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?

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New York’s new “stable option” pension gimmick for local governments and school districts is “a stopgap with long-term risks,” Moody’s Investor Service warned this week.

The pension funding changes, approved as part of the 2013-14 state budget as alternatives to an even more questionable proposal by Governor Andrew Cuomo, were the focus of a two-page analysis in Moody’s latest biweekly Credit Outlook report (subscription-only).

“The deferral of pension contributions would increase the unfunded pension liabilities of participating local governments, a credit negative,” Moody’s said [emphasis added].

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Noting that New Yorkers had been treated last week to “almost daily political perp walks” involving “a parade of office-holders,” an editorial in Saturday’s Wall Street Journal pointed out: “The bigger scandal in the Empire State continues to be what the politicians do that’s legal.”

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Public employee unions can’t invoke the Triborough Amendment to preserve old pension plans that did not require employee contributions, the state Court of Appeals held in two cases this week. The rulings, favoring management in the cities of Yonkers and Oswego, were a solid win for taxpayers.

Firefighters unions in both cities were striving to preserve non-contributory pension benefits for employees hired after their contracts expired in 2009. In December 2009, Governor David Paterson signed a new Tier 5 pension law that eliminated non-contributory police and firefighter pension plans, requiring employees hired after January 10, 2010, to kick in 3 percent of their salaries to the New York State Police and Fire Retirement System. (The new plan, which was superseded succeeded last year by Tier 6, also limited “pensionable” overtime to 15 percent of regular pay.)

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Defending the new state budget’s three-year “millionaire’s tax” extension in a Newsday op-ed today, Governor Cuomo writes: “The extension doesn’t take place until 2015, the year our financial projections show a $5-billion budget gap. By extending this tax, which generates $2 billion, the state addresses the future gap.”

Huh? Where did that “$5 billion budget gap” come from?

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Governor Cuomo’s proposed two percent cap on interest arbitration awards to police and firefighters unions was stripped from the final Article 7 budget bill dealing with Education, Labor and Family Assistance issues. At the same time, the Senate and Assembly majorities were unable to get the governor to agree to their preference for a straight four-year extender of the arbitration law, which expires June 30.

This is good news: it means there is still a chance that Cuomo will use his legislative leverage on this issue to demand more meaningful changes that could really help localities get control of their public safety compensation costs.

A second small plus in the final budget is that the Legislature also dropped Cuomo’s proposal to eliminate all state-mandated reporting requirements for local governments. On the surface, it may have sounded like a good way to cut red tape, but it also could have jeopardized the continued existence of important accountability tools like the School Property Tax Report Card and state comptroller’s detailed reports on municipal finances.

The left-of-center Fiscal Policy Institute (FPI) was absolutely wrong in pushing to raise New York’s minimum wage — but absolutely right about the problems with the state “minimum wage reimbursement credit.”

Bad policy begets more bad policy (so, FPI guys, you ultimately have yourselves to blame!).  But there’s really no excuse for what Senate Republicans cooked up here in the name of “compromise”: a tax subsidy covering a portion of the wage increase for minimum-wage workers aged 16 to 19 employed by small firms.  As FPI points out, this will create a disincentive to hire older workers and a disincentive to raise wages above the new minimum for younger workers.

To make matters worse, since the budget bills are not accompanied by an updated financial plan, no one knows for sure what the tax credit will cost. Current estimates are $20 million to $40 million.*

* The Senate did release this financial summary “fact sheet,” but it does not break out the year-by-year revenue impact of tax changes — which, after all, would expose the extent to which the laws passed with the budget represent a net tax hike over the next five years.

Governor Cuomo and the Legislature are about to add another gnarly twist to the state’s heavily cluttered personal income tax code with their agreement to create a new “Family Tax Credit.” The credit, as widely reported, is designed to put a $350 check in about a million mailboxes starting “on or before October 15″ in 2014 — within three weeks of the next statewide election. It would expire after 2016.

The credit is targeted to residents of New York State who have at least one child aged 17 or younger under 17 and adjusted gross income of $40,000 to $300,000.  However, in order to determine who gets a check in the mail, the state Department of Taxation and Finance will need to rely on the latest information it has available — which will come from 2012 tax returns (those IT-201 forms New Yorkers have to file before April 15).

As a result, although this is supposed to be a break against 2014 taxes, the language in the new revenue bill says eligibility will be decided on the basis of family, income and tax status as of “the taxable year two years prior to the taxable year in which the credit is allowed,” which means 2012.  For each of two succeeding years, eligibility also will be based on the tax return filed two years earlier.

Inevitably, thousands of those $350 checks will be delivered in the fall of 2014 to people who were eligible for the credit in 2012 but will no longer be eligible in 2014.

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Requiring timely payment in full of every employer’s actuarially determined annual required contribution is among the hallmarks of pension fund probity, in both the public and private sectors. Unlike many of its counterparts in other states, the New York State Teachers’ Retirement System (NYSTRS) has always lived up to that high standard.

Until now.

Buckling to political pressure created by Governor Cuomo’s fiscally irresponsible pension “smoothing” proposal, NYSTRS has negotiated statutory language that would give school districts the option of deferring a chunk of their rising pension contributions over the next seven years. If most districts participate, the sum involved could easily amount to well over $1 billion.

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So, in the end, the state’s pension guardian caved, after all.

To his credit, Comptroller Thomas DiNapoli did not embrace Governor Cuomo’s dubious proposal to allow localities to massively underpay pension contributions to the New York State and Local Retirement System (NYSLRS), trading short-term savings for potentially open-ended long-term liabilities.

However, NYSLRS’ sole trustee did the next-worst thing: unnecessarily offering an “alternative” revision to an existing pension cost deferral program, enacted with his support three years ago.

(Click here for subsequent post on separate teacher pension funding changes.)

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