As a result of this type of overheated rhetoric coming from the Governor and others, confusion continues to reign as to what effect the new tax law will have on New York state. In an earlier column this month, I attempted to provide a simple primer on the federal income tax system and discussed briefly some of the changes that will occur under the new law. It is my hope that this can provide a starting point for having a discussion of the effects of the new tax law on New York state. If you are interested in reading that column it can be found here http://nyassembly.gov/mem/William-A-Barclay/story/78897/. In this column, I would like to expand on what the Governor is referring to and whether the federal tax bill will be as devastating to New York as Governor Cuomo claims.
It is no secret that New York is a high-tax state. The non-partisan Tax Foundation each year ranks every state in terms of their tax burden and New York is always either the highest or close to the highest in almost all categories of taxes. Sadly, our property taxes and income taxes are no exception. Prior to the enactment of the federal tax bill, individuals were able to deduct their property taxes and state income taxes on their federal tax return. Accordingly, the impact of our high property and income taxes were relatively muted at least for those who itemize their deductions on their federal tax returns.
Under the new federal law, taxpayers will no longer be able to deduct their state and local taxes and the deduction for property taxes is capped at $10,000. Most New Yorkers will not be affected by this change because they do not itemize their deductions but rather take a standard deduction. In fact, most will enjoy a tax cut because the new tax bill increases the standard deduction for a single filer to $12,000 and $24,000 for joint filers and also increases the child tax credit.
If most New Yorkers will benefit from the federal tax plan, why is the Governor sounding the alarm of economic Armageddon. It is because he is worried about tax migration—that is, wealthy people leaving New York state and moving to other states with lower taxes. This is already occurring and could accelerate with the new tax law. The new federal tax law negatively affects wealthy New Yorkers because they tend to itemize their deductions and the new higher standard deduction is not enough to cover what they pay in state and local taxes. Moreover, New York’s income tax is progressive, meaning those who earn the most income pay the most in state income taxes. If New York loses these wealthy citizens to other states, it will have a bigger direct impact on the state revenues than if middle class or low-income citizens left the state.
There is irony to the fact that many of those speaking the loudest against the federal tax cuts are the same people who, in the past, advocated for higher taxes on the rich. At that time, they claimed that taxation of the wealthy did not play a role in where they lived. But now that the federal government is doing the taxing, their tune has changed.
Ultimately, it is too soon to know exactly what effect the new tax law will have on New York and the state budget. There are indications that the economy will grow stronger as a result of the tax cuts. For example, Apple announced that because of the federal tax cuts it would be investing $350 billion in the US over the next five years and hiring an anticipated 20,000 workers. Hopefully, more businesses will be following Apple’s lead. If the economy takes off, and the stock market continues to grow, that could be very positive for New York’s economy offsetting any lost revenue as a result of tax migration. However, New York could also work on lowering its tax burden and if we did, the issue of tax migration would be mitigated.
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