Fair Share Taxation

The problems:

1. New York State taxes over all are regressive.

New York is the most unequal state in the nation. Rather than countering that with a tax system designed to increase equality and opportunity – or taking advantage of the wealth attracted by, and created in, our state to improve life for all New Yorkers, we tax middle, moderate, and low income New Yorkers more than the very rich.

2. New York relies extremely heavily on local taxes, placing the greatest burdens on areas with the greatest needs and fewest resources, and leading to ever-increasing property taxes – and increasing frustration about high property taxes.

High property taxes are one of the sources of regressivity in the State tax system, and the truth is that high property taxes are the biggest problem for people with modest incomes.

3. This year, there is a likely budget shortfall.

A proposal:

1. Collect more revenue by increasing income taxes on the richest 3-4% of the population.

Relatively modest increases in taxes on people in the highest income brackets would yield billions of dollars in additional revenue. A few examples are below.

Source: Revenue calculations are from FPI based on tax data from NYS Department of Taxation and Finance. (

*Note that there may be more than one tax filer per household

2. Provide targeted guaranteed protection against unaffordable property taxes with a dramatically expanded “circuit breaker” which would cap the portion of a households income it could be required to pay in property taxes.

A circuit breaker establishes a maximum percentage of income – or a range of maximums increasing as income increases – that a household can be required to pay in property taxes. If the household's property tax bill exceeds this amount, the state rebates all or part of tax payments above the limit.

New York already has a circuit breaker, but it is available only to people with incomes below $18,000 a year, and has an extremely low benefit cap ($375 for seniors, 7$5 for everyone else), so it does not extend very far.

A redesigned circuit breaker could both target substantial assistance to lower income families with high housing costs and high property taxes, and protect households higher up the income scale which have property tax costs that are particularly high in relation to their incomes.

In addition to the circuit breaker, it also makes sense to simply shift the share of taxing and spending back towards the State government and away from the localities.

3. Help localities reduce property taxes for everyone by sending additional money to the localities, providing additional formula based education aid, Medicaid assistance, and revenue sharing help.

A really substantial increase in aid to localities (in addition to the substantial increases for education already proposed for the years ahead) could be accompanied by a mandate that property taxes be lowered.

Providing more assistance directly to localities, and permitting them therefore to lower property taxes would reduce the costs of a circuit breaker because fewer people's tax bills would exceed the cap.

Why this makes sense:

Under current law, New York State taxes are regressive: the less income you have, the larger a portion of it you pay in taxes.

Low, moderate and middle income New Yorkers pay almost twice as large a portion of their incomes in state taxes as the very highest income residents of our state.

The poorest fifth of New Yorkers pay an average of 12.7 percent of their income in state and local taxes (and New York has the 5 th highest taxes on the poor of any state). Those in the middle pay an average of 11.34 percent. The top 20% pay 9.65% of their incomes on average, but the richest 1 percent pay only 6.5 percent. The richest 1 percent of New Yorkers get over one-quarter of the income in the state, but pay only 17 percent of the taxes.

Figure 1: Effective New York State and Local Tax Burdens by Income Class

Source: Institute on Taxation and Economic Policy

The regressive structure of state and local taxation is a result both of over-reliance on local taxes, and of an income tax structure that is much less progressive than it was 40 years ago.

A. Income tax shifting

Over the past 40 years, the top rate of the New York State Personal Income Tax (PIT) has been cut from over 15 percent to 6.85 percent. At the same time, New York has increased income tax rates on the lowest income households, and failed to adjust tax brackets and personal exemptions for inflation, so that moderate and middle income New Yorkers are paying more income tax as well. (Fixing the marriage penalty and introducing and expanding the state EITC, did give relief to working families, but this relief has not been enough to outweigh the other changes).

As the Fiscal Policy Institute has repeatedly pointed out, a family earning $50,000 a year is paying $1,000 more than they would have under the old rates, while someone making $1 million is holding on to an extra $63,000 each year. If New York simply returned to its mid-1970s income tax rates adjusted for inflation, state revenue would be $7.7 billion higher, but 95 percent of New Yorkers would pay lower taxes than they do today.

While the PIT cuts are the most egregious, other tax cuts have also gone to the best off while leaving the bill for working families. According to the Pataki administrations own estimates, tax cuts since 1994 have reduced state revenues by $16.5 billion a year. While some of these cuts were appropriate and broadly shared, most were not.

B. Shifts from income to property (and sales) taxes

Over recent decades, cuts in New York state taxes have led to compensating increases in local taxes – sales and property – as local governments have to take on more of the burden of essential services. These taxes, or course, are much less sensitive to differences in income than an income tax.

Nationwide, state governments collect 58 percent of state and local taxes, while counties, cities and other local governments collect 42 percent. Here in New York , those proportions are almost reversed, with the state collecting just 45 percent of total taxes and local governments collecting 55 percent. This is the largest local tax share in the country.

There is good reason that elsewhere states collect the majority of state and local taxes. States have greater fiscal resources than local governments, and usually have a wider range of revenue options to draw on. While local taxes almost always mean sales and property taxes, states also tax income, corporations, and inherited wealth. In addition, relying on states to fund a larger share of local services spreads the tax burden more evenly among areas with high and low income and high and low needs. When a disproportionate share of government spending is funded locally, the areas with the greatest needs are often those with the least resources, a mismatch that produces chronic budget crises, especially in upstate cities such as Buffalo .

The very wealthy can afford it:

1. They have enjoyed huge tax breaks in recent years.

The people we are asking to pay additional New York State taxes are people who have benefited enormously from Federal tax breaks, as well as State tax breaks, in recent years.

The Urban Institute – Brookings Institution Tax Policy Center looked at the impact of Federal tax cuts enacted since 2001, and found that in 2006:

- Households in the bottom 5 th of the income spectrum received tax cuts, averaging $20, that raised their after tax income by an average of .3%.

- Households in the middle 5 th of the income spectrum received tax cuts, averaging $740, that raised their after tax income by an average of 2.5%

- The top 1% of households received tax cuts, averaging $44,200, that increased their after tax income by 5.4%

- Households with an income above 1 million received an average tax cut of $118,000, a 6% increase in their after tax income.

(And tax cuts yet to take effect in 2006 were even more skewed towards the wealthy than those enacted to that point)

If we look only at the Bush capital gains and dividend tax cuts in tax year 2005, in order to get a sense of the impact of Bush tax cuts on the very wealthiest group of tax filers, we see that:

The .6% of filers with reported incomes above $500,000 saved an average of $81,204 each that year on these tax breaks, collecting 73.4 % of the total tax reductions.

The 13,776 tax filers with incomes over 10 million dollars – 0.01% of all tax filers - got an average tax break from these cuts in 2005 of $1,876,280 each. Their collective tax break was 25.8 billion dollars and together this .01% of filers saw 28.2% of the total tax savings.

(In contrast, the 49.6% of tax filers with adjusted gross incomes of less than $30,000 saw an average tax savings of 5 dollars per filer as a result of these tax cuts that year, and the 18.3% of filers with incomes between 30,000 and 50,000 saw average savings of 34 dollars.)

1. The incomes of the extremely wealthy have skyrocketed in comparison to the incomes of everyone else.

Nationally, detailed data examined by Piketty and Saez show that in 2005 the share of income going to the wealthiest 1% of households (those with incomes above $350,000) - 19.4% - was at its highest level since 1929.

In New York between the early 1980's and the early 2000's

• The average income of the poorest fifth of families increased by $1,901 , from $14,175 to $16,076. This is roughly an increase of $90/yr.

• The average income of the middle fifth of families increased by $10,817 , from $37,714 to $48,531. This is roughly an increase of $515/yr.

• The average income of the richest fifth of families increased by $51,205 , from $79,227 to $130,431. This is roughly an increase of $2,440/yr.

• The average income of the richest five percent of families increased by $104,927 , from $111,134 to $216,061. This is roughly an increase of $5,000/yr.

The State Division of the Budget projected that in 2007 the wealthiest 5% of households would receive 46% of total income.

New York (temporarily), and New Jersey have raised income taxes on the rich in recent years, and the sky did not fall.

In 2003, New York State raised the rate on incomes above 500,000 from 6.85% to 7.7%, and the rate on income above $150,000 for couples and $100,000 for singles to 7.5% (declining back down in increments).

At the same time, New York City income tax rates on the highest bracket were raised .5 percentage points, from 3.648 % to 4.25%.

The estimated yield of the state increases was $1.3 billion in 2003, $1.5 in 2004, and $1.74 in 2005. The fact that the yields went up every year, despite the fact that the rates went down, is just one good indication that high income New Yorkers kept right on making more money with the tax increase in place.

In January 2004 New Jersey raised income taxes on income above $500,000 from 6.37% to 8.87%. The increase has produced more than 800 million dollars in revenue per year, and the number of people with extremely high incomes in New Jersey has continued to grow faster than the population over all since the increase.

States with income taxes on high end earners – or on high and middle income earners - higher than the highest NY rates:

•  California : 10.3%>$1,000,000
•  Rhode Island : 9.9% > $336,550
•  Vermont : 9.5% > $336,550
•  Oregon : 9% > $6,850
•  Iowa : 8.98% > $60,435
•  New Jersey : 8.97% > $500K
•  Washington DC : 8.7% > $40,000
•  Maine: 8.5% > $18,250
•  Hawaii: 8.25% > $40K
•  North Carolina: 8.25% > $120,000
•  Minnesota: 7.85% > $67,360
•  Idaho: 7.8% > $23,963

(five additional states also have income tax rates that are higher than NY)

A Circuit Breaker targets property tax assistance to the people who need it most

It directs help to lower income people generally, because housing costs – and taxes based on housing costs – are a larger portion, on average, of lower income people's earnings. Circuit breakers typically also include assistance to renters – based on a portion of their rent imputed to property taxes passed on by landlords. New York's existing circuit breaker includes renters.

It directs help to people with limited or fixed incomes who live in areas with rising property values – those people who really can be priced out of their homes by rising property taxes.

And it directs help to people facing shorter-term hard times – like a period of unemployment that reduces their income while leaving their property tax bill in place.

U.S. Census Bureau, “State and Local Government Finances: 2003-04”