NYS Personal Income Tax (PIT) Reform A Progressive Code to Stimulate the Economy & Provide Relief for Working & Middle- Income New Yorkers Senator Jeffrey D. Klein Deputy Majority Leader 34th Senate District February 2009
Senator Jeffrey D. Klein Deputy Majority Leader, New York State Senate Prepared By: Alex Camarda Office of Senator Jeffrey D. Klein We welcome feedback on our reports. Please contact Alex Camarda, Policy Director, at 718-822-2049 to provide your thoughts on this report or discuss collaboration on implementing its initiatives. Special thanks to Art Friedson and the NYS Dept. of Taxation and Finance for their invaluable assistance with this report.
Dear Reader: 2009 finds many New Yorkers encountering the most difficult economic challenges of their lifetimes. What began as a crisis in mortgage securities on Wall Street is now significantly impacting Main Street. 145,000 New Yorkers have lost their jobs in the last year. 50,000 homeowners experienced foreclosure in 2008. Unfortunately, the immediate future looks no better. Tens of thousands more New Yorkers will lose their homes. Unemployment in New York City will likely surge to over 8 percent, and will hit double digits for minority workers. The severe recession has also had a profound impact on state and local budgets. Because governments are required to balance their budgets by law, spending cuts and regressive fees have been proposed to make sure the books are balanced. These spending cuts and fees not only downsize or eliminate important programs in health care, education, and other areas- they cause the economy to contract even more, creating a vicious downward spiral that could send the economy plummeting further. That’s why I’m proposing reform to the state personal income tax (PIT). My proposal will cut taxes for most New Yorkers making less than $250,000 a year. For example, a married couple making 100K will receive over a tax cut of over $1000 dollars under my proposal. With New Yorkers tightening their belts during this fiscal downturn, it’s essential we put money back in people’s pockets so they can meet their bills and buy essential items. Tax relief will also boost consumer spending, help small businesses, and stimulate the economy. In addition to tax relief for middle-class New Yorkers, my proposal will generate an additional $1 billion to reduce spending cuts to vital programs and the need for onerous fees on everything from Ipod downloads to movie tickets. The revenues for my proposal are generated by increasing taxes on the most fortunate and wealthy New Yorkers. It is appropriate that the wealthiest pay a bit more during this difficult economic time, given that they experienced a tremendous gain in wealth over the last three decades and have traditionally paid much more of their income in state taxes. Regards, Jeffrey D. Klein Deputy Majority Leader New York State Senate 34th District
Index Section 1: The Current Economic Crisis Section 2: The Economic Crisis’ Impact on State & Local Government Budgets Section 3: New York State’s Existing Personal Income Tax Section 4: Senator Klein’s Personal Income Tax Reform
SECTION 1: The Current Economic Crisis
Collapse of the Financial Sector • It is well-established that the United States is experiencing the most severe economic downturn in decades. • The recession rooted in the subprime mortgage crisis and subsequent credit crunch has acutely affected New York, the nation’s commercial capital: • The implosion of the capital markets dramatically resulted in the elimination of investment banks, as Bear Stearns and Lehman Brothers went under, Merrill Lynch was acquired, and Goldman Sachs and Morgan Stanley changed their status. 1 • Private sector financial employment dropped 13 percent in NYC from October 2007 to October 2008. A job lost in the financial sector results in two more jobs lost in other industries in NYC and 1.3 jobs lost elsewhere in NYS. 2 • Wall Street bonuses declined 44 percent to $18.4 billion from last year’s $32.9 billion, according to the state Comptroller.3 Taxes on income from Wall Street provides 12 percent of all city tax revenues, and 20 percent of all state revenues. 4
The Recession’s Impact on New Yorkers • The recession has moved beyond its origins on Wall Street to impact New Yorkers on Main Street: • Unemployment in NYS increased by 145,300 (to 6.1 percent from 4.6 percent) from November 2007 to November 2008. 5 • First-time unemployment claims in NYC rose 40 percent (comparing late August-late November 2008 with the same period last year). 6 Over one million New Yorkers statewide filed unemployment claims in 2008. 7 • Approximately 50,000 homes were foreclosed statewide in 2008. 8 NYC accounted for about 20,000 foreclosures. 9 • Home prices in NYC dropped 7.5 percent between October 2007 and October 2008. 10 • According to a Siena Research Institute poll on consumer confidence, a record 61 percent of New Yorkers say they are worse off today than a year ago. 11
The Immediate Future is Bleak • The Fiscal Policy Institute estimates that the city unemployment will rise to 8.5 percent by the end of 2009 from its current level of 5.7 percent. 12 For African-Americans and Hispanics, it projects a 14 and 10 percent unemployment rate, respectively, in 2009. 13 • State Comptroller Thomas DiNapoli believes 225,000 jobs will be lost statewide in the next two years. 14 • Home prices statewide are projected to fall an additional 13 percent during 2009. 13 According to the Center for Responsible Lending, foreclosures in New York will total 122,192 for 2008-2009. 14 • Consumer spending also shows “little sign of improvement”, according to a Siena Institute Research poll, with purchasing plans for major expenditures like home improvements and cars down 25 percent from last year. 15 • Local consumer attitudes were reflected in national holiday retail spending. Penny-pinching resulted in a 2.2 percent year-to-year decline in retail sales at chain stores open at least a year, the worst downturn since 1970. 16
SECTION 2: The Economic Crisis’ Impact on State & Local Government Budgets
Recession Has Contributed to State & City Budget Deficits • As a result of unemployment, the decline in tax revenues from Wall Street, falling home prices and consumer spending, among other economic factors, the state and city are facing large budget deficits. • The Governor projects a state budget deficit of $15 billion in fiscal year 2009, and $47 billion over 4 years. 17 • The New York City forecast is similarly dismal, with the Independent Budget Office predicting a $4.3 billion budget gap in fiscal year 2010 (beginning July 1st) and nearly $7 billion in fiscal year 2011. 18
Balancing Budgets Results in Spending Cuts & Tax/Fee Increases • The state and city (and other localities) are required by law to balance their budgets. Consequently, they are largely forced to take actions that cut spending and raise taxes and fees. • Governor Paterson’s proposed budget cuts education spending 3.3 percent ($698 million), reduces the growth in spending on health care by 12 percent, or $1.3 billion, (including $700 million reduction for hospitals and $400 million for nursing homes) while raising $4.1 billion by creating 88 fees on items ranging from Ipod downloads to movie tickets to haircuts. 19 • Mayor Bloomberg’s recently ordered agency heads to cut spending 7 percent in their budgets for FY2010, in addition to proposing $800 million in tax and fee increases. 20
Spending Cuts & Tax/Fee Increases Contract the Economy Further • It is widely believed by economists and public policy experts that cutting spending and raising taxes in a recession only deepens the economic contraction. • “When the state enters a recession, revenue naturally falls and expenditures rise. The balanced budget rules then force the state to reduce spending, raise taxes, or some combination thereof, which is counter-productive since it exacerbates the economic slowdown.” 21 -Joseph Stiglitz, Nobel Prize Winner in Economics and Columbia University Professor • “Spending cuts and tax increases can further slow a state’s economy during a downturn and contribute to the further slowing of the national economy, as well.” 22 -Center on Budget and Policy Priorities • “States and localities must…balance our budgets every year leaving us no choice but to make difficult decisions that help undo national efforts to stimulate the economy.” 23 –Nassau County Executive Tom Suozzi
The Solution: Personal Income Tax Rate Reform • To counter state and local government actions that, while balance the budget, undermine economic growth, Senator Klein proposes reform to the state’s personal income tax. • Klein’s reforms would reduce taxes for New Yorkers making up to $250,000 a year who claim the standard deduction in filing their return. • This will provide financial relief for working and middle-income New Yorkers during these difficult economic times. • It will also stimulate the economy by putting money into the hands of New Yorkers to spend, thereby increasing consumer demand and helping businesses with lagging sales.
SECTION 3: Existing New York State Personal Income Tax Rates
Existing New York Personal Income Tax (PIT) Rates • There are three different classes of tax filers in New York State, depending on one’s marital/family status. Income is taxed differently for each class of filers. • Income is taxed for all filers at 4 to 6.85 percent income, depending on the amount earned. • For example, a single individual earning $50,000 a year would have their first $8,000 earned taxed at 4 percent, the amount between $8,000 and $11,000 taxed at 4.5 percent, the amount between $11,000 and $13,000 taxed at 5.25 percent, the amount between $13,000 and $20,000 at 5.9 percent, and the amount above $20,000 at the highest rate, 6.85 percent.* • *= Filers may be eligible for a variety of deductions, exemptions, and credits that reduce their tax burden.
The Current PIT Marginal Rates Are Not Very Progressive • Currently, NYS Personal Income Tax rate structure is not very progressive. • An individual earning just over $20,000 a year would pay the same marginal tax rate (6.85 percent) on their last dollar earned as a millionaire would (6.85 percent). A married couple filing jointly earning just over $40,000 a year would be taxed at the same marginal rate (6.85 percent) on their last dollar earned as a couple making $10 million.
The New York PIT Rates Were Much More Progressive in the Past • The state income tax was once much more progressive, with very wealthy New Yorkers paying a much greater proportion of their income in taxes than middle-class taxpayers. 24 • In 1972, New York State had a PIT with 14 different brackets ranging from 2 percent to 15 percent. Since then, changes to the income tax have gradually made the personal income tax flatter, ultimately resulting in today’s narrow rate range of 4-6.85 percent. This movement toward a regressive income tax has benefited wealthy New Yorkers. 25
Federal Taxes Have Also Become More Regressive • While the New York PIT tax code has become flatter, federal taxes on income, as well as other forms of wealth, have become less progressive as well. 26 • Before the 1980s, the wealthiest .01 percent of taxpayers paid a total federal tax rate of more than 60 percent. By 2004, they paid under 40 percent. 27
Income Inequality Has Also Increased • While the wealthiest New Yorkers have paid less of their income and other forms of wealth in federal and state taxes over the last three decades, the income of the wealthiest has skyrocketed. Consequently, income inequality has widened dramatically. • In 1977, the median family income in the United States (adjusted for inflation) was $47,400. In 2005, it increased to $58,400. Meanwhile, the wealthiest .01 percent saw their incomes rise to $10 million in 2005 from $2 million in 1977 (adjusted for inflation). 28 • In 1975, the top 1 percent of income earners in the U.S. made 8 percent of all income earned. In 2005, the top 1 percent made 19 percent of all income earned- 11 percent more than 30 years earlier. 29
SECTION 4: Senator Klein’s Personal Income Tax Reform
Klein’s PIT Proposal- Key Elements • Raises taxes on wealthier New Yorkers while providing tax breaks to middle and working class residents. • Reduces taxes for New Yorkers making up to $250,000 a year who claim the standard deduction in filing their return. • Tax increases for those making more than $250,000, with rates increasing from 6.85 to 8.97 percent for millionaires and 10.3 percent for income above $3 million. • The proposal would also produce $1 billion in additional savings beyond tax cuts that could be applied to the budget deficit.
Klein’s PIT Proposal • Klein’s proposal would add tax brackets to the current income tax structure, making it more progressive. Rates would range from 4 to 10.3 percent depending on income and filing status (see next few slides, #23-#25) rather than the current, flatter structure of 4 to 6.85 percent (see slide #15). • A tax cut would be provided through increasing the standard deduction. The standard deduction is a dollar amount that is deducted from one’s income and not taxed. The larger the standard deduction, the less one pays in taxes. For example, a taxpayer who is single and not a dependent making $50,000 a year currently receives a standard deduction of $7,500. This means they are taxed on $42,500 of their income rather than $50,000, thereby lowering their taxable income. • Klein’s proposal would double the standard deduction for every type of tax filer. In our example above, the standard deduction would increase from $7,500 to $15,000. The taxpayer in our example would be taxed on $35,000 of their income rather than $42,500, thereby achieving a tax cut by not paying taxes on $7,500 that they pay taxes on today.
Tax Brackets & Rates for Klein’s Proposal- Married & Filing Joint Returns & Resident Surviving Spouses
Tax Brackets & Rates for Klein’s Proposal- Unmarried Individuals & Married Filing Separately
Klein’s PIT Proposal- Impact on Sample Taxpayers • Klein’s proposal would give a tax cut to filers making up to $250K in income and claiming a standard deduction. Those making above $250K would see an increase in their taxes. • Klein’s proposal would also produce $1 billion dollars beyond the tax cut in revenues to the state to fill budget gaps.
Klein’s PIT Proposal- Distributing the Tax Cut Through Debit Cards • Rather than having the Dept. of Taxation and Finance alter their withholding tables to reflect the doubling of the standard deduction, Klein’s proposal calls on the Dept. to aggregate the tax cuts for tax filers based on their 2008 returns. • Lump sum tax cuts should be distributed to eligible recipients by Tax & Finance via a debit card, as is done for unemployment benefits by the NYS Dept. of Labor and for food stamps by the NYS Office of Temporary and Disability Insurance. • Recipients will be able to use the debit card as they would a department store gift card- solely for spending, thereby stimulating the economy. The cards will have an expiration date in 2009, as determined by the Dept. of Taxation and Finance, with unspent money reverting back to the state. • The Department of Taxation and Finance shall have discretion over establishing policies related to the distribution and use of the debit cards, provided tax cuts are used exclusively for spending in 2009.
ENDNOTES • Suzy Jagger, “End of the Wall Street investment bank,” TimesOnline, September 22, 2008. • BALCONY Business and Labor Coalition of New York, “DiNapoli Report: Wall Street’s Transformation Will Lead to Lower Tax Revenues; Continued Job Losses,” [http://www.balconynewyork.com/2008/11/24/dinapoli-report-wall-street%E2%80%99s-transformation-will-lead-to-lower-tax-revenues-continued-job-losses/], accessed January 7, 2009. 3. Helen Kennedy, “City takes hit as Wall Street bonuses cut,” Daily News, January 29, 2009. 4. Ibid. 5. Representative Carolyn B. Maloney, “New York State Unemployment Spikes to 6.1 percent,” [http://maloney.house.gov/index.php?option=content&task=view&id=1753&Itemid=61], accessed January 7, 2009. 6. Patrick McGeehan, “Job Losses in City Reach Up Ladder,” The New York Times, December 12, 2008. 7. Representative Carolyn B. Maloney, “New York State Unemployment Spikes to 6.1 percent,” [http://maloney.house.gov/index.php?option=content&task=view&id=1753&Itemid=61], accessed January 7, 2009. 8. “New York state foreclosures may top 50,000 in 2008,” Reuters, November 20, 2008. 9. Office of the Mayor, “Mayor Bloomberg and Speaker Quinn Join the Center for NYC Neighborhoods to Award New Grants to Help Prevent Mortgage Foreclosures,” [http://www.nyc.gov/portal/site/nycgov/menuitem.b270a4a1d51bb3017bce0ed101c789a0/index.jsp?doc_name=/html/om/html/recent_events.html ], accessed January 7, 2009. 10. Jack Healy, “Home Prices Fell at Their Sharpest Pace in October,” The New York Times, December 31, 2008. 11. Damian Ghigliotty, “NY Consumer Confidence Rebounds,” Crain’s New York Business.com, [http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20081205/FREE/812059979/0/], accessed January 7, 2009. 12. Daniel Massey, “New York Comptroller Raises Job-Loss Estimate,” Workforce Management, [http://www.workforce.com/section/00/article/26/02/88_printer.php], accessed January 7, 2009. • Ibid.
ENDNOTES 14. Syracuse.com, “Comptroller: Expect massive job losses across New York state,” [http://blog.syracuse.com/news/2008/11/comptroller_expect_massive_job/print.hml], accessed January 7, 2009. 15. Damian Ghigliotty, “NY Consumer Confidence Rebounds,” Crain’s New York Business.com, [http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20081205/FREE/812059979/0/], accessed January 7, 2009. 16. Stephanie Rosenbloom, “After Weak Holiday Sales, Retailers Prepare for Even Worse,” The New York Times, January 9, 2009. 17. New York State Governor David A. Patterson, November Special Session Deficit Reduction Plan, Albany, NY: November 12, 2008. 18. Henry Goldman, “NYC Faces $7 Billion Deficit by 2011, Agency Says,” Bloomberg.com, [http://www.bloomberg.com/apps/news?pid=20670001&refer=us&sid=az6NB1CePkK0] 19. Chris McKenna, “Paterson wields budget ax, cuts deep. Schools face double-digit cuts in aid,” Times Herald-Record, December 17, 2008. • Henry Goldman, “NYC Faces $7 Billion Deficit by 2011, Agency Says,” Bloomberg.com, [http://www.bloomberg.com/apps/news?pid=20670001&refer=us&sid=az6NB1CePkK0] • Peter Orszag and Joseph Stiglitz,“Budget Cuts vs Tax Increases at the State Level: Is One More Counter-Productive Than The Other During a Recession?,” Center on Budget Policies and Priorities (November 2001), [http://www.fiscalpolicy.org/10-30-01sfp.pdf], accessed January 29, 2009. • Elizabeth McNichol and Iris J. Lav, “State Budget Troubles Worsen,” Center on Budget and Policy Priorities (January 14, 2009), [http://www.cbpp.org/9-8-08sfp.htm], accessed January 16, 2009. • Tom Suozzi, “Want a fast stimulus? Have feds pick up Medicaid tab,” New York Daily News, January 1, 2009. • Fiscal Policy Institute, “The Path Not Taken: How New York State Increased the Tax Burden on the Middle Class and Cut Taxes for its Highest Income Taxpayers by Over $8 Billion a Year,” [http://www.fiscalpolicy.org/taxhistory2.htm], accessed December 22, 2008. • Ibid. • Thomas Piketty and Emmanuel Saez, “Lower Taxes for the Highest Earners,” The New York Times, October 31, 2007. • Ibid. • David Leonhardt, “Income Inequality,” The New York Times, January 20, 2009. • Ibid.