With its new package of whopping tax increases, New York State’s Democratic-controlled legislature has crossed over a metaphorical fiscal Rubicon. Over the last century, Albany has legislated its way to the nation’s highest tax burden largely during times when governors and legislators pleaded fiscal emergencies as their rationale for steadily higher taxes. Now, however, the legislature’s Democratic caucus, which back in November captured super-majority control over Albany, is raising taxes not because it claims it needs to but simply because it can. Given that the pandemic has increased the already-massive disincentives for doing business and living in New York, this latest round of increases, designed to funnel another $4.3 billion out of the state’s private sector and into government, will test the progressive notion that taxes don’t influence people’s decisions on where to live or do business.
New York State created its income tax in 1919, after the federal Wartime Prohibition Act followed by the Eighteenth Amendment to the Constitution banned the sale of alcohol, depriving the state of a valuable excise tax. Income taxes filled the fiscal gap, but the end of Prohibition in 1933 and the resumption of liquor sales didn’t bring an end to the income levy. Instead, pleading necessity amid the Great Depression, New York raised the income tax rate to a heady 8 percent. And so it has gone for decades, with some of the state’s biggest increases coming during periods of fiscal emergency, like tax hikes following the back-to-back recessions of the late 1960s and early 1970s, when the state chose higher taxes over reduced government to fill fiscal gaps created by its own free spending. Occasionally the tax boosters, ranging from liberal Republicans to moderate Democrats, would acknowledge the worrying trend of ever higher levies, as when Governor David Paterson said back in 2008 that friends of his in the business community had told him in response to Albany’s latest tax increases, “Good luck in New York state, but we can’t pay the taxes. The opportunities aren’t there.”
But now legislators aren’t even pretending that New York is in a fiscal crisis. Instead, the latest tax increase is designed to fund a wish list of progressive ideas, from more school aid (for a state that already spends more per pupil than any other) to higher Medicaid spending (in a state that already runs the most expensive program in the country). The new, high-tax-fueled budget also includes funds to aid illegal immigrants and bail out tenants behind on their rent.
The only good news, if one can call it that, is that the original legislative proposal would have raised taxes by even more—$7 billion. Beyond hiking the income tax and the corporate tax, which is what the legislature has settled for, the original proposal would have also increased the inheritance tax, established a new tax on New York City “mansions,” and imposed a higher capital gains tax. The bad news is that all these taxes are on the table the next time the legislature wants to boost levies, which almost certainly will be next year.
The original idea of a tax increase arose in the depths of the Covid pandemic, when entire parts of the state’s economy were shut down. By the time Governor Andrew Cuomo proposed what now seems like a modest $1.5 billion in additional income taxes back in January, the need for any increase was already disappearing as tax collection came in higher than expected and the new Biden administration pledged massive stimulus aid. That package ultimately provided some $12.5 billion in budget aid to the state, billions more for local governments and school districts, and tens of billions of dollars in direct aid to New York residents. Amid that bounty, Kathryn Wylde, the chief executive of the business group the Partnership for New York City, told the New York Post: “If the state acts to raise taxes, it is a political statement aimed at punishing the rich—not a reflection of economic need.”
The New York tax burden is already punishing enough. New Yorkers pay a greater percentage of their earnings to the state than residents of any other state. The total tax burden, on top of federal taxes, amounts to 12.79 percent of income, according to a new study. Opponents of the latest tax increases claim that the state’s punishing rates are responsible for driving high earners and businesses away, and indeed the state consistently faced massive levels of net outmigration to other states even before the pandemic. That migration has included thousands of jobs in areas like financial services. Among the firms that have relocated significant jobs away from the city are Credit Suisse, Barclays, UBS, and AllianceBernstein, according to a recent Forbes article. Goldman Sachs has moved a big-money management division to Florida, and hedge fund manager Carl Icahn has decamped there as well. The Empire State’s taxes are one reason that former hedge fund manager Leon Cooperman said, “I suspect Florida will soon rival New York as a finance hub.”
Progressive advocates of higher taxes say that they don’t drive high earners away. Legislators point to tax-filing statistics showing that the number of millionaires living in New York increased in the last decade. Much of that growth in wealthy households, however, is a function of the soaring stock market, which helped mint hundreds of thousands of new millionaires across the country. But New York is no longer getting a significant share of those new wealthy. From 2009 through 2018, the number of millionaire households in the U.S. grew at a rate 40 percent faster than the number in New York State, according to an Empire Center report. Migration statistics make clear that as people become wealthier they are more likely to leave.
Indeed, even as tax advocates claim that higher levies don’t matter to rich New Yorkers, state officials are pleading with the Biden administration to reinstate the deductions for state and local taxes that President Donald Trump’s 2017 tax package put limits on. Rescinding those limitations on state and local deductions would ameliorate the bite that New Yorkers face under the new law’s higher state taxes because residents would get to deduct those higher levies on their federal income taxes. But the Biden administration, looking for ways to pay for a massive new infrastructure spending program, is unlikely to go along.
New York’s new, bigger tax bite comes at a time when the state’s main economic engine, New York City, faces enormous challenges retaining businesses and workers in a post-pandemic economy. New York City’s office vacancy rate has soared to 15 percent, and surveys show that employers of office firms, which form the backbone of Manhattan’s economy, may allow anywhere from 10 percent to a quarter of their employees to work remotely even after Covid lockdowns end. That would make the recovery of the city’s economy, which has lost half a million private-sector jobs (or 13 percent of its pre-pandemic total), exceedingly difficult. On top of that, city residents—battered by the pandemic, growing social unrest, and high taxes—are increasingly unsettled about the city. A Manhattan Institute survey last summer found that 40 percent of residents were considering leaving New York. A majority said that they didn’t think the taxes they paid were worth the services they received. It’s unlikely that yet another tax increase will change those sentiments.