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Wealthiest New Yorkers will pay less under Cuomo’s tax reform

State tax overhaul will reduce bills for the wealthiest by removing a surcharge

Occupy Albany demonstrators rallied in the Capitol's war room last month, urging Gov. Cuomo to extend New York's "millionaire's tax." AP Photo/Mike Groll.

The tax reform deal brokered Tuesday by Gov. Andrew Cuomo has been widely portrayed as a populist breakthrough, a plan to cut New York State’s deficit by extracting greater contributions from the rich. “Albany Tax Deal to Increase Rate for Top Earners,” reads the A1 headline in today’s New York Times.

But there’s one catch: The very wealthiest taxpayers will actually see their taxes go down.

The top tax rate under the existing system is 6.85 percent, but income above $200,000 is taxed at a rate of 7.85 percent, and income above $500,000 is taxed at a rate of 8.97 percent, under the surcharge known as the “millionaire’s tax.” The new deal announced by Cuomo eliminates the so-called millionaire’s tax, and raises the rates for households earning over $2 million annually to 8.82 percent.

The very highest earners – who earn a high proportion of their income above the $500,000 threshold where the top rate under the millionaire’s tax currently kicks in – will end up paying less under the Cuomo deal.

Just how much the wealthiest taxpayers will save under Cuomo’s plan depends on whether the new system applies “rate capture” – an arrangement in which all of a household’s income is included in a higher bracket once income crosses a given threshold. James Parrott, an economist at the Fiscal Policy Institute and expert on New York’s tax system, said he believes that some form of rate capture will be included in the new system, but that details have not yet been released.  Gov. Cuomo’s office has not yet responded to our inquiries on whether the new system will apply rate capture.

Even if it does, the wealthiest New Yorkers stand to benefit from Cuomo’s plan.

For example, under the current  system, a New Yorker earning $5 million dollars per year would pay a 6.85 percent tax rate on his or her first $200,000 of income, 7.85 percent on income between $200,000 and $500,000, and a 8.97 percent rate on all income above $500,000. The total tax owed to New York State would be $440,900. Under Cuomo’s plan with rate capture, the same person would pay 8.82 percent taxes on all of their income – for a tax liability of $410,000 $441,000. [UPDATE 12/8: As income rises above $5 million, the total tax bill under the new plan declines in comparison with the old.] “Its probably a little less progressive at the top,” said Howard Chernick, a professor of economics at Hunter College, of the deal announced by the governor.

Chernick said Cuomo’s reforms made the tax system more progressive overall by creating a larger number of graduated marginal tax rates, which get higher as income increases. He added that the changes were far more progressive than simply allowing the millionaire’s tax to lapse without changing the marginal rates – which would have occurred if Cuomo and the legislature had failed to act.

In 2010, about 5.9 percent of New York State households – or roughly 424,500 – earned more than $200,000, according to estimates from the 2010 American Community Survey. These households are currently subject to a surcharge under the millionaire’s tax, and will pay less under Cuomo’s new plan.

NOTE:
In an earlier version of this post, we relied on data from Phoenix Marketing International, cited in news reports and research from the Partnership for New York City, to say that there were 381,197 New Yorkers who earned at least $1 million in 2010. Phoenix’s research in fact identified the number of New York households with over $1 million in assets, not annual earnings. See economist Robert Frank’s account. H/T Bill Hammond from the Daily News, via @NYDNHammond.