Cuomo is Right on the Millionaire’s Tax

A year or two ago, the State of Illinois increased its state income tax rate by 60%. It was the right thing to do. Today, Governor Cuomo is refusing to keep a New York State income tax surcharge. That is also the right thing to do. Why the difference? The overall state and local tax burden in Illinois had long been below the national average, unsustainably low given that state’s services and other obligations. New York’s state and local tax burden is the highest in the country, except (in some years) for Alaska and Wyoming where most of the taxes are on mineral extraction and not residents or other businesses. Illinois’ top state income tax rate was increased from 3 percent to 5 percent. The New York State rate is nearly 7 percent without the surcharge – 10 percent in New York City where a local income tax is added, and is 9 percent with the surcharge – or more than 12 percent in New York City.

Throughout the country, public services are being devastated by soaring pension costs caused by two factors – inadequate past funding by taxpayers, and retroactive pension enhancements for public employees. In Illinois, taxpayers deserve the majority of the blame: in many years taxpayers put in zero, and there isn’t nearly enough money even to pay the pensions public employees were promised when hired, even without pension spiking and any of the retroactive deals. In contrast, the public employee unions and their retroactive pension deals may be more to blame in New York City than anyplace else in the country, with the United Federation of Teachers the most guilty of all (based on the difference between what was promised when workers where hired and what they took later).

Governor Cuomo makes an appropriate distinction between Washington, ruled by the wealthy at the expense of everyone else, and Albany, ruled by producers of public services at the expense of everyone else. “Mr. Cuomo insisted that under no circumstances would he consider backing the extension of the surcharge, saying it would encourage residents and businesses to move to other states. He said he would support a federal millionaires’ tax, because it would treat residents of all states equally.”

There has been plenty of discussion in the Midwest about businesses moving from Illinois to Wisconsin as a result of the Illinois income tax increase. It is overblown – the overall tax burden is still higher in Wisconsin. Meanwhile, the gap between New York in general – and New York City in particular – and any other state is already huge. And still would be if the state income tax surcharge expired. Income, sales and property taxes and all kinds of fees have been repeatedly increased in the past decade. So why are public services in a downward spiral?

The millionaire’s tax is popular, but it wouldn’t be if people knew why more revenues are required. Imagine asking this question in a poll. “Over the past 16 years, pensions for New York’s public employees have been retroactively enriched in political deals in Albany, while retirement benefits for other workers have been cut back. The cost has been hidden and must now be paid. How should the cost be paid? a) higher state income taxes b) higher local property taxes c) cuts in public services d) diminished aid to the poor e) cutting the pay and benefits of future public employees so low that competent workers cannot be hired or f) some other way?” What do you think the answer would be? And if someone answered something other than f), imagine this follow-up. “Would it change your mind if more additional revenues might lead to even more pension enrichments, which cannot be taken back no matter how terrible the effects are on other people, leaving the state’s finances no better off than before?”

New York State doesn’t have a separate income tax (the payroll tax) that only falls on wage income (not investment income) and only on the first approximately $100,000 of wage income, exempting wage income above that level. The federal government does. The New York State income tax does not tax investment income, capital gains and dividends, at a lower rate than work income. The federal income tax does. Those who have benefitted from siphoning off New York’s high tax burden try to confuse the favorable treatment the wealthy receive at the federal level with their treatment in New York State. The two are, in reality, very different. President Obama should have just let the Bush tax cuts expire.

On the other hand, the federal government taxes pension and other retirement income at the same rate as other income under the income tax (though these are exempt from the payroll tax). In New York State, pension and retirement income are partially exempt from taxes for private sector workers and fully exempt for public sector workers. Every dime, no matter how young a public sector worker gets to retire, no matter how high that pension income (or total household income) is. The state and local income tax rate on early retired public employees in New York State is not 3 percent, or 5 percent, or 7 percent, or 9 percent. It is zero. ZERO! Even on a $50,000 pension for someone with $100,000 in total household income, or a $100,000 pension for someone with $200,000 in total household income. I wonder what the answer would be if a poll asked about that?

The millionaires and the public employee unions are alternating between attempting to engineer a convenient amnesia about the events of and leading up to 2008 and all those retroactive pension enhancements, and pointing fingers at each other hoping to deflect the blame. Knowledgeable people know, and many less knowledgeable people sense, that it isn’t the 1 percent and the 99 percent. It is the 1 percent, the 10 percent, and the other 89 percent. The 10 percent are retired and near retired people with a sweet deal whose cost was deferred to the future to be paid by less well off others, the other 89 percent. A large share of these are public employees.

If the public employee unions really want to stand with the serfs in reality, and not just benefit at their expense, they’ll have to give back the entire cost of all the retroactive pension deals starting in 1995 in some other way (since the pension deals are irrevocable). With interest, and without fraudulent underestimates of that cost. And pay taxes on pension income on the same basis as the wage income of those who serve them, who generally have no employer-funded retirement benefits at all. And have the same expectations of what the least motivated and productive among them owe at work that they themselves have of private sector workers when they shop or receive a service as consumers.

Let the unions agree that these things be changed, really changed not just symbolically changed, permanently changed not just temporarily changed, and changed for existing workers and retirees not just future hires. Let the state constitution be modified, so the Generation Greed senior citizens in the state legislature would no longer have the power to irrevocably retroactively increase their generation’s pensions at a cost that would devastate the state, and then collectively flee to Florida, as they can today and to an extent already have. Then we’ll talk about increasing New York State income tax rates as something other than additional pillaging by the other better off.

Otherwise, the lesson of the big increase in NYC school funding over the past decade-plus (and stock investing over the past 15 years) remains in effect. The more ordinary people put in, in exchange for promises, the more those who control our public and private institutions will take out. Those institutions thus cannot be saved by sacrificing and contributing more resources, and perhaps cannot be saved at all and must be replaced by less corrupted institutions.