1THE ISSUE
Individuals with a taxable New York income of more than $1,077,550 a year or joint filers earning above $2,155,350 a year are subject to the state’s “millionaires tax.” Roughly 45,000 taxpayers are in that 8.82% state income tax bracket, according to the state Division of the Budget. Approximately half of them live outside New York state, and about a quarter live in New York City. Unless the state extends the tax, it will expire Dec. 31. Gov. Andrew Cuomo last month proposed continuing it through 2020. It’s controversial because it was initially billed as temporary, and only six states and Washington, D.C., have a higher top tax rate.
2THE PLAYERS
Cuomo, Assembly Democrats, left-leaning advocacy organizations and other supporters of the tax say it fills a $4 billion budget hole and note that studies show it does not affect high earners’ decision to live in New York. “In order for the state finances to hold together, the state really needs the millionaires tax,” said James Parrott, chief economist at the liberal Fiscal Policy Institute. But the Partnership for New York City, an organization of large businesses in the city, and think tanks such as the Manhattan Institute say the tax does indeed repel high earners from the state. “Albany needs to understand the potential negative impact of a tax rate that is higher than almost any of our domestic and global competitors when it comes to attracting talent and jobs,” Kathryn Wylde, partnership president and CEO, said in a statement after Cuomo called for the extension. Senate Republicans, who control the upper chamber jointly with the Independent Democratic Conference, oppose the tax, while IDC leader Jeff Klein, a Bronx senator, supports it and predicts the GOP conference will ultimately agree to extend it.
3YEAH, BUT …
Before the tax was created in 2009, joint filers earning above a mere $40,000 fell into the state’s highest tax bracket—paying 6.85%. The millionaires tax replaced an essentially flat tax with a graduated one. As a result, a 2015 analysis by the Institute on Taxation and Economic Policy found, New York’s top 1% of earners pay 8.1% of their income in state and local taxes, including property and sales taxes. Nationwide only California’s top earners hand over a larger portion. But New York’s richest still pay a lower share of their income to the government than the state’s bottom 20% of earners do. While the poorest fifth don’t make enough to pay state income taxes, they still shell out 10.4% of their family income on property, sales and excise taxes. The middle 20% of earners lose 12% of their income to taxes. Parrott said without a high-rate income tax bracket, things would be even more unfair.
4SOME BACKSTORY
The millionaires tax traces its roots back to a three-year income tax surcharge put in place after Wall Street’s collapse in 2008. Former Gov. David Paterson got the state Legislature to approve two new brackets at the high end of the income spectrum: 8.97% for million-dollar earners and 7.85% for those making $300,000 or more. In late 2011, days before the two top rates were to expire and fall back to 6.85%, Cuomo and the Legislature extended them but lowered the top rate to 8.82% and the second rate slightly, as well. They simultaneously implemented a package of middle-class tax cuts. The moves allowed the governor to proclaim that every New York taxpayer would pay a lower rate than before he took office. Last year the state passed a new round of middle-class tax cuts that will phase in through 2025. This decoupled the middle-class tax cuts from the millionaires tax, removing a key reason for legislators who oppose the higher rate to extend it.
5WHAT’S NEXT
The Legislature can do nothing and let the millionaires tax die without losing the middle-class tax cuts it was once paired with. But the political impetus for including it in the next state budget is strong: Lawmakers would rather not raise taxes and fees or slash billions in spending to close the deficit that would be created if the tax ends. The impact of its expiration on the budget three- quarters of the way through the next fiscal year would be a loss of $683 million, Cuomo’s budget office estimates, and would balloon to $3.4 billion in fiscal 2019 and $4 billion two years later. Another factor in the tax’s favor is that few constituents of Senate Republicans—who mostly represent working-class upstate districts—have to pay it. Polls show across-the-board support for a higher rate on top earners. A vote on the fiscal 2018 budget is expected in late March.
Individuals with a taxable New York income of more than $1,077,550 a year or joint filers earning above $2,155,350 a year are subject to the state’s “millionaires tax.” Roughly 45,000 taxpayers are in that 8.82% state income tax bracket, according to the state Division of the Budget. Approximately half of them live outside New York state, and about a quarter live in New York City. Unless the state extends the tax, it will expire Dec. 31. Gov. Andrew Cuomo last month proposed continuing it through 2020. It’s controversial because it was initially billed as temporary, and only six states and Washington, D.C., have a higher top tax rate.
Cuomo, Assembly Democrats, left-leaning advocacy organizations and other supporters of the tax say it fills a $4 billion budget hole and note that studies show it does not affect high earners’ decision to live in New York. “In order for the state finances to hold together, the state really needs the millionaires tax,” said James Parrott, chief economist at the liberal Fiscal Policy Institute. But the Partnership for New York City, an organization of large businesses in the city, and think tanks such as the Manhattan Institute say the tax does indeed repel high earners from the state. “Albany needs to understand the potential negative impact of a tax rate that is higher than almost any of our domestic and global competitors when it comes to attracting talent and jobs,” Kathryn Wylde, partnership president and CEO, said in a statement after Cuomo called for the extension. Senate Republicans, who control the upper chamber jointly with the Independent Democratic Conference, oppose the tax, while IDC leader Jeff Klein, a Bronx senator, supports it and predicts the GOP conference will ultimately agree to extend it.
Before the tax was created in 2009, joint filers earning above a mere $40,000 fell into the state’s highest tax bracket—paying 6.85%. The millionaires tax replaced an essentially flat tax with a graduated one. As a result, a 2015 analysis by the Institute on Taxation and Economic Policy found, New York’s top 1% of earners pay 8.1% of their income in state and local taxes, including property and sales taxes. Nationwide only California’s top earners hand over a larger portion. But New York’s richest still pay a lower share of their income to the government than the state’s bottom 20% of earners do. While the poorest fifth don’t make enough to pay state income taxes, they still shell out 10.4% of their family income on property, sales and excise taxes. The middle 20% of earners lose 12% of their income to taxes. Parrott said without a high-rate income tax bracket, things would be even more unfair.
The millionaires tax traces its roots back to a three-year income tax surcharge put in place after Wall Street’s collapse in 2008. Former Gov. David Paterson got the state Legislature to approve two new brackets at the high end of the income spectrum: 8.97% for million-dollar earners and 7.85% for those making $300,000 or more. In late 2011, days before the two top rates were to expire and fall back to 6.85%, Cuomo and the Legislature extended them but lowered the top rate to 8.82% and the second rate slightly, as well. They simultaneously implemented a package of middle-class tax cuts. The moves allowed the governor to proclaim that every New York taxpayer would pay a lower rate than before he took office. Last year the state passed a new round of middle-class tax cuts that will phase in through 2025. This decoupled the middle-class tax cuts from the millionaires tax, removing a key reason for legislators who oppose the higher rate to extend it.
The Legislature can do nothing and let the millionaires tax die without losing the middle-class tax cuts it was once paired with. But the political impetus for including it in the next state budget is strong: Lawmakers would rather not raise taxes and fees or slash billions in spending to close the deficit that would be created if the tax ends. The impact of its expiration on the budget three- quarters of the way through the next fiscal year would be a loss of $683 million, Cuomo’s budget office estimates, and would balloon to $3.4 billion in fiscal 2019 and $4 billion two years later. Another factor in the tax’s favor is that few constituents of Senate Republicans—who mostly represent working-class upstate districts—have to pay it. Polls show across-the-board support for a higher rate on top earners. A vote on the fiscal 2018 budget is expected in late March.
A version of this article appears in the February 6, 2017, print issue of Crain’s New York Business.
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