Under Congress' tax plan, whither New York, its neighbors, and the rest of the country?
Congress' tax plan is not a done deal, but it's getting close enough that New Yorkers must realistically ponder its impacts. How will the most radical changes to state and local governance in at least a generation – enacted with no hearings and thus Congress not benefiting from outside analysis – affect our state and city?
The most obvious change is state and local tax deductibility. The original Senate plan was to kill such deductions altogether, but now Congress appears to be working toward a compromise with the House to cap all such deductions at $10,000.
This provision disproportionately hits New York and its neighbors. Because of its high income and high taxes, New York, with just 6.1 percent of the country's population, comprises 13.3 percent of state and local tax deductions, according to the Tax Foundation research group.
And the deduction is worth more to New York than to anyone else: a full 9.1 percent of income, or more than $7,200 annually.
Our neighbors, too, depend on these deductions, with Connecticut and New Jersey comprising similar disoportionate shares.
Many observers, including this one, have written about the risk of making it harder for state and local governments to raise revenue. States already face more than $600 billion in future payments for public-sector retiree health care benefits, and another $1.1 trillion in similarly unfunded pension payments.
The grim reality is that the states that depend the most on these tax deductions are broke. New York state's pension funds are nearly fully paid up, although we do owe $72.8 billion in retiree health care promises. New Jersey, by contrast, has set aside just 30.9 percent of its estimated $243.6 billion in future pension costs, according to a Bloomberg ranking. Connecticut has put away just 44.1 percent of its $61.1 billion liability.
Proponents of eliminating the state and local deductions say that the change will spur these states to address these liabilities. The opposite may be true: Congress has now given the public-sector unions that resist any and all changes to benefits, and the politicians who depend on them, a fresh enemy to attack.
From now on, it won't be Gov. Cuomo's, Murphy’s, or Malloy’s fault, or the fault of their predecessors, that each state has failed to tackle these costs. It will be out-of-state Republican lawmakers’ fault, for taking away the means to attempt to pay them.
Even with the changes to future pension and health care benefits that states should be working on anyway, with or without Congress’ “help,” tax hikes and spending cuts are highly likely.
Congress is simply making such tax hikes more expensive for the people who would pay them. Ray Dalio, chairman of the Bridgewater Associates hedge fund, estimates the average New York itemizer will pay an extra 3.3 percent of income in state taxes – equivalent to a second New York City income tax.
That’s not for better services. That’s just to keep up with our retirement promises while still struggling to keep up with our increasingly deteriorated public infrastructure, like subways and streets.
New York is unlikely to benefit much from the worse plight of its neighbors. New York derives value from its proximity to smaller-scale financial centers in Connecticut and New Jersey, set up three decades ago in part to avoid high taxes. If even a few high earners in such states give up and move to Florida, it harms the whole region's economy. Connecticut and New Jersey, too, are homes to much of the city's workforce.
New Yorkers face another risk, too. The state is home to three of the country's nine counties with property taxes above $10,000 annually, according to ATTOM Data Solutions, a real-estate research firm. Those three counties are Westchester, Rockland and Nassau; five of the remaining six are in New Jersey and Connecticut.
If you're expecting your home value to decrease as Congress curtails the property-tax deduction and the mortgage-interest deduction at the same time, and you're worried about paying an effectively higher income tax rate, too, what is the natural thing to do? Cut back on today's spending. Is someone facing an extra cash call of potentially several thousand dollars a year going to buy a new car?
For many families, this tax bill, at least in the short term, will feel like the opposite of getting a raise.
That’s not just a New York problem, but an American one. The six states responsible for more than half of the country's state and local tax deductions are home to 121 million people, or nearly 40 percent of the country's population.
This isn't some theoretical tax debate, then. This is abruptly changing the fiscal condition of, well, much of the whole country: the people who pay high state and local taxes, and the people who depend on those payments for government services. Congress will only know for sure how they'll all react after it’s done.
Nicole Gelinas is a contributing editor to the Manhattan Institute's City Journal. She is on Twitter at @nicolegelinas.