recapture tax would provide between $9.5 and $14 billion in revenue, making most of this year’s budget cuts unnecessary.
TAX LAW FLAWS
The New York Times and others have called for a review of New York’s web of business tax breaks. “Why, for example, do sellers of precious metal bullion and coins get a tax break that costs the state $185 million in 2010?” asked a Times editorial. “Doing away with about 5% of these deals would bring in nearly $1.5 billion.”
But even though total compensation at Wall Street firms is up 6%, Albany has little appetite for taxes that would be paid by the rich. Despite strong public support for the current surcharge, Gov. Cuomo and the State Senate are opposed to renewing it, and the Assembly has proposed scaling it back so that a higher rate applies only to taxable income above $1 million. It’s a change that would bring in about 70% of the revenue that the current surcharge provides.
After two decades of tax cuts favoring the wealthy, it’s no surprise that New York has been running out of money to fund basic public services. But it’s a sign of wealthy New Yorkers’ outsized political influence (see p.4) that the biggest revenue fight in Albany this year is simply whether to keep today’s tax rates in place.