Proposed Tax Hike Would Destroy Jobs
FISCALWATCH MEMO April 4, 2002

An income tax increase proposed this week by a majority of City Council members would cause New York to lose nearly 48,000 jobs, according to the Manhattan Institute’s tax policy analysis model.

Twenty-seven of the 51 Council members have signed a letter urging Council Speaker Gifford Miller to support a package of three “modest” tax increases, which they say would total over $2 billion, to help close the city’s $4.8 billion budget gap for fiscal 2003.[1] 

The Council members are calling for restoration of the commuter tax[2] and of a portion of the stock transfer tax, which was effectively abolished more than 20 years ago.[3] But the largest element of their plan is a proposal to raise the city’s top resident income tax rate, now 3.65 percent, by a full percentage point (to 4.65 percent) for New Yorkers with incomes between $200,000 and $250,000, and by two full points (to 5.65 percent) for all new Yorkers earning more than $250,000.[4]

The increase would be equivalent to a whopping 55 percent income tax surcharge for those in the newly established top bracket. While proponents say the income tax hike would raise “over $1 billion,” the net increase would actually amount to some $1.23 billion, according to the Manhattan Institute’s NYC-STAMP model.[5] 

There were 71,050 New York City tax filers with adjusted gross income above $200,000 as of 1999, according to the city Finance department. Spread across this population, the proposed tax hike would work out to an average $17,298 per affected household.[6]

In their letter to Speaker Miller, the Council members supporting the tax hike claimed that it would be “a fair, effective way” to help balance the budget—but they fail to acknowledge even the possibility that this would also jeopardize the city’s economic recovery.

Higher taxes = less economic growth

The economic disincentives created by the proposed income tax increase would lead to a loss of 47,916 jobs, the Manhattan Institute’s NYC-STAMP model estimates. This impact would be on top of an estimated loss of 10,733 jobs stemming from the Council’s recent decision to allow an existing income tax surcharge to revert to a full 14 percent.[7] The city already has lost more than 100,000 jobs in the wake of the World Trade Center attack.

Taxpayers with incomes above $200,000 tend to have much greater discretion than most New Yorkers over how—and where—they earn their money. While most taxpayers are wage-earners, the higher brackets include a larger proportion of business proprietors, decision-makers and entrepreneurs, who customarily reinvest a portion of their incomes in their own firms and in the stock market. A significant city income tax increase will slow economic growth and reduce employment by making New York a less attractive place for these well-paid individuals to live and work, and by reducing the amount of money they spend and invest in the city.[8] 

The tax hike would further worsen the city’s competitive standing in two especially noteworthy ways:

• the combined state and city income tax rate in New York would rise to a maximum of 12.5 percent—nearly double New Jersey’s top rate of 6.35 percent, which is the highest of any neighboring state’s.[9]
• the total effective capital gains tax rate in New York[10]—already highest in the nation at 27.5 percent—would effectively increase to as much as 29 percent.

Prior to this year, the last time the city enacted a large income tax increase was a little over a decade ago, when then-Mayor Dinkins imposed in quick succession a big property tax increase and two tax surcharges that represented a total income tax increase of more than 28 percent.[11] These steps fed a downward economic spiral in which the city lost more than 300,000 private sector jobs, a tenth of its employment base. While the proposed tax hike would directly affect fewer taxpayers than those enacted in the Dinkins era, it is still the wrong medicine for what ails the city’s economy.

Notes

1. The full text of the letter can be found at http://www.gothamgazette.com/searchlight/miller_letter.shtml.
2. For an explanation of why this is a bad idea, see “The Tax Whose Time Has Gone,” Fiscalwatch Memo 2002-01.
3. To fulfill Municipal Assistance Corp. bond covenants, the stock transfer tax is still collected but then immediately rebated in full to taxpayers.
4. Although neither the Council members nor other groups supporting the tax increase are specific on this point, it is assumed for purposes of this analysis that the higher rates will be targeted on the basis of adjusted gross income, which is the normal starting point for calculating taxes.  Taxable income—AGI minus deductions and exemptions—is the basis for tax rate brackets.
5. For details on the model and its previous findings, see “What New York Has Gained From Tax Cuts,” Manhattan Institute Civic Report 20, September 2001.
6. The U.S. Census Bureau estimates there were 95,329 New York City households with incomes exceeding $200,000 as of 2000. But the census definitions of households and income are different from those used for tax purposes. To the extent the current number of tax filers affected by the proposed increase is higher than the 1999 figure, the average household impact would be lower; e.g., if the number of affected filers has grown to 80,000, the average tax increase would be $15,362.
7. See Fiscalwatch Memo 2001-01.
8. This disincentive was vividly illustrated just a few months ago, when All-Star baseball slugger Juan Gonzalez turned down a huge contract offer from the Mets and accepted a lower amount to play for the Texas Rangers. “Even if the Rangers offer a little less than the Mets, I wouldn’t have to pay the taxes that are in New York,” he explained. (See “Gonzalez Likely to Spurn Mets,” by Tyler Kempner, The New York Times, January 8, 2002),
9. The top state income tax rates are 5.3 percent Massachusetts, 4.5 percent in Connecticut and 2.8 percent in Pennsylvania, except in Philadelphia, where the nation’s highest municipal wage tax brings the top rate for residents to 7.34 percent.
10. This is calculated as a combined federal, state and city rate, reflecting the effects of state and local  tax deductibility.
11. The 14 percent surcharge enacted in 1991—and still on the books today—originally was compounded on top of the 12.5 percent “Safe Streets, Safe Cities” surcharge, which expired at the end of 1998.

POSTED: APRIL 4, 2002