Will the Last Investment Banker Left in Manhattan Please Turn Out the Lights?
February 11, 2009
When I wrote last month about New York Governor David Paterson’s plan to close New York state’s $15 billion budget gap, I noted as one of its greatest strengths that it does not include any income tax increase. New York City already has the country’s highest top rate for personal income tax—10.498%—and a further increase would make the city uncompetitive at a time when it can ill afford to lose wealthy residents to other jurisdictions.
Yesterday, State Sen. Eric Schneiderman introduced a bill to raise the state’s top tax rate from 6.85% to 10.3%, matching California for the top statewide rate in the country. The proposal is presented as a substitute for the governor’s proposals, but it is in fact a substantially larger tax increase—nearly $6 billion per year (if the estimates hold up, which they often don’t) instead of between $3 and $4 billion.
Schneiderman’s proposal adds three brackets to New York’s income tax: the 10.3% statewide rate would apply to incomes over $1 million (as it does in California). For incomes over $500,000, New York State would match New Jersey’s top rate of 8.97%. A bracket of 8.25% would start at $250,000.
Since New York City has its own income tax with a top rate of 3.648%, this proposal would make New York City home to the four highest state-local income tax rates in the country: the 10.498% rate it already applies to incomes over $50,000; an 11.898% rate on incomes over $250,000; a 12.618% rate on incomes over $500,000; and an astounding 13.948% rate on incomes over $1,000,000. (And some members of the New York City Council are discussing a city income tax increase on top of all this!)
Like most parts of the country, New York City has many residents who have lost their jobs and are figuring out what to do next. However, the newly jobless senior investment banker is someone with more options than your average laid-off worker. Some of these people have enough money that they can retire. Others can afford to sit out for a couple of years and wait for market (or tax) conditions to improve. Most can afford to move across the country to take a new job. Those starting their own firms have great latitude about where to do so. Do New York politicians really want to tell these people to go away?
Connecticut, with a top personal income tax rate of 5%, saw an influx of finance firms from New York over the last two decades. This tax change would make the dislocated all the more likely to gravitate toward Greenwich and Stamford for their next endeavors—or even to New Jersey, whose 8.97% top rate would look like a picnic compared to those across the river in NYC.
New York doesn’t need to shoot itself in the foot. Governor Paterson has put forward a plan that closes the state’s budget gap without any change to income tax rates. Paterson’s plan is imperfect, though many of its planks increase revenue while moving in the direction of sound tax policy. Schnedierman’s plan, on the other hand, would move the city and the state in a very negative direction.