New York's tax on high incomes could start a national trend
The Empire State, not seeing fit to await further developments on the national stage, agreed this weekend to pass an emergency temporary state income tax increase on upper-income residents to eliminate a large budget deficit magnified by the pronounced recession.
State budget deficit drives decision
Gov. David Paterson (D-N.Y.) and state assembly leaders in Albany reached the deal to help close a deficit of $15-16 billion for the fiscal year that begins in April. The temporary tax hike, which will expire after three years, is expected to raise about $4 billion.
"We are right now on the verge of cuts and service reductions that I would have to describe as life-threatening," Gov. Paterson told Bloomberg News last week on the eve of the agreement. At the time, the governor had estimated the deficit could rise by another $3 billion over the coming fiscal year.
There's not much else the state of New York could do. It's already making massive cuts in public and social services -- $9.5 billion in the governor's proposed budget -- so a tax increase was unavoidable. Without it, the state would have had to implement cuts that would have bordered on the absurd.
Dubbed the "millionaires' tax," the state income tax increase applies to those filers earning $300,000 per year and up.
The tax increase is as follows: For those tax filers earning more than $300,000, the top tax bracket would rise to 7.85 percent from 6.85 percent, or a 14.5 percent increase in taxes. For those earning more than $500,000, the top bracket rises to 8.97 percent from 6.85 percent, or a 30.5 percent increase.
The State of New York's finances have been hit particularly hard by the financial crisis, which has resulted in the layoffs of hundreds of thousands of financial service professionals in the New York City area. Those layoffs have swelled the state's unemployment rate to 7.7 percent and have also eliminated billions in bonus-based state tax dollars, as firms have reduced or eliminated bonuses.
Fiscal Policy Analysis: No one likes a tax increase, but as noted, the State of New York was left with no other choice. The state cannot wait for possible further help from the federal government, and for too long the state lived under the myth that taxing citizens who earn $300,000 a year at the same rate as couples who earn $40,000 would be sufficient to support public services. Sorry, all you "millionaires" who don't feel like millionaires, but it doesn't work that way, and now New York's tax structure begins its long journey back to tax fairness and reflecting the shared sacrifice that must occur to cope with problems caused by the financial crisis and the recession.
In sum, if you're making $300,000 a year or more in New York, you'll have to pay a little more, temporarily. The resources are needed. There are no other options. It is both the correct public policy and the responsible public policy.
In the same way Gov. Al Smith's reform policies in New York State in the 1920s provided a blueprint for FDR's New Deal, hopefully New York State's example will serve as impetus for the U.S. Congress to make a similar tough decision after the economic recovery is in place and raise upper-income federal taxes, as well.