NCPA - National Center for Policy Analysis


February 22, 2010

Thanks to the interplay of federal and state tax rules, Albany's share of all income taxes paid by New York's wealthiest residents has actually been rising since the 1970s.  And it will soon rise to its highest level ever, if President Obama and congressional Democrats have their way.  This is bad news for New York's battered economy, says E. J. McMahon, a senior fellow for tax and budgetary studies, and Josh Barro, the Walter B. Wriston Fellow; both with the Manhattan Institute. 

Albany couldn't have picked a worse time to enact yet another temporary income-tax increase-- yet that's precisely what Governor David Paterson and the Legislature agreed to do last spring, as part of the 2009-10 state budget, say McMahon and Barro: 

  • This hike, twice as large as the one in 2003, has raised the top state rate to 8.97 percent on filers with taxable incomes of over $500,000 (and to 7.85 percent for those starting as low as $200,000).
  • The Bush tax cuts included a phase-out of limits on itemized deductions (known as "Pease," after the Ohio congressman who sponsored it) starting in 2006, its scheduled elimination in 2010, and its reappearance in 2011.
  • Obama's first budget would restore the full Pease limit and add yet another cap on itemized deductions.
  • If Obama's deduction cap winds up enacted and federal rates in top brackets increase in line with his plan, New York's effective top tax rate will rise to at least 7.3 percent in 2011.
  • That will be its highest level ever -- more than half again as high as the effective top rate in the 1970s; the combined federal and state tax bite on salaries, wages, and bonuses of New York State residents in the top bracket will come to just over 48 percent. 

Economists and tax policy analysts have long recognized a link between taxpayer behavior and changes in marginal rates, especially in higher income brackets, where taxpayers have more control over the timing and nature of their incomes.  When rates rise sharply, taxpayers respond by working and earning less, by shifting their "domicile" to lower-tax jurisdictions, and by using legal strategies to shift or shelter income in tax-exempt investments, say McMahon and Barro. 

Source: E. J. McMahon and Josh Barro, "Empire of Excess," City Journal, Winter 2010. 

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