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FPI/CWF Report Debunks Criticisms of Progressive Income Tax Reform

For Immediate Release: March 24, 2009

Contact:      Jason Angell, Center For Working Families 718-222-5754,  x242 or (cell) 845-625-9325,

                        James Parrott, Fiscal Policy Institute 212-721-5624 or (cell) 917-880-9931,

                        Frank Mauro, Fiscal Policy Institute 518-786-3156 or (cell) 518-469-6680,


New Report Debunks Criticisms of Progressive Income Tax Reform in New York


Raising Taxes on Wealthy New Yorkers is the Best Option for Balancing the State’s Budget During the Recession; Executive Summary Attached


Albany – The Fiscal Policy Institute and the Center for Working Families released a new report today debunking criticisms of progressive income tax reform. The report also explains why increasing taxes on the portion of income over a relatively high level is  the “best option” for solving New York’s current budget crisis.


The report, Back on Track: Back on Track: Why Progressive Tax Reform is an Essential Part of New York’s Budget Solution, looks at the economic changes and policy choices that caused New York’s current fiscal crisis and examines the consequences of rolling back some of the state’s income tax cuts on the wealthiest taxpayers.


In less than two weeks, New York policymakers must decide how to balance next year’s $14.2 billion deficit; the federal stimulus helps, but there’s still a gap of about $8 billion,” said Jason Angell, Director of the Center for Working Families, who co-authored the report.  “Progressive income tax reform is not only the fairest way to get New York back on track, it’s also the most economically sound. Low- and moderate-income families already are being battered by the recession. The State shouldn’t add to that pain with damaging budget cuts.”


“When you look at the economic evidence,” said Frank Mauro, Executive Director of the Fiscal Policy Institute, “there’s little reason to believe progressive tax reform that adds one or more brackets to the personal income tax at relatively high levels would hurt New York’s economy, and good reason to think it’s the best option policymakers have left. The experience in other states that have raised high-end income taxes shows that the wealthy have not deserted their states just because their taxes were increased.”


Under current law, the threshold for the top personal income tax rate is $20,000 for single taxpayers and $40,000 for joint filers. “Relatively few taxpayers would be affected by a high-end tax increase,” said James Parrott, Chief Economist and Deputy Director of the Fiscal Policy Institute. “In 2006,” according to Parrott, “only 2.5 percent of New York residents had annual incomes above $250,000, one of the thresholds often discussed for an increased tax bracket. In most New York counties, fewer than two percent of taxpayers would be affected.”


The study notes that drastic state budget cuts will harm the economy more than progressive income tax reform, and that such reform would provide balance to the overall tax system and help make New York more economically productive in the long-term.


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Back on Track: Why Progressive Tax Reform is an

Essential Part of New York’s Budget Solution



Executive Summary


New York faces one of the largest budget deficits in the country for the coming year at $14.2 billion. The State’s 2009-10 fiscal year begins April 1, 2009. Two responses to addressing the crisis have dominated the policy debate. While both acknowledge the detrimental impact Wall Street revenue declines have had on the State’s fiscal condition, they diverge in significant ways.  


One response frames the deficit as a matter of excessive public spending and calls for massive cuts to public programs and services. The other finds that, following thirty years of personal income tax (PIT) cuts for the wealthiest New Yorkers, the State’s overall tax system is highly regressive and incapable of supporting essential service needs. This view warns of the economic damage that would result from large state budget cuts and calls for restructuring the PIT as a necessary step towards fiscal stability in this troubled economic climate.


In the context of a deepening recession, which is the most sensible path to take? This policy brief reviews arguments, analysis and data pertinent to deciding whether progressive tax reform should be part of the solution. We find that:


·          A deficit-reduction plan that relies too heavily on cuts will intensify the economic slump by reducing consumer spending, counteracting the federal economic stimulus effort, and devastating working and middle class families reliant on public services.


·          Economic theory—articulated by such eminent economists as President Obama’s budget director, Peter Orszag, and Nobel laureate Joseph Stiglitz—suggests that during a recession, steep state budget cuts hurt the economy much more than a high end income tax increase.


·          High-end income tax increases have not had the negative economic consequences that opponents predicted. Progressive tax reform in a number of states has not led to the movement of wealthy families out of their states or correlated job loss.


·          Other states have successfully restructured high-end PIT rates without resulting economic harm:


o        From 2004 to 2006, following California’s implementation of a new national top rate of 10.3 percent on income over $1,000,000, there was a 38 percent increase in the number of millionaires in the State.


o       The number of half-millionaires in New Jersey has grown by 70 percent since increasing their highest rate from 6.37 percent to 8.97 percent in 2002, from 26,000 in 2002 to 44,000 in 2006. (Gov. Corzine recently proposed a one-year increase to 9.75 percent.)


o       New York experienced a comparable increase in high-income returns after temporarily raising PIT rates, from 250,000 in 2003 to over 325,000 in 2005, representing a 30 percent growth.


  • States with higher top PIT rates than New York have experienced positive private sector job growth over the past decade. Additionally, during the last temporary PIT increase, New York gained 127,000 jobs.


  • Marginal income tax increases will not have a significant impact on small business owners.  For example, 98.6 percent of all small business owners make less than $250,000 a year. 


  • Current fiscal pressures largely stem from excessive tax cuts made over the last three decades.  New York has cut the top PIT rate on wealthiest residents in half even as growing polarization has left New York with the widest income gap between the top and bottom in the nation. Today a single person with an income of $30,000 pays the same marginal tax rate as a person with an income of $30 million.


  • The reality of the claim that state spending is “out of control” is that aside from new commitments involving education, healthcare, property tax relief and transportation, state spending from 2004 to 2008 grew at less than 2.9 percent a year, barely the pace of consumer inflation.   The state, however, made these important new commitments without identifying how to sustainably pay for them.


  • High-end PIT cuts have led to a massive tax shift. To compensate for lost state revenue, New York has increased the burden on local governments to pay for essential services through increased property and sales taxes. The tax burden now falls heaviest on those with the least ability to pay.


  • New York should consider reforming its top PIT rates to help close the remaining 2009-10 budget gap, ensure fiscal stability, protect services, and restore sustainability and fairness to the overall tax structure.


  • Even after all available federal stimulus funds that can go towards the deficit are utilized, New York would still be left with a $7.5 to $8 billion gap for the coming fiscal year.


  • A high-end income tax increase will help blunt the impact of state-wide program cuts while affecting relatively few New Yorkers.  For example, raising PIT rates above $250,000 would affect only 2.5 percent of all taxpayers statewide and only one percent of upstate taxpayers.


  • Permanent PIT reform would provide the financing necessary to phase in substantial property tax reform once the economy recovers.

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