A state tax rate still too high

Published in Albany Times Union

The recent release of Gov. Cuomo’s Tax Relief Commission’s final report gave New Yorkers much to discuss. Already bombarded by talk of overhauling the federal tax system, this plan provides another layer to consider in determining how New Yorker’s tax bills and the state’s future economy could be impacted by tax reform.

Recognizing the problem is an important first step. Based on various state business climate rankings, New York consistently hovers near the bottom. According to the Small Business and Entrepreneurship Council’s Business Tax Index of 2013, which considers 21 tax measures ranging from personal income tax rates to state corporate tax rates and even wireless taxes, New York was 44th out of 50 states.

Unfortunately, when it comes to specifics, the commission’s recommendations fall short of accomplishing Cuomo’s desire to: “continue our efforts to reverse the state’s reputation as a tax capital and make New York a friendlier state for families and businesses.”

New York is among a handful of states with extraordinarily high state taxes on capital gains. With a top state rate of 8.82 percent on long-term gains, a New York resident currently pays a top combined effective federal and state rate of 31.4 percent, which includes a new Medicare surcharge and an increase in the top federal capital gains tax rate (enacted as part of the fiscal cliff deal). This saddles New Yorkers with a top combined tax rate on capital gains that is 10 percentage points higher than they faced in 2012. Big Apple residents face an additional local capital gains tax of 3.88 percent — for a whopping combined 32.7 percent.

Given Cuomo’s desire to make a friendlier tax environment, one would expect to see some discussion of this burdensome tax in the report. Unfortunately, the scheduled reduction in the state’s top individual income tax rate (which also applies to capital gains income) from 8.82 percent back to 6.85 percent has been postponed yet again.

High capital gains tax rates are an obstacle to New York investment, entrepreneurship and economic growth. Economic data shows that each $1 billion increase in investment in the U.S. was associated with an additional 23,200 jobs. Prior to the fiscal cliff agreement in Washington, Allen Sinai, an internationally regarded economist, predicted a decrease in jobs as a result of an increase in the top federal capital gains rate from 15 percent to 20 percent. Real economic growth would fall by an average of 0.05 percentage points and jobs would decline by an average of 231,000 per year.

There are a few bright spots in the commission’s report including a slightly lower state corporate tax rate and a proposal to cut the estate tax from the current 16 percent rate to 10 percent with an increased exemption to $5.25 million. In a perfect world, New York would have been better off completely eliminating its estate tax to keep its residents and to prevent the migration of existing capital.

If the governor and state lawmakers are committed to raising capital, they must address the shortcomings of the commission report and address the high tax rates that are impeding investments and job opportunities. Reforming the state tax code requires bold ideas that will foster a favorable business climate that encourages risk taking and investment.

Taxing consumption rather than saving and investment can be an important policy lever for achieving stronger economic growth, funding important spending priorities, and achieving higher living standards for all New Yorkers.

Pinar Çebi Wilber is an economist for the American Council for Capital Formation, a nonprofit, nonpartisan organization promoting pro-capital formation policies and cost-effective regulatory policies. http://www.accf.org.