Taxes & Generational Equity: State and Local Taxes

This post continues a discussion of how and why a hypothetical couple age 67 and earning $75,000 per year would pay little more than one-third the federal, state and local taxes as a young working couple with the exact same income. Even though, to the extent the two couple’s non-money situations differed, the senior citizens were better off. The scenarios are laid out, and a spreadsheet is attached, here. The topic of this post is New York’s state and local taxes. Based on some assumptions and the TurboTax program, my hypothetical older couple, the Senior Voters, would owe just $2,570, or 3.4% of their income, in New York State and New York City taxes. But my hypothetical young couple, Young and Younger Hopeful, would owe $7,962 in state and local taxes, or 10.6% of income. Adding a one-year-old “Baby Hopeful” would cut the state and local bill only slightly, to $7,857 or 10.5% of income. Eliminating Ms. Hopeful’s job and cutting the couple’s income to $50,000 per year would reduce the state and local tax burden to $5,346 (10.7% of that reduced income), still double what the Senior Voters pay at $75,000 in income. The rest of the post shows how this is so.

For state income tax purposes, and also for New York City local income tax purposes, the Senior Voter’s taxable income is zero. In fact virtually all retired senior citizens in New York State have a taxable income of zero because pension income, 401K payments, annuities and Social Security, all taxable under the federal income tax, are tax free for New York State and New York City. Since a senior couple has a standard deduction of $15,000 on top of that to capture any taxable investment income, like the $10,000 the Senior Voters earned even if it wasn’t in a 401K or IRA account, only those with investment income in excess of that amount on top of their 401K and IRA investments owe a penny of state and local income tax. Under the circumstances, one wonders how much senior citizens pay collectively in this state. In an interesting twist, pension and other retirement income is tax free for private sector workers after age 65. But for public employees, pension income is exempt from state and local income taxes at any age. But for any senior citizens such as the Senior Voters, $75,000 in income disappears at tax time.

In fact, according to TurboTax, the Senior Voters would actually get a $230 refund, although I believe this must be a mistake. Since the City of New York shifts the tax burden from property taxes to income taxes, the state gives city residents a local income tax break as part of the STAR property tax rebate. According to the program, the Senior Voters would get the rebate too, even though they owe no taxes. Perhaps someone could correct this.

Meanwhile the Young Hopefuls would have a taxable income of $56,467 out of a total income of $75,000. That is, to say the least, more than zero. Their only exclusion is half of the self employment tax; they also receive a standard deduction of $15,000 from the state. The Hopefuls would owe $3,075 in state income taxes, and $1,637 in local income taxes. Adding a “Baby Hopeful” would add a $1,000 dependent exemption, reducing taxable income to $55,467. That saves $69 in state income tax and $36 in local income tax over a year. Even with their income cut by one-third to $50,000, the Hopefuls would still have a taxable income of $30,467, and they would still owe nearly $2,100 in state and local income taxes.

The personal income tax is New York State’s biggest source of funds by far. The New York City local income tax, which virtually no other U.S. local governments have, substitutes in part for property taxes, keeping property taxes lower here than elsewhere.

Speaking of property taxes, I assumed the Senior Voters were homeowners, like 80% of those age 65 or over in 2005 according to the U.S. Census Bureau. As best as I can tell from the Senior STAR regulations and typical property tax bills in my neighborhood, the Senior Voters would owe $2,800 in property taxes. Their property taxes are low in part because New York City shifts the burden to the income tax (which they don’t pay), and in part because the city’s property tax system favors small homes over apartments and commercial property.

Like 57% of those under age 35, I assume Young and Younger Hopeful are renters, in this case renters of a one-bedroom paying $1,800 per month in an apartment building, which is all they could afford in Windsor Terrace. According to the City of New York’s Independent Budget Office, a property worth $300,000 would pay $1,602 in taxes if it were a small home, $2,772 if it were a Co-op, but $13,050 if it were a rental apartment. Under the circumstances, I think it’s fair to assume that the Hopeful’s landlord is paying at least $3,250, or one quarter that last amount, though the actual figure could be much higher. And since all landlords are in the same boat with regard to property taxes, and none can undercut the others, those taxes are passed on to the tenants in high rents. For example, rents certainly rose since the 18% property tax increases in 2003, didn’t they? So in addition to higher income taxes, the young pay higher property taxes, indirectly, until they can afford to buy. And with prices at bubble levels, that may not be for a while.

Interestingly, the property tax in neighborhoods comparable with Windsor Terrace in the suburbs — say the south shore of Nassau County — is typically around $8,000, although senior citizens get a break on those as well. But in such places, parents can feel secure that they can send their children to the local public school in any neighborhood. Given their lower taxes at moderate income levels, it appears that New York City is just about the best place around to be a middle class Senior Voter. And given the schools, it appears to be one of the worst places to be a young hopeful, at least once a “Baby Hopeful” reaches age 5 and unless he somehow gets into one of the good schools here.

Another factor overwhelms this, however. The $8,000 in suburban property taxes is more than any city resident with an income of $75,000 pays in state and local taxes combined. But unlike the New York City local income tax, the suburban property tax doesn’t rise as income does: the City’s taxes hit those with higher incomes harder. At $200,000 in work earnings a New York City couple would owe $6,400 in local income taxes, with property taxes on top of that; at higher incomes the local income tax would escalate further and faster. Moreover, the suburbs tend to have relatively few multiple dwellings, so a young middle-income couple such as the Hopefuls would probably be in an illegal apartment in somebody’s cellar if they lived in Nassau County.

The suburbs could adopt the city’s tax structure if the wanted, by adopting a countywide income tax, and shift the local tax burden from those earning $75,000 per year to the wealthy. They could also permit more multiple dwellings within their borders. By and large, however, they have absolutely no interest in doing so, because by making their communities affordable to young hopefuls, they would also make them affordable to working class families willing to squeeze into a small housing unit in order to gain access to more job opportunities and better schools.

Back in New York City, what this analysis shows is that senior citizens, unless they have extensive investment income over and above their retirement accounts (and haven’t put their money in municipal bonds), are carrying very little of the state and local tax load. Very little at all. The burden falls more far heavily on everyone else, even at the same income level.

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