High-Stakes Taxing

This report reviews the impact of federal tax cuts on New York State since 2001 and looks at how the Empire State would be affected by the sharply divergent tax policy agendas of the 2008 presidential candidates, John McCain and Barack Obama. Estimates are provided for the direct New York impact of the candidates’ principal individual income tax proposals over the next two years.

The starting point for both McCain and Obama is the Jobs and Growth Tax Relief Reconciliation Act of 2003, or JGTRRA, which expanded and accelerated the tax cuts first enacted in 2001 under President George W. Bush. Most of the JGTRRA cuts are slated to expire at the end of 2010, creating uncertainty about future federal tax policy that the next president must take the lead in resolving.

Citing economic growth as his priority, McCain would seek to make the Bush cuts permanent. He also is proposing a significant reduction in corporate taxes and expanded Alternative Minimum Tax (AMT) relief.

Obama’s income tax changes, by contrast, are primarily aimed at “restoring fairness to the tax code.” He would accomplish this by immediately raising ordinary income, capital gains and dividends tax rates on all taxpayers earning more than $250,000, restoring the top two rate brackets in effect before 2001 while preserving Bush’s tax cuts and credits in lower brackets. At the same time, Obama would target significant new and expanded tax credits to low- and middle-income workers. He has not made explicit promises concerning the AMT.

The comparative analysis in this report focuses on the cumulative impact of the candidates’ tax plans in 2009 and 2010. Over the next two years, we estimate:

• McCain’s proposal would drive about $675 million in added tax cuts to low- and middle-income families in New York.
• Obama would provide low- and middle-income New Yorkers with new or expanded tax credits worth about $13 billion. But at the same time, he would increase taxes on the state’s high-income residents by at least $16 billion.
• Obama would count on New York’s high-income households to help finance a large portion of his proposed tax credits nationwide. With just 6.4 percent of the nation’s tax filers, New York State’s share of the Democratic candidate’s tax increases would come to nearly 11 percent—more than any state except California.
• Changes in taxpayer behavior induced by Obama’s proposed tax increases would reduce New York State personal income tax revenues by $800 million to $1.1 billion. New York City’s potential revenue losses over the same two-year period are estimated at $144 million to $285 million.
• This does not include Obama’s proposal to nearly double federal taxes on the “carried interest” income of private equity firms and hedge funds. Nor does it reflect his proposal to apply Social Security payroll taxes to all incomes above $250,000, starting in 2018.

* This does not include Obama’s proposal to nearly double federal taxes on the “carried interest” income of private equity firms and hedge funds. Nor does it reflect his proposal to apply Social Security payroll taxes to all incomes above $250,000, starting in 2018.

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