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To determine the most equitable way to raise the revenue needed to help close the City and State budget deficits, long-term changes in which constituencies are paying more taxes, which ones less, should be considered.
Shifts in New York State tax collections: the rise of the personal income tax. The total annual value of tax cuts enacted from 1994 through 2000 in New York State now exceeds $12 billion. Cuts worth billions of dollars a year more were also approved during the 1980s. These reductions have primarily been made in the personal and corporate income tax – through top tax rate reductions – and far less in regressive taxes like sales taxes. Consequently, there has been a shift in the overall tax burden to middle-income taxpayers and to local governments.
The State’s three largest tax revenue sources, accounting for 91% of collections in 2001 are, in declining order of amount collected, the personal income tax, the sales tax, and corporate income taxes, which includes the corporate franchise tax and the banking and insurance company taxes .
Personal income tax. The personal income tax accounts for a substantially larger share of State tax revenue today than it did 20 and 30 years ago. Between 1982 and 2001, personal income tax payments increased by 219% compared with a 194% increase in total State tax collections and by 929% from 1972 to 2001 compared to 599% for all taxes. The $26 billion collected in personal income taxes in 2001 constituted approximately 59% of State tax revenues that year, compared with 54% in 1982 and 40% in 1972.
Corporate income taxes. From 1982 to 2001, collections of the three corporate income taxes grew at only a little more than half the rate of personal income tax. Corporate income taxes generated 15% of total tax revenue in 1972, 13% in 1982, and 9.8% in 2001. This shrinkage occurred even as corporate profits surged during the 1990s and 2000. Of special note, bank taxes accounted for a shrinking share of total tax revenue despite record high commercial bank profits every year except 2000 from 1991 to 2001.
State corporate income tax collections are set to take a large temporary hit in fiscal years 2003 and 2004 because New York State remains entirely coupled to the 30% “bonus depreciation” provision of the federal economic stimulus package enacted in 2001 which is in effect until 2004 (2007 for investments in lower Manhattan). The Washington D.C.-based Center on Budget and Policy Priorities estimates that failure to decouple will cost New York (not including New York City) $912 million in corporate and personal income tax revenue in FY2003 and $545 million in FY2004, approximately 80% of it against the corporate income tax. The New York State Division of the Budget estimates a considerably smaller impact. The fiscal note accompanying the New Jersey Business Tax Reform Act of 2002, which decoupled the state from bonus depreciation, estimated that the corporate income tax in that state “might drop by $100 million or more in FY03” absent this provision; with a corporate tax base much larger than New Jersey’s, the likely loss to New York’s corporate income tax will be in the range of several hundred million dollars depending on the amount of corporate capital investment.
Sales taxes. Although sales tax collections grew at slower pace than personal income tax collections, they grew significantly faster than the corporate income tax, posting a 168% increase from 1982 to 2001 and a 488% increase since 1972. Sales taxes slipped from 24.5% of State tax revenue in 1972 to approximately 19% in 2001. The sales tax became slightly more progressive when sales of clothing and footwear costing less than $110 were exempted in 2000. On the other hand, the State has enacted a host of sales tax breaks for businesses, ranging from exempting purchases by businesses located in one of the state’s 71 Empire Zones to expanded exemptions available to the telecommunications industry.
Shifts in New York City tax collections: greater reliance on personal income tax, less on the property tax. The City’s four largest taxes, generating 88.6 % of tax revenue in 2002, are the real property tax, personal income tax, sales tax and business income taxes.
a) Property tax. The share of City tax revenue raised through the real property tax has declined substantially during the past quarter century. Property taxes generated about 51% of tax revenue in 1977, 44% in 1992, and 35% in 2001, with an expected upturn to 38% in 2002 reflecting the decline in collections of other taxes and the stability of the property tax. According to the New York City Independent Budget Office, real property tax collections fell from $5.23 per $100 in personal income in 1976 to $3.63 in 1986 and $3.26 in 1996.
Residential property tax collections have been kept in check in part because of assessment caps placed on one-to-three family homes and small apartment buildings and limits that were placed on the assessed value coops and condos. Special exemptions have played a substantial role in holding down both residential and commercial property tax collections: the $8.4 billion in property taxes collected in FY 2002 were reduced by $873.9 million through exemption programs including the coop/condo abatement program that cost $181 million, exemptions for multi-unit apartment building construction in Manhattan south of 110th Street worth over $100 million, and Industrial and Commercial and Incentive Program incentives with a total value of $190 million.
People who own their own homes in New York City are largely working-class and middle-class. According to the 1999 New York City Housing and Vacancy Survey, total household annual income was less than $40,000 for 37% of owner-occupied housing units, between $40,000 and $79,999 for 33% of owner-occupied units, and $80,000 and over for the other 30%. Only 11% of units were occupied by the most affluent – households with annual incomes of $125,000 or more.
b) Personal income tax. The New York City Independent Budget Office estimates that New York City’s personal income tax will account for 20.2% of tax revenue in 2002, down from 24.8% in 2001 but still substantially greater than its 14.1% share in 1982 and more than twice its 9.9% share in 1977.
c) Business income taxes. In sharp contrast to the personal income tax, business income taxes have experienced virtually no increase as a share of total tax revenue. Business income taxes generated 12.7% of City tax revenue in 2002, almost level with the 12.5% share in 1982 and slightly ahead of the 11.5% share in 1977. Among business income taxes, only the unincorporated business tax has experienced a substantial share growth, from under 1.5% in the 1970s to 3.7% in 2002. The $1.4 billion the general corporation tax the City estimated it would collect in 2002 is little more than the $1.1 billion collected ten years ago when adjusted for inflation.
The share of total revenue generated by business income taxes temporarily surged in the mid-1990s and generated 15.2% of tax revenue in 1997, reflecting the enormous rise in business profitability during this period, especially in the financial sector. But by 2001 the share slipped back to 14.0% --even as the personal income tax share continued to rise -- and by 2002 it was down to an estimated 12.7%
d) Sales taxes. Sales taxes generated 15% of City tax revenue in 2002, slightly ahead of the 13.8% share in 1977. City conformance to the State sales tax exemption on clothing and footwear in 2000 made the sales tax slightly more progressive. But, as is the case for the State sales tax, many exemptions have been added that benefit businesses. For instance, exemption of sales taxes on construction materials, furnishings and equipment such as computers are typically included in City business tax incentive deals.
State and City personal income taxes became less progressive. Because it imposes higher rates on wealthier households, the personal income tax is considered a progressive source of government revenue.
In the recent economic boom, wealthy households accounted for a growing share of State and City personal income tax revenue. This did not mean that State and City personal income taxes became more progressive. The share of taxes generated by the wealthy grew because during the 1990’s their share of total City and State income expanded immensely as the economy and Wall Street boomed.
a) New York State Personal Income Tax. During the Cuomo Administration, the top rate on earned income was cut from 15% on earned income and 14% on unearned income to 7.85%. for both. Under Governor Pataki the top rate was reduced further to the current 6.85% for both earned and unearned income. The personal income tax cuts enacted under Pataki in 1995 reduced revenue by $4 billion a year when fully in effect.
An analysis of the 1995 personal income tax cut that compared the tax in 1994 with 1998 conducted by the Institute on Taxation and Economic Policy documented the cut’s strongly regressive impact. According to the analysis, “A full 24 percent of the tax cuts went to only the wealthiest one percent of New Yorkers – those with incomes exceeding $494,000 and with an average annual income of $1.3 million.” Said the study, “This group received an average tax deduction of over $11,000.” The poorest 20% of New Yorkers “found their personal tax burden reduced by an average of $8.” The second lowest 20% received $68 on average and only three percent of the total tax cut.
Since 1997, progressiveness was also eroded by failure to index tax brackets to the rate of inflation. The effects of inflation are pushing increasing numbers of moderate-income families into the top bracket, which begins at only $40,000 for married taxpayers filing jointly.
Progressiveness was enhanced only temporarily when in 1980 the State began to tax unearned (investment) income at a higher rate than earned income – 14% for unearned and 12% for earned. This gap widened as the unearned rate remained at 14% while the earned income rate was cut to 10% in 1984. This progressive aspect of the rate structure was ended when in 1987 the unearned income rate was reduced to match the new, lower earned income rate.
To be sure, many small modifications enacted in the personal income tax have had a progressive impact. Among these are expansion of the earned income tax credit and a new child-care credit. Effective in 1991, New York conformed to federal limits on itemized deductions for the wealthy and enacted a “supplemental income tax” for upper-income taxpayers. But clearly, the bulk of the savings have gone to the affluent.
b) New York City Personal Income Tax. According to an analysis by the New York City Comptroller, the personal income tax was “slightly more progressive in 1990 than in 1997.” Failure to index income brackets to inflation since they were last adjusted in 1997 resulted in considerable “bracket creep” as average incomes rose. The current $50,000 threshold for the top rate for single taxpayers and $90,000 for joint filers now hits solidly middle-class individuals and families. At the lower end of the income spectrum, many New Yorkers are now becoming taxpayers because the household credit is not indexed to inflation.
In addition, progressiveness has been eroded because:
• The 12.5% “Safe Cities, Safe Streets” surcharge was ended in 1998. According to the Independent Budget Office, the distribution of the savings under the surcharge, which was started in 1990, was “concentrated among the wealthiest New Yorkers” inasmuch as it was not a flat surcharge but had its own progressively-structured rates and brackets. This surcharge also exempted lower-income filers.
• Beginning in 1997, unincorporated businesses owners were able to take a partial credit against the resident personal income tax liability for their share of the businesses’ unincorporated business tax (UBT) payments. Although the credit is progressively structured at a maximum of 65% of the UBT paid for taxpayers with adjusted gross income of $42,000 or less and 15% for those with incomes of $142,000 or more, the UBT is still paid largely by affluent individuals.
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