McMahon: Look out, NYers, the taxman cometh
'The hardest thing in the world to understand is the income tax," Albert Einstein once complained to his accountant. Non-geniuses scrambling to meet next week's Tax Day deadline would surely agree. As if the federal income tax weren't complicated enough all by itself, New York forces its workers and business owners to navigate an increasingly byzantine state income tax code that only a professional tax preparer (or tax-prep software company) could love.
The state's IT-201 Resident Personal Income Tax form now takes up four pages -- twice as many as its federal counterpart, the 1040. That doesn't include the additional forms necessary to claim most of the state's three dozen income tax credits. New York's annual Tax Expenditure Report, a 223-page compendium of the money effectively "spent" on state tax breaks, needs 37 pages to explain the myriad deductions, credits and preferences available under the personal income tax alone.
While tax compliance in New York is a time-consuming nuisance, the burden of income taxes threatens to become a serious drag on our long-term economic competitiveness. In the wake of December's vote by the State Legislature to extend a modified version of the "millionaire's tax" first enacted in 2009, New York's top rate of 8.82 percent is the eighth highest in the country. Among our peer states, only New Jersey (barely) and California impose higher income taxes on their wealthiest residents. The 12.7 percent combined state and local top rate for residents of New York City is the highest anywhere in the country.
What Gov. Andrew M. Cuomo described as "the first major restructuring of the tax code in decades" was, in reality, a straightforward tax hike of $1.9 billion accomplished through a series of temporary adjustments to existing tax brackets and rates, leaving the structure of the code intact.
Compared to the rates scheduled under permanent law, the December tax bill temporarily raised taxes by $2.6 billion a year for taxpayers with incomes above $1 million (and married filers with incomes above $2 million), while redistributing $690 million of the proceeds in the form of temporary tax breaks for the middle class. At least these changes are set to expire at the end of 2014.
If there was a silver lining to December's makeshift tax package, it was the governor's promise to create a 13-member commission to "examine a comprehensive overhaul of the state's entire tax code," as described in a joint press release with legislative leaders. This could be an opportunity to identify ways of making the state tax code simpler, more efficient and more competitive.
But five months later, Cuomo still hasn't gotten around to appointing the panel.
Meanwhile, the federal tax code is in flux. With the Bush tax cuts due to expire at the end of this year, the question is not whether federal tax changes are coming, but whose tax policy priorities will prevail after the November elections.
President Barack Obama is pushing higher taxes on the wealthy, including further restrictions on the itemized deductions they can claim for taxes paid to state and local governments. Likely Republican nominee Mitt Romney, echoing congressional Republicans, says he wants "lower and flatter rates on a broader tax base," which would imply a scaling back of existing deductions.
No matter who controls the White House and Congress next year, the federal government seems likely to curtail -- if not eliminate -- the state and local tax deduction, through which the federal tax code has effectively subsidized the higher cost of state and local government in New York. When that happens, our state tax rates will feel a stronger tug from the laws of gravity.
E.J. McMahon is senior fellow at the Manhattan Institute's Empire Center for New York State Policy.