New York City's Plans to "Tax the Rich"

The following post was written on October 9, 2012:

Here are a couple of things on a serious collision course.

This morning’s WSJ reports on the tax proposals of the various Democratic mayoral hopefuls in New York City.  (The election for the next mayor of NYC is next year, not this year;  the current mayor, Bloomberg, is term limited and can’t run again.)  The article is behind a pay wall, so I won’t link it, but basically there are five announced Democratic candidates to replace Mayor Bloomberg, and all of them have put forth plans to raise the New York City income tax rate on “the rich.”  Meanwhile, there are no announced Republican candidates, and none really in the wings.  It is highly likely that we are going to get one of these Democrats come Jan 1, 2014.  They are all competing to see who can shout the class warfare cry the loudest.

Current NYC top income tax rate is 3.876%.  (That’s separate from NY State, with a top rate of about 9%, and of course Federal, with a top rate of about 39%.)  The WSJ points out that the top 1% of filers, about 30,000 families, pay fully 43% of the NYC income tax.  Bloomberg has been a consistent foe of raising the NYC rate, arguing that it only takes a tiny number of people to leave for the suburbs to wipe out any increased revenue from the higher rates.  The Democratic candidates have different ideas.  Here are the candidates and the proposals:

Bill DeBlasio (currently “Public Advocate” – a citywide elected office with no particular responsibilities and no purpose that anyone can identify):  Raise top rate to 4.3% on income above $500,000, and use it to fund a pre-school education initiative.

John Liu (currently Comptroller):  Raise top rate to 5.1% on income above $5 million annually.

Christine Quinn (currently Speaker of the City Counsel and representative of our district in Greenwich Village) – Previously proposed to raise taxes on the wealthy sufficient to generate $1 billion in revenue; now says she no longer supports that, but is “open” to a tax increase.

Scott Stringer (currently Manhattan Borough President – another job with no particular responsibilities or purpose) – Raise to rate to 4.332% on income above $1 million.

Bill Thompson (former NYC Comptroller who left due to term limits in 2009; also was Democratic candidate for mayor and lost to Bloomberg in 2009):  Had a proposal in 2009 to increase taxes on income above $500,000; now says he wants to “reassess” that.

But here’s something coming from the other direction that nobody’s paying much attention to.  Romney’s tax plan is to lower rates on all incomes, including high incomes, and make up for that with decreased deductions.   There has been a lot of back and forth between the campaigns in the last few days (including at the debate) as to what that means – Would taxes paid by the high income go down?  Would that force taxes paid by the middle class to go up?  Romney has insisted that rates would go down, but total taxes paid by the high income would not go down.  So it must be something about deductions. 

In an interview the day before the debate, Romney fleshed out his proposal, proposing to put a dollar limit on itemized deductions, for which he tossed out a number of $17,000.   That $17,000 would be a “bucket” for all deductions, including mortgage interest and charitable contributions.  Although Romney did not mention it, I presume that the cap would also cover the deduction for state and local income tax.

Most of the talk is about the mortgage interest deduction, but that’s not where most of the money is for high income New Yorkers.  You can only deduct interest on a mortgage up to $1 million.  At today’s 4% or less interest rates, that’s only $40,000 a year at most.  The real money for us is in the state/local income tax deduction.

Currently a New Yorker with about $1 million annual income pays over $100,000 in state and local income tax, and deducts that from his Federal tax, saving about $40,000 of Federal tax in the process.  This is a huge subsidy by the Federal government to the high income tax states, which are largely the same as the Democrat-controlled states (California, New York, Illinois, New Jersey, Connecticut, etc.).  New York City is already right at the top when you add state and city income taxes together.  The mayoral candidates think they can increase the rates still further.  Meanwhile, seven states have no income tax at all, including two of the biggest, Texas and Florida.

The elimination of deductability of state and local income taxes would immediately increase the burden of these taxes by close to 40% and increase the competitive advantage of the low/no income tax states dramatically.

Our former Senator Moynihan was the great protector of the state/local income tax deduction.  Today, Schumer is the guy.  Will he really be able to hold the line?  I think Romney completely realizes that the highest tax states are never going to vote for him and he might as well stick it to them.  Even though I live in New York, I think he’s right.  Anyway, even if not enacted, if a proposal to eliminate or even reduce the deductibility of state and local income taxes gets any traction, it will quickly make us realize the precariousness of our existing tax structure.