President Obama’s proposed cap on itemized federal income tax deductions for state and local taxes would cost New York residents $3.8 billion a year, according to a report released by Governor Cuomo’s office today. However, you’ll have to dig a little to find that number: Obama isn’t mentioned until page 11 of the 26-page document.
The opening section of the report (which is, by the way, useful and well-researched in most respects) focuses on how bad it would be for New Yorkers if the federal government were to completely eliminate the deduction for state and local taxes. However, no one in a position of authority in Washington is actually proposing such a thing. The much more more serious risk to New York is that the White House and Congress will agree to some form of limit on itemized deductions for high-income taxpayers, as Obama proposed in his budget last week (reviving a proposal he first trotted out three years ago).
President Barack Obama’s proposed federal budget revives his proposal to cap the value of itemized income tax deductions for the highest-earning 3 percent of taxpayers, a category starting at $200,000 of taxable income for single filers and $250,000 for married filers.
Under current law, if you’re in the 39.6 percent tax bracket, you get a 39.6 percent discount on the cost of items for which you claim deductions, assuming you’re not subject to the Alternative Minimum Tax (and if you make enough to be in that bracket, you’re probably beyond AMT range). Obama would reduce it to 28 percent, the highest tax rate in lower brackets.
By far the largest deduction claimed by high-income taxpayers, especially those earning $1 million and more, is for state and local taxes.
So guess which state’s tax base (with the possible exception of California’s) would be hit hardest by this change?
The White House says that if an automatic budget sequester is triggered in Washington later this week, New York ultimately will lose $275 million in federal aid.
To put that in context, based on the latest available government finance and economic data, $275 million represents:
- about 0.093 percent of total spending by New York’s state and local governments as of 2010;
- about 0.027 percent of New Yorkers’ personal income as of 2012; and
- about 0.024 percent of New York State’s Gross Domestic Product as of 2011.
Those amounts reflect small fractions – one-hundredths — of a single percentage point.
For taxpayers in New York State’s top personal income tax bracket, the new federal tax law will drive the combined federal and state marginal tax rate to within a percentage point of 50 percent, its highest level in 27 years. For New York City’s highest earning residents, the combined federal-state-local income tax bite will now consume more than half of every added dollar of income for couples earning at least $1,000,000.
The just-enacted federal tax increase will fall heavily on high-income New Yorkers – but will take a much smaller bite out of the Empire State’s tax base than President Barack Obama had been seeking.
The bill preserves President George W. Bush’s income tax cuts for the vast majority of households while raising the top federal income tax rate, from 35 percent back to the pre-Bush level of 39.6 percent, on taxable incomes of $400,000 for single filers to $450,000 for married joint filers. This effectively translates into gross household incomes of $450,000 to over $500,000, respectively.
New York residents will pay almost $90 billion in added taxes over the next two years if the federal government plunges over its fiscal “cliff” with no changes to current law, according to a timely report issued last week by Comptroller Thomas DiNapoli. The scheduled tax changes outweigh the impact of scheduled “sequestration” cuts to federal spending, which would cost the state and local governments $5 billion over the next nine years, including a $600 million hit to the state budget in fiscal 2013.
Governor Andrew Cuomo is making a big deal out of the failure of a congressional “super committee” to produce a deal on reducing the federal budget deficit. This is supposed to trigger $1.2 trillion in across-the-board federal budget cuts over a 10-year period beginning in 2013—which, Cuomo said yesterday, could translate into $5 billion in lost federal funding for New York.
Bemoaning “Washington’s inability to get its fiscal house in order,” the governor warned: “These events, combined with a stagnant national economy and the expanding fiscal crisis in Europe that has led to a sudden and severe decline in revenues for the state, have dramatically changed the fiscal course of the state.”
As expected, President Obama’s latest deficit-reduction package calls for a return to pre-2001 income tax rates and new limits on itemized deductions for filers with incomes starting as low as $200,000 — essentially the same thing the president proposed two years ago.
Back to the future for NY?
For high-income earners, Obama’s proposed combination of federal rate hikes and deduction limits would raise New York’s net (i.e., post-deduction) state and local income tax rates their highest levels ever — higher, even, than after Nelson Rockefeller jacked up New York’s top rate to 15 percent in the early 1970s, as Josh Barro and I explained in this 2010 City Journal article. By curtailing the interest deduction on municipal debt, the Obama plan would also raise the cost of borrowing for state and local governments — an especially important for heavily indebted states like New York.
Then there’s the not-so-little matter of the elasticity of income in response to a big federal tax hike, and the resulting impact on the state’s revenue: (more…)
New York State is among the easiest places in the country to qualify for the federal Social Security Disability Insurance (SSDI) program, the Wall Street Journal reports today.
Don’t look now, but the feds are dropping more cash from helicopters — and the Empire State is already grabbing a big handful.