Ten months into New York’s just-ended fiscal year (most recent data), state tax revenue was actually up year-over-year. By a miniscule amount—it’s probably best to see FY 2021 revenue as essentially flat—but up nonetheless, it’s a curious backdrop for a proposal to raise both individual and corporate income taxes. If a tentative budget agreement goes through, New York taxes would go up $4.3 billion. For New York City residents, who face both city and state taxes, that yields a top marginal individual income tax rate of 14.776 percent, while most businesses in the city would face a top corporate rate of 16.1 percent (even more for the finance industry).
The additional $4.3 billion a year generated by these taxes would be for new programs, not to cover any revenue shortfall. The state is already slated to receive $12.4 billion in aid under the American Rescue Plan Act, with local governments receiving another $10.6 billion.
New York’s current top individual income tax rate of 8.82 percent was meant to be temporary, designed to meet the state’s needs during the Great Recession. It has now been extended four times, most recently through 2024. To that, officials have now reportedly converged on a deal to overlay another temporary tax increase, this one with a top marginal rate of 10.9 percent through 2027. Theoretically, the state rate would then return to the pre-Great Recession rate of 6.85 percent, but if anyone believes that will happen, perhaps they should put their anticipated tax savings into a down payment on a bridge for sale in Brooklyn. Measured in nonbusiness taxes (not just individual income taxes) as a percentage of personal income, New York already has the nation’s second-highest tax burden on individuals (an 8.1 percent effective rate), trailing only Hawaii (8.4 percent). If this plan were adopted, the state’s burdens would inch very close to Hawaii’s. The national average is 5.7 percent.
The state’s corporate income tax rate of 6.5 percent is reasonably competitive regionally, but to this, New York City adds another 8.85 percent on activity performed in the city (9 percent for the finance sector) and a Metropolitan Commuter Transportation Mobility Tax is imposed at up to 0.34 percent of payroll expense. Businesses already pay an estimated $10,400 in business taxes per employee in New York, compared to a U.S. average of $6,500. The only states with higher business taxes per employee—North Dakota, Wyoming, and Alaska, in that order—generate much of their tax revenue from capital-intensive oil and natural gas operations. Of states with broader economies, New York is already without peer, in a bad way. The budget being negotiated would bring the state rate from 6.5 percent to 7.25 percent, yielding a top New York City rate of 16.25 percent in the finance industry and 16.1 percent for most other companies, including small businesses.
Overall, New York’s state and local tax burdens—on individuals and businesses alike—run 14.1 percent at present, the highest in the country, and 1.3 percentage points higher than its next highest competitor (Connecticut). The current proposal would expand that gap still further, and at a time when taxpayers are increasingly mobile. Instead of focusing on ensuring the return of those who temporarily relocated, New York policymakers are on the verge of inducing them to make those relocations permanent—and to have others join them.
Like most states, New York has fared reasonably well during the pandemic despite early fears of dramatic revenue losses. The real risk is that high earners who have temporarily relocated during the pandemic don’t come back, or that a more remote work-friendly environment leads many taxpayers to move out-of-state. Policymakers have talked about tax increases not only to fund new programs but to cover these hypothetical losses. Raising rates on those with the most flexibility to leave—or never to return—risks turning those fears into a self-fulfilling prophesy.
Click here to read our comprehensive analysis of New York’s revenue options.
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