Paterson / Silver Budget Will Make New York’s Taxes Worst in Country

March 31, 2009

David Paterson, reversing his previous position in favor of balancing New York State’s budget without an income tax hike, has agreed with Democratic legislative leaders on a plan that raises about $7 billion in new taxes and fees. A majority of that new revenue will come from higher income taxes on high income people. Meanwhile, the state’s budget will grow to $131.8 billion, 8.7% larger than last year’s.

In our 2009 State Business Tax Climate Index, New York rated as having the second-worst tax climate for business in the country, with New Jersey taking top honors. However, once this plan is enacted, New York will leapfrog New Jersey to claim the mantle of America’s worst tax code for business.

The plan’s centerpiece is the addition of two new income tax brackets to New York’s income tax. The current top rate is 6.85%. A rate of 7.85% would be added for filers earning over $200,000 ($300,000 for couples), and an 8.97% rate would apply over $500,000. The 8.97% top rate is the same as in neighboring New Jersey, but high-income New York City residents would face a combined city-state rate of 12.62%, more than two points higher than the next-highest rate (California’s 10.55%).

That income tax hike is expected to raise about $4 billion per year for the state. The plan would also raise $1.5 billion by eliminating a property tax rebate program. As I’ve written before, that program is flawed and its elimination is probably a relatively good way to raise revenue; however, it is still extra money out of New Yorkers’ pockets next year. Finally, the plan imposes sundry tax and fee increases, including higher taxes on utilities, car rentals, beer, wine, and cigars; higher tuition at state universities; and increased fees for things like hunting and driver’s licenses.

This plan isn’t as terrible as the Full Schneiderman, but it’s still quite bad. Usually, New York politicians defend high taxes by saying that New York City is so wonderful, people will stay at any price. But at a time when (former) investment bankers have become more price-sensitive and more mobile, this plan gives them a push to take their next business ventures elsewhere.

This tax increase would be less annoying if it were truly necessary to produce a balanced budget. However, as the New York Times noted in a news analysis piece yesterday, the budget’s 8.7% spending increase “could hardly be called austere.” Symbolizing New York leaders’ lack of spending restraint, the budget even includes $170 million for “members’ items,” the New York State version of federal earmarks.

If the state has money to spend on the Utica Curling Club (“Where Central New York plays the hottest sport on ice”), the Haverstraw Brick Museum (“a museum dedicated to the history of brickmaking & bricks”), and the Montauk Boatman’s and Captain’s Association (a trade association for charter deep sea fishing boats catering to the Hamptons set), can legislators truly say this tax increase is ‘necessary’?

If there is a silver lining here for non-curling New Yorkers, it’s that New Jersey is working on a terrible tax and budget plan of its own. New Jersey may re-leapfrog New York and retain its honors for worst tax code in the country. Usually, here at the Tax Foundation, we say we like tax competition between the states, but this is not really what we had in mind.

More on New York taxes.


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