Tax Hike Gouges NYC Metro Region
In an era of steeply progressive taxation, New York State’s local government aid formulas inevitably have a Robin Hood effect—redistributing income from the relatively wealthy New York City metropolitan area to relatively poorer regions north of the Bear Mountain Bridge.
However, the Legislature’s 2003-04 budget deal pushes this trend to an extreme degree, significantly adding to the transfer of income from downstate to upstate.
As a fiscal matter, when added state taxes are stacked up against restored state aid, the New York City metropolitan area is clearly on the losing side of the new state budget deal (although the City alone may end up roughly breaking even, depending on how different forms of aid are counted).
Economically, there is no doubt that the entire downstate region will disproportionately suffer the harmful consequences associated with raising taxes by well over $1 billion at a time when many key business sectors have yet to emerge from the recession.
Drawing the revenue bulls-eye
The largest single item on the Legislature’s revenue-raising agenda is an increase in New York State’s top personal income tax rate. Effective in 2003, the rate will rise from 6.85 percent to 7.5 percent for married couples earning taxable incomes of $150,000 to $500,000, and to 7.7 percent for couples earning taxable incomes above $500,000. The tax hike is expected to produce $1.64 billion in the 2003-04 fiscal year and $3 billion over the next three years.
As illustrated in the pie chart below, households in New York City, Nassau and Suffolk counties on Long Island, and the northern suburbs of Westchester and Rockland counties will pay at least 89 percent of new income taxes collected from all New York State residents.
Where the New Income Tax Revenue Will Come From
Source: Manhattan Institute calculations based on data from Department of Taxation and Finance reports and Statistics of Income reports from the Internal Revenue Service
New York City, Long Island, Westchester and Rockland residents will pay a total of about $1.2 billion in added income taxes during the 2003-04 fiscal year, compared to just $144 million for all households in the rest of the state. Most of the city’s share will originate in one borough—Manhattan.
The remainder of the state income tax hike—some $338 million in all—will come from nonresidents who work in New York, including commuters from Connecticut, New Jersey and Pennsylvania.
Just 4 percent of all tax filers in New York State fall into the high-income brackets affected by the new higher rates. However, these households are disproportionately concentrated in just a few downstate counties. In Westchester, for example, nearly one-quarter of all married couples will be affected.
While the median family income throughout the state was just below $52,000 as of 1999, it approached or exceeded $100,000 in most Westchester and Nassau County towns, as well as in some parts of Rockland, Suffolk County and Manhattan, according to the Census Bureau. This helps explain why the region’s share of the tax increase greatly exceeds both its 63 percent share of the state’s total population and its 70 percent share of total personal income.
A losing proposition
In addition to the income tax increase, the Legislature’s budget adds an additional quarter-percent to the existing 4 percent statewide sales tax and removes two of the statewide sales tax “holidays” for clothing purchases that had been recommended by the Governor. This is expected to raise $567 million in new revenue during fiscal 2003-04. State tax data indicate $367 million, or 65 percent of the total, will be generated in New York City, Long Island, and Westchester and Rockland counties.
Many state legislators defended their support for the income and sales tax increases as a way to hold down property taxes, principally school taxes. However, as shown below, the total school aid restoration for these counties doesn't come close to offsetting the state tax increase.
State Tax Increase vs. School Aid Restorations
As shown above, the net state tax increases in Long Island, Westchester and Rockland will exceed school aid restorations by $457 million.
The Legislature also restored nearly $1 billion in spending for Medicaid and health care programs that Governor Pataki had cut. According to some published reports, when this funding is added to the school aid total, New York City may reap over $1 billion in new cash from Albany, slightly more than the additional state taxes it will generate. However, a final figure will not be available until the city updates its financial plan for the fiscal year beginning July 1.
Suburban counties, however, clearly lose when increased state taxes are compared to direct aid. Legislative analysts said the adopted budget included state aid restorations sufficient to “provide property tax relief for homeowners of $1.3 billion.” After deducting restored school funding, that would leave a total of about $300 million, for which a complete county-by-county distribution table is not available. However, even in the unlikely event that this aid is distributed among counties in equal proportion to increased taxes, tax increases will exceed property tax relief by at least $337 million in Long Island, Westchester and Rockland.
Hitting where it hurts
Previous studies of the flow of state funds within New York have documented that, on a per-capita basis, the New York City metropolitan area provides a large net subsidy to the rest of the state.
A larger question, however, is what the new state budget will do the economy of the New York City metropolitan area. Based on previous correlations between taxes and employment, the Governor’s office has estimated that 100,000 jobs will be lost as a result of the income tax increase. If so, most of those jobs will be concentrated downstate—where New York City and Long Island, in particularly, have continued to experience private sector employment declines over the past year.
State tax hikes will be compounded by a separately approved increase New York City’s own income tax, which will raise the combined state-local marginal rate in the city from 10.5 percent to 12.15 percent.
Legislators and local elected officials in upstate New York, where private sector employment is growing at a slightly faster pace than the national average, may be tempted to assume the distribution of the fiscal costs under the new state budget is an unalloyed benefit to their region.
But with the decline in the relative importance of key upstate industries, New York’s economy as a whole—and, to an even greater extent, its income tax-dependent state treasury—is heavily dependent than ever on growth in the New York City region. Thus, the ultimate cost of the budget is likely to be heavier than upstate officials now appreciate.
POSTED: MAY 13, 2003