Cuomo’s dug New York into a giant tax trap

Cuomo’s dug New York into a giant tax trap

The opening salvo of Cynthia Nixon’s challenge to Gov. Cuomo included a claim guaranteed to stir the passions of true-blue progressives: Cuomo, she said, “has given massive tax breaks to corporations and the super-rich.”

But aside from extending $420 million a year in tax giveaways to film and TV producers — which Nixon, to her credit, has at least mildly questioned — Cuomo hasn’t given “massive” tax breaks to anyone.

Quite the contrary: In the real world, Cuomo has further boosted the state’s already heavy reliance on taxes paid by income millionaires. This has made Albany’s revenue base more fragile and volatile — a problem aggravated by the new federal cap on state and local tax deductions, which effectively raises total tax rates for New York’s highest earners.

At the root of this trend is New York’s so-called “millionaire tax,” first enacted under Gov. David Paterson as a temporary three-year measure to deal with the financial crisis in 2009. The top rate was pegged at a flat 8.97 percent, nearly one-third higher than the existing rate of 6.85 percent.

Starting in his 2010 campaign, Cuomo said he opposed extending the higher tax beyond its sunset date. But at the end of 2011, his first year in office, he changed his mind and extended most of the tax for three more years at a slightly lower 8.82 percent, applied as a flat rate to the incomes of single filers earning $1 million and couples earning $2 million. To attract Republican Senate support, this was packaged with temporary rate cuts for middle-class taxpayers.

Since then, the governor has pushed through cuts in both corporate and estate taxes, a series of temporary tax credits and property tax rebates and the first installment of a permanent multiyear cut in middle-class income taxes. He’s also expanded state pre-kindergarten funding and promised “free” public university tuition for students from families earning up to $125,000.

And it’s all been financed by the millionaire tax, which raises about $4.5 billion a year and is next due to expire at the end of 2019. The upshot: Under Cuomo, New York’s state tax burden hasn’t been reduced but shifted further up the income scale. The personal-income tax now makes up nearly two-thirds of the state’s total tax receipts, up from half when Gov. Mario Cuomo left office in the mid-1990s. More than 40 percent of the tax originates with the highest-earning 1 percent of taxpayers.

At the top of the state’s tax pyramid (as of 2015, according to the latest state data) are about 47,000 taxpaying households with adjusted gross incomes of more than $1 million — including more than 25,000 households in New York City, which adds its own 3.9 percent income tax to the state total.

New York’s state income-tax base also includes another 54,000 non-resident income millionaires — taxed at lower effective rates because their capital gains and dividends are beyond the reach of Empire State tax collectors. The nonresident share of high earners had been rising steadily, even before Cuomo took office — and is likely to grow more now that the feds have imposed a $10,000 cap on SALT deductions, which averaged $500,000 for New York’s resident income millionaires.

In a desperate effort to “thwart” the SALT cap, Cuomo’s latest budget includes two tax workarounds: an optional corporate-payroll tax, which would be deductible as a business expense; and a scheme for allowing taxpayers to offset most of their taxes with (theoretically) deductible contributions to government-sponsored “charitable” trust funds. But the payroll tax is so convoluted it’ll appeal to few if any corporate employers, and the IRS is likely to disallow the charitable-deductions dodge.

Meanwhile, the progressive advocates backing Nixon’s candidacy have called for even higher millionaire taxes. So have Speaker Carl Heastie and his Democratic super-majority in the state Assembly. Raising top tax rates is a perennial item on Mayor de Blasio’s agenda, as well.

The governor has made clear his concern that the SALT cap could drive high-income residents out of the state. Yet in the face of Nixon’s challenge, he’s more tightly embraced the unions that ultimately drive most of the demand for higher taxes.

It’s certainly a conundrum — of Cuomo’s own making.

E.J. McMahon is research director of the Empire Center and adjunct fellow with the Manhattan Institute.

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