Tax Revolution in Albany? Not So Fast

DUTCHESS County Executive Marcus Molinaro last week launched his uphill campaign for governor with a pledge to “roll out a bold property-tax cut that defenders of the status quo will despise.”

The newly minted GOP nominee said he’d “fundamentally alter the tax system” — and to “do it out of compassion.” He also promised to take over the local share of Medicaid costs, saving at least $3 billion.

Molinaro’s rhetoric made it all sound obvious — and easy. In fact, New York faces real financial constraints that’ll limit options for whoever occupies the governor’s office starting next January.

Start with the biggest single variable in Albany’s financial plan: the temporary added income tax on high-income households, due to expire at the end of calendar year 2019, which now generates $4.5 billion in annual revenue.

Initiated in 2009 under former Gov. David Paterson and repeatedly extended by Gov. Cuomo, the so-called millionaires tax boosts the top statewide rate from 6.85 percent to 8.82 percent for taxpayers with incomes starting at $1 million for singles, $2 million for couples.

Top-bracket residents of New York City already pay the second highest state and local rate in the country, trailing only California’s. Now that the new federal law curtails state and local tax deductions, New York’s effective tax burden has risen to an all-time high. The SALT cap compounds the risks associated with the state’s heavy dependence on taxes from the volatile incomes of its highest-earning 1 percent, who generate more than 40 percent of the income tax.

Assuming the millionaires tax goes away, Cuomo’s latest financial plan projected a $4 billion budget gap for fiscal 2020, growing to more than $7 billion thereafter. If budget growth is held under Cuomo’s self-imposed 2 percent spending cap (which, adjusting for fund shifts, actually allowed more than 4 percent growth this year), the gap is estimated at $780 million in 2020, rising to $1.4 billion in 2021.

If the millionaires tax is extended and spending held to 2 percent, the out-year gaps disappear — assuming top-bracket payers keep reliably churning out those extra billions, oblivious to the SALT deduction loss.

Molinaro just became the standardbearer of the political party that traditionally has been most sensitive to the economic impact of high income taxes. So, before he rolls out what sounds more like a big tax shift than an actual tax cut, he has to decide: Would he, like Cuomo, extend the millionaire tax as a way to pay for the goodies he’s promising voters? Or would he allow the tax to expire as scheduled, on Dec. 31, 2019?

Or would he take a middle course of phasing it down — and ultimately out?

Also in the state budget is a multiyear phase-in of the biggest and broadest income tax cuts since the mid-1990s for households with incomes up to $300,000. When fully effective in 2025, those cuts will be worth $4.5 billion. How do they fit into Molinaro’s tax overhaul?

Meanwhile, a deadline also looms for Cuomo’s cap on local property taxes, first enacted in 2011. The cap has saved billions for property owners outside the city, New York’s most significant and transformative pro-taxpayer fiscal policy in decades. But whether the cap endures is another question.

At the insistence of former Assembly Speaker Sheldon Silver, the cap was awkwardly incorporated into the temporary state law regulating rents in New York City, which expires next June.

Will Molinaro commit himself to making the tax cap a permanent, free-standing law with no new loopholes? And will he make it more effective by standing up to the powerful public-sector unions whose contracts are the primary driver of high local taxes?

There are plenty more dollars-and-cents questions where those come from — starting with whether he’d fight to change contracting laws that needlessly inflate publicworks construction costs.

Insisting he means business, Molinaro told the Republican convention: “Stakeholders in the Albany power and money game will spit their coffee as we roll out our vision.”

Don’t expect to see any stained shirts around the state Capitol unless he’s actually willing to tackle the structural causes of New York’s high taxes.