What the tax bill really means for New York

BY E.J. McMAHON

Founder and research director, Empire Center

You don’t have to be a fan of the federal tax deal to realize its impact on states like New York has been misrepresented by most of its leading political critics.

Sen. Kirsten Gillibrand, for example, last week claimed the bill “raises middle-class taxes.”

Wrong. Even with the state- and local-tax deduction curtailed, most middle-class households — especially families with children, even within the heavily taxed six-figure middle class of New York City and its suburbs — will get a tax cut in 2018. (To see how you’d fare, plug your numbers into journalist Maxim Lott’s online program at http://www.taxplancalculator.com).

For Gov. Cuomo and state lawmakers, the immediate problem isn’t what the bill will do to most state taxpayers, but what it does to some of them — high earners who have been footing an outsized share of the bill. Under Cuomo, Albany’s budget has become more dependent than ever on revenue raised from the state personal-income tax — more than 40 percent of which originates with households earning $1 million or more.

And under the revised tax code, the virtual repeal of state and local tax deductions means these same taxpayers will save little or nothing, despite a small cut in the top federal rate. New York City’s millionaire earners, in particular, will be paying tens or even hundreds of thousands of dollars more in combined federal, state and local taxes in 2018. This will further widen the effective price of living and working in New York as compared to a low- or no-tax state such as Florida.

On the plus side, by cutting corporate tax rates from 35 percent to 21 percent, the bill is expected to boost economic growth, from which New York will benefit.

The new law also generously excludes 20 percent of income of owners of “pass-through” businesses like partnerships and limited-liability companies. But that won’t be available to firms involved in legal services, accounting, health, finance or consulting — basically, most of the highest-income professionals in New York.

While the elimination of the federal deduction for property taxes won’t prevent most middle-class families from getting at least a small tax cut, it’s likely to depress values at the high end of the suburban residential housing market throughout the New York region. To his credit, Cuomo’s 2011 property-tax cap has prevented the already sky-high burden from growing in New York. But now he needs to do more.

Cuomo’s initial response was drearily familiar: He said he wants to make permanent a temporary program requiring county governments to convene “shared services” panels of municipal officials, which produced predictably miniscule savings in their first go-round last summer. He also pledged to follow through on a scheduled, temporary state-funded “property tax credit” due to peak in 2019 and then disappear. That credit is actually little more than a revenue transfer to homeowners from income-taxpayers — the sort of thing that needs to disappear sooner, rather than later, in the post-SALT-deduction world.

While Cuomo is (so far) just rearranging deck chairs, Mayor de Blasio won’t even acknowledge the tax base is in danger of sinking. The mayor recently reiterated his call for a new “millionaires tax” to fund subway repairs — a proposal widely seen as dead on arrival in Albany even before the federal tax bill reduced it to absurdity.

More than ever, the state and local buck in New York stops with the governor.

Now that the feds are about to effectively (and yes, yes: unfairly) raise New York’s already high tax burden, Cuomo needs to address the long-neglected factors that make government in New York so expensive — starting with collective-bargaining mandates that lock in high government-employee compensation and staffing levels, and contracting rules and liability laws that make public construction costs prohibitively expensive.

If Trump and Congress can ever get together on Medicare cuts or other health-care savings, inevitably threatening New York with the loss of billions, the pressure for change will only grow. It’s time for the governor to shift from reactive mode to proactive reform — before it’s too late.