New York is among the states with highly progressive income tax structures. And that’s posing a problem. Revenues are coming in below expectations. New York Gov. Andrew Cuomo explains,
Less than three weeks after he proposed his 2019 state budget, Gov. Andrew M. Cuomo on Monday raised red flags over slipping tax revenues and suggested that some popular items in the fiscal plan, including state aid to schools, could face cuts from what he offered in mid-January.
Calling the situation “as serious as a heart attack,” the Democratic governor said revenues are $2.3 billion below projections for the fiscal year that ends March 31.
Part of the problem, as he sees it, is that federal tax reform capped the deductibility of state and local taxes. What that policy did, as the Tax Foundation assesses it, is end the federal subsidy of high-tax states.
Although these taxpayers received a net tax cut from the TCJA, lawmakers from high-tax and high-income jurisdictions, such as New Jersey, California, and New York, dislike this proposal. The primary reason is that this $10,000 cap makes taxpayers more sensitive to subsequent state and local tax increases. Under previous law, an individual who faced a state or local tax increase of $1 would end up only facing a net tax increase of between $0.60 and $0.90, depending on their federal marginal rate, due to the SALT deduction. Now under current law, the cap means taxpayers will face the full cost of a state and local tax increase. Some jurisdictions liked the implicit subsidy for additional government spending that existed under previous law.
The above paragraph comes from the TF analysis of a proposal by two Members of Congress from New York who want to eliminate the cap.
Back to Cuomo:
“Tax the rich. Tax the rich. Tax the rich. We did that. God forbid the rich leave,” Cuomo said of a mobile group of people who can more easily switch residences to states with lower state and local tax levels.
The top 1% of New York taxpayers pay 46% of state income taxes. Revenues vacillate with capital gains—a problem that is compounded in New York because bonuses in the finance industry are often tied to trading revenue. Markets were especially volatile during the last quarter amid uncertainty about trade and interest rates.
Some New York taxpayers moved income forward to 2017 to take advantage of the uncapped state-and-local deduction, which boosted revenue last year. Politicians naturally spent that windfall. But non-wage income-tax revenue over the last two months were still $1.2 billion below 2016 levels.
The bigger problem seems to be geographic tax arbitrage. Mr. Cuomo notes in a PowerPoint presentation that “anecdotal evidence suggests that high income taxpayers are considering changing their residence and that financial industry firms are looking at real estate outside of New York.” While the Governor blames the GOP tax reform, high earners have been decamping for years, as E.J. McMahon of the Empire Center has chronicled.
Illinois residents are fleeing for more economically hospitable states. They go to Texas, Florida and other Sun Belt states because job prospects are better, tax burdens are lower and the weather is more temperate. The Exodus is real. It’s damaging Illinois. And it may be getting worse.
The warning comes from a fellow sufferer, otherwise known as the governor of New York…
We fear heart attacks, but we also see a potentially positive outcome in Springfield if Democratic Gov. J.B. Pritzker and the Democrat-controlled General Assembly absorb the right lesson from New York. The unfair federal subsidy of affluent Illinois households is dead. Those households will pay more in federal taxes — a reflection of the high taxes levied by their state and local governments. That means there is a newly compelling reason for the governor, legislators and local officials statewide to manage budgets responsibly and reduce their high tax burdens.
But if the profligate ways continue, there will be trouble ahead: If state and local officials insist on ever-higher spending and then raising taxes, residents will rebel. Even more will leave this state. And as Illinois’ population continues to shrink, a higher tax burden falls on everyone who remains.
Tax policy matters. Taxpayers – perhaps especially high earners – are mobile. Which is why, as the Washington Research Council writes, fiscal federalism is particularly apt to this discussion.
We also point to a key principle of fiscal federalism (a theory allocating responsibilities among the three levels of government), which holds that redistributive tax policies are best enacted at the national level. Adding this dimension to the analysis leads to our third finding:
It’s true: Capping the state and local tax eliminated a subsidy for wealthy taxpayers in high-tax states like New York. But, it’s still appropriate to question whether the subsidy ever made fiscal sense. Arguably, the cap increased transparency and made the consequences of highly progressive taxation more evident.