Blog Taxes

The Tax Hike’s Silver Lining

December 07, 2011

Deals that come together quickly in Albany should always be viewed with some skepticism, but the one announced on Tuesday has a silver lining. If the temporary personal income tax hike is the price we pay for long-term reforms that enhance infrastructure, encourage job growth, make the state and local tax system more equitable, and reduce future pension costs, then it is a price worth paying.

Three notable positive long-term elements of the agreement are (1) creation of a Commission to re-examine New York’s tax structure, (2) authorization of design-build procurement practices for infrastructure projects, and (3) allowing destination gambling.

These are steps New York should take. The current tax structure calls out for reform. Its unfair nature is not rooted primarily in the State’s personal income tax, which already ranks as the third most progressive among the 44 American states that have such a tax. Rather, it is the combined high and regressive set of state and local taxes, including sales and property taxes, which require reform.

Design-build procurement, which combines design and construction into a single contracted service, can deliver facilities more speedily than conventional procurement. If combined with longer-term maintenance contracts, it can also lock-in commitments to keep those facilities in better condition than do public agencies under conventional arrangements.

The effort to return to New York the jobs and revenues now captured by neighboring states and Nevada from gambling activities also makes good economic sense.

The downside of the deal is in the new personal income tax brackets that will replace the existing ones. Many New Yorkers will pay slightly less than if the current temporary tax surcharge were extended but more than they would if the surcharge had been allowed to expire. While this provides a net gain of $1.9 billion in annual revenue over letting the “millionaire tax” expire, it increases the state’s reliance on a small number of high earners in the volatile financial services sector and reduces New York’s competitiveness. In New York City high earners will be paying a state and local income tax rate of 12.7 percent, higher than anywhere else in the nation.

In addition, the payroll tax dedicated to the MTA will be cut for small businesses and some other employers. The MTA is promised an offset from the new tax revenues, but mass transit services may be in jeopardy in the future if the political commitment to hold the MTA harmless from the tax loss wanes.

The new tax brackets should be acceptable to New Yorkers on two conditions. First, they are accompanied by the positive long-term reforms described above. Second, they also should be accompanied by long-term measures to curb expenditures. Next year’s budget should not be allowed to grow more than 2 percent, and additional actions should be taken to slow future growth. Key among those efforts is reform of the state and local pension system along the lines of the Governor’s “Tier 6” proposal, which calls for an increased retirement age, more reasonable ways of calculating benefits, higher employee contributions, and other modifications which will save over $120 billion in the next 30 years.

In sum, the advantages of this package, if combined with pension reforms, outweigh the negatives. But taxpayers must be vigilant to ensure that elected officials do not stray from promises made and stay on the path of fiscal responsibility.