Speaker Christine Quinn is attempting to help solve NYC's fiscal problems by raising the rate of taxation of NYC's personal income tax (PIT) on incomes above $297,000, to 4.25 percent (from 3.65 percent), above $532,000 to 4.45 percent and above $1.2 million to 4.65 percent (i.e., a full percentage point increase). The current NY State top rate is 6.85 percent and this is also being considered for an increase.
The PIT surtax is estimated to raise $1 billion and I could be convinced that under current conditions the increase is fair and the brackets well chosen, because:
- NYC has to balance its budget. There are no easy solutions. Those who are high income earners are better able to weather the storm.
- Back in the early days of the Clinton Administration, New Yorkers earning more thsn $200,000 got hit with a surcharge. There was little complaint (New Yorkers voted for him with lop-sided majorities) and the economy recovered well from the recession that hit its lowest point in 1992.
- Anyone in the bracket above $297,000 knows that taxes paid to NYC are deductible from taxable federal income. So the tax is shared with Uncle Sam.
- It's very hard to find a tax that doesn't hurt NYC's competitive situation (the property tax, which is the best of the taxes to raise for competitive reasons, has already been increased), but at least high income earners know that NYC is a good business partner and is a good place to live.
- My friend the late Karen Gerard, former deputy mayor for economic development, once said that after her retirement from the city she worked out a way to save a Wall Street firm millions of dollars by moving to New Jersey. She expected the firm to move. Instead, its reaction was that he savings was "chump change". For many individuals, it would take more than a 1 percentage point increase in the NYC income tax to persuade them to move out of NYC.
- The only tax that doesn't affect the competitive situation of NYC is a tax on land.
On the other hand:
- There would be a competitive effect relative to Connecticut or New Jersey or upstate.
- The top bracket will be high for a city tax. Back in May 2000, when I was Chief Economist in the Office of the NYC Comptroller, we reported a top rate of 3.9 percent, the highest PIT rate for any city that also had a state PIT. Washington, DC had a PIT rate of 9 percent for incomes above $20,000 - but it has no state PIT.
- An increase in the NYC's income tax would have to be approved by the state legislature. Albany has a much bigger budget gap to close than NYC and doesn't have the property tax to fall back on.
- The NYC increase would be on top of whatever increases the state comes up with. The Daily News on Feb. 5 reported that the number of millionaires in New York appears to have dropped by 10 percent, from 48,984 people in 2008 to 44,165 in 2009. The lower Wall Street bonuses would account for much of the change. One proposal would raise the state income tax above the current 6.85 percent for those making $250,000 and above. Others would start at $500,000 or $1 million.
- Gov. Paterson said the last time a temporary tax was approved on the wealthy, in 2003, New York was coming out of a recession. "In contrast, at this point we have not found the floor of this budget deficit, and millionaires - however many of them are still left - can't pay a $48 billion deficit over three years."
- Assembly Speaker Sheldon Silver said there is strong support for hiking taxes on the wealthy, which could raise at least $1 billion. A state surcharge of 1 percentage point on top of Speaker Quinn's percentage point would bring top combined state-city PIT rates to 12.5 percent.
- A fairness issue can be raised based on what percentage of PIT are paid by what percentage of taxpayers. Back in 1997, only 5.5 percent of NYC's PIT filers had adjusted gross incomes (AGIs) of more than $100,000. Yet they paid 57 percent of the PIT.
- A NYC PIT surcharge will be paid mainly by Manhattan residents. In 1997, Manhattan residents accounted for fewer than one-fourth of resident PIT filers, but half of AGIs and 57 percent of the NYC resident PIT tax liability.
- Nonresidents continue to get off lightly. They earned in 1997 on average twice the incomes of NYC residents, and accounted for 37 percent of the earnings of NYC workers, yet they paid only 7 percent of the PIT. Since then, the commuter tax has been eliminated.
Speaker Quinn has also assembled four proposals to help small businesses: Streamlining the permit and licensing process, waiving for 12 months permit and license fees and developing neighborhood marketing campaigns, requiring city agencies to review the effects of new regulations affecting small businesses, and offering commercial kitchen space “at a reasonable fee” to 60 start-up food manufacturers.
Three other proposals are designed to improve municipal efficiency: Merging city agencies with similar or overlapping functions, consolidating the Board of Education’s Retirement System into the general city pension system, reducing “unnecessary administration costs”, and reducing spending on municipal recruitment programs that currently cost the city $30 million a year.
Two proposals relate to R&D and training in the medical and biotech areas: Creating an annual four-year tax credit of up to $250,000 for research and development, facilities and staff training in the area of biotech, and training more nurses by linking experienced nurses to health-care-education programs at the City University of New York.
The remaining four proposals don't fit in any of the above areas: Purchasing the .nyc domain name for New York City businesses, organizations and residents; raising penalties for those who commit gang initiation crimes; creating a one-time amnesty program for those with outstanding violations to pay portions of fines; and improving the referrals of New Yorkers at risk of losing unemployment benefits to public programs like food stamps or Medicaid.
None of Speaker Quinn's smaller proposals would have anything like the fiscal impact of the surtax on personal incomes.