Posted by Leonard Steinberg on November 6th, 2013

Its official: Bill de Blasio is the mayor-elect of New York City. Getting elected was relatively easy, but now its down to work. He is smart enough to know that botching Bloomberg’s successes will almost certainly lead to a fiscal mess and prevent the very things that are important to him from happening: a financially thriving New York feeds government coffers (reminder: every time a $5 million apartment sells, at least $ 275,000.00 in tax dollars are generated). One of his signature policy proposals is an income tax increase on wealthy New Yorkers to pay for pre-Kindergarten and after school programs(of course I wish he’d address the real estate tax issue and government inefficiencies as a priority, but he will only get to that after the first 100 days he promised). He’d raise New York City’s top income tax rate from 3.876% to 4.41%, but only on incomes over $500,000.00 per year.

Here’s what you should know about the tax:

• It probably won’t become law, even if de Blasio wins. New York City controls its own property taxes, but income and sales tax changes have to be approved by the State. That approval isn’t likely to be forthcoming (although with a 70+% wining margin his chances have increased). Partly that’s because Gov. Andrew Cuomo is pretty conservative on tax policy for a Democrat and the State Senate is controlled by Republicans. But partly it’s because the state, like the city, is heavily dependent on high-earning NYC residents as a tax base. The more the state lets the city tax those people, the less room it has to tax them itself.
• You probably won’t pay it, even if it becomes law. According to the city’s Independent Budget Office, only about 54,000 of the city’s 3.5 million tax filers (1.4%) make enough money to pay the proposed tax. And if you only make a little more than $500,000, you’ll only pay a little bit extra. Unlike most provisions of New York income tax, there will be no “recapture” — that is, you’ll only pay tax on the amount of your taxable income that exceeds a half million dollars.
• Here are some examples of the tax that would be due. Let’s say you’re a married couple with an income of $700,000. On average, the IBO estimates you’d be able to take about $32,000 in tax deductions and exemptions. With $168,000 in taxable income over the $500,000 threshold, your added tax bill would be $897, or 0.13% of your income. As you get wealthier, the hit gets more substantial. A taxpayer with $10,000,000 in taxable income would pay an added $50,730 in tax, or 0.51% of income.
• Even if you do have to pay the tax, it’s only supposed to last for five years. Milton Friedman famously said there is “nothing so permanent as a temporary government program,” but temporary tax increases really do sometimes prove temporary. New York City had a temporary income tax increase from 2003 to 2005. New Jersey had a one-year high income surtax in 2009; it went away on schedule. New York State also enacted a temporary, three-year high-income surcharge in 2009; Cuomo didn’t keep his promise to let it sunset, but he did keep it in a much reduced form.

Is De Blasio’s tax plan a good idea? I don’t think New York City government needs more money; we already have some of the highest taxes in the country, on income and also on rental and commercial property. Our sales tax rate is also high, though lots of items are exempt from sales tax. Raised taxes have already had a damaging effects on the markets in the UK and France.

The city uses those receipts to finance an unusually high level of per-capita spending. Over the last decade, much of the city’s rising tax receipts have gotten sucked into a vortex of pension and employee health care costs that the Bloomberg administration has been unable to control. If it’s important for New York City to make new investments in pre-Kindergarten and after school programs, it ought to be able to find the money by cutting the budget elsewhere.

De Blasio does show a measure of smarts by making the tax proposal temporary; he told the New York Times that after five years he’d seek to replace the tax with another funding source or cost cuts elsewhere. Perhaps he’s hoping to negotiate savings on pension benefits or employee healthcare in the meantime?

I think the risk of economic damage from higher income taxes is oversold, at least in the specific context of New York City, although the case studies of London and Paris are troubling. It’s not that taxes don’t influence economic decision-making; the whole reason that Greenwich and Stamford have emerged as centers for the hedge fund industry is a desire to avoid taxation in New York: will more very wealthy New Yorkers move out of the city?  New York has changed over the last few decades in ways that make it more desirable than ever as a place for the global elite to live and work. You can see this in soaring prices for luxury real estate. New York City’s capacity to get away with taxing the hell out of the wealthy is likely higher than ever.

The principal barriers to job creation and growth in New York City are non-tax factors, with the extremely high cost of both housing and commercial real estate are at the top of the list. The city also has a punishing regulatory environment. Some industries (think banking, advertising, media, fashion and law) have good reasons to put up with the cost and hassle; others get pushed out.

If de Blasio implements effective policies to bring down the pre-tax cost of living and working in New York (a big if), that would more than offset any economic damage that would come from a 0.534% increase in income tax rates on New York’s wealthiest residents. So if you’re worried about New York’s economy, you should probably focus on what the new Mayor has to say about real estate development and crime prevention more than his tax plans.