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 following table presents a breakdown of the combined Marginal Effective Tax Rate (METR) for residents of different parts of New York, using a methodology presented in this recent paper by Gerald Prante and Austin John of Lynchburg College. The higher METRs for residents of New York City and in New York City suburbs (where most high-income payers live and work) reflects the impact of the MTA payroll tax in that region.
Only California, which recently raised its top tax rate to 13.3 percent on incomes over $1 million, will have a higher combined tax bite than New York City under the new law. For California residents in that state’s top bracket, the income tax on added dollar of income in the top bracket will come to 51.9 percent, according to Prante and John.
The main elements of the federal tax hike are as follows:
- The top marginal rate rises from 35 percent to 39.6 percent on taxables incomes of $400,000 for single filers and $450,000 for married couples, which typically equates to a range of more than $450,000 to over $500,000 of adjusted gross income after deductions.
- An additional Medicare tax of 0.9 percent is imposed on all wage and salary income of households in the new top bracket. This is on top of the existing Medicare payroll tax of 2.9 percent — evenly divided between employer shares and employee shares, with self-employed persons paying the full amount. (Most economists assume the “incidence” of a tax paid by an employer falls on the employee.)
- A federal limitation on the value of total itemized deductions, known as “Pease” after the congressman who introduced it in 1991, is reimposed in high-income brackets after being phased out by the Bush tax cuts between 2006 and 2010. The formula is a bit complicated, but it effectively adds 1.2 percent to the marginal rate in the top bracket.
The combined federal-state-local marginal income tax rate for New Yorkers in the top bracket last exceeded 50 percent back in 1986, when it was about 54 percent statewide, and somewhat higher in the city. However, that rate applied to a narrower taxable income base, which contained more loopholes before the 1986 federal tax reform law took effect the following year. The city’s combined marginal rate was last above 50 percent in 1995, before a series of state and city income tax cuts took full effect in the late 1990s.
Wealthy New Yorkers who don’t like the idea of paying more than half their total salary, wage and self-employed business income in federal, state and local taxes have three options for bringing their tax bite back under 50 percent. They can choose to rely more on income from capital gains and dividends, which will now be taxed at a federal rate of up to 23.8 percent (up from 15 percent under prior law) but has long been taxed the same as other income at the state and city level. They can also shelter more of their income in tax-free municipal bonds, or in other tax-preferred investments like TV and film production – which will reduce the amount of income available for taxation by the state and city.
A third choice is to move someplace where state and local taxes are lower, or even non-existent. Of course, nobody is really likely do that.