Tax Reform Options Spread Pain Differently for New Yorkers

Friday, December 21, 2012

As a compromise remains out of reach for President Obama and John Boehner on how to revamp spending and tax policies in 2013, a new analysis looks at five different scenarios for tax reform and how each would affect the annual bills paid by New Yorkers.

New York City’s Independent Budget Office compared the estimated average tax liability for local residents based on whether tax rates remain the same, whether all tax cuts scheduled to expire actually expire, or whether some tax cuts expire while others are renewed.

The results show that New Yorkers’ tax bills could be significantly different in a number of ways next year. The degree of change varies greatly depending on income.

Allowing for full expiration of the Bush Tax Cuts would increase the average federal income tax liability of New York City residents by $2,673, the most of any scenario. People earning over $2 million a year would see their tax bill go up almost $400,000 compared to if all the tax cuts were renewed. That would be a 20 percent increase over what the average tax liability was for that set in 2010.

It’s by far the largest increase in terms of dollars out of all income brackets under that scenario. But in terms of percent increase, people making between $20,000 and $50,000 would get hit hardest: full expiration of the Bush Tax Cuts would nearly triple their average tax liability, from $583 to $1,685.  That’s a 189 percent increase.

Michael Jacobs, an analyst at the IBO who penned the study, said that allowing the Bush Tax Cuts to expire would raise the bottom tax rate from 10 percent to 15 percent. No other tax bracket would see a larger increase in its rate, and since lower-income New Yorkers have a higher percentage of their income taxed at that bottom rate, the change for them would be most dramatic.

“For someone making $500,000, whether it’s 10 or 15 percent on the first $15,000, let’s say, isn’t going to matter,” Jacobs explained. For someone making only $20,000 in Jacobs’ example, three-quarters of their income would be affected by the higher rate.

Another option would be to cap itemized deductions at $50,000 and otherwise keep rates the same. Jacobs estimates that wouldn’t change anything for people making less than $150,000 a year, but it would make for the largest increase in tax liability felt by the wealthiest New Yorkers out of all scenarios IBO imagined. Capping itemized deductions for things like state and local taxes and charitable contributions would raise the liability of those making over $2 million a year by $409,129, a 21 percent increase.

“The itemized deduction is very important and beneficial to people who live in high tax states and are able to deduct their state or local taxes,” Jacobs said. “We’re a high tax state in New York, and if you live in the city, that’s even more taxes you pay. At the upper income level, that’s a lot of money.”

Restoring capital gains tax rates to 20 percent (currently 15 percent) and taxing dividends as ordinary income would result in the smallest change for New Yorkers, with top earners seeing the highest increase in liability of just 8 percent.

“The old rate on capital gains is still a preferential rate,” Jacobs said.

The final option, and the one championed by President Obama, would be allowing the tax cuts to expire only on income above $250,000. That would concentrate increases in tax liability on the top earners in New York City—15 percent higher for people making more than $2 million—but would still raise their average tax liability less than by simply capping itemized deductions.

Whichever scenario comes about through negotiations between Obama and Boehner, the report concludes that “New York’s disproportionate share of high-income returns makes it likely that city taxpayers would contribute a large share of the additional federal tax revenue under any scenario other than extending all of the tax cuts."


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