New York's Income Tax System Among the Best for Working Families in 1999

Most Relief Comes from the State Earned Income Tax Credit Enacted in 1994

New York has among the lowest income tax burdens in the country for low-income working families.1

  • Of the 42 states with income taxes, only Vermont and Minnesota do a better job than New York in shielding both poverty-line incomes and minimum wage-earnings from income taxation.
  • New York is one of only four states in which near-poor two-parent families of four — those with incomes at 125 percent of the poverty line — receive a refundable tax credit rather than having an income tax liability (32 states) or no liability (6 states).
  • For near-poor single-parent families of three, only Vermont and Minnesota provide higher refundable tax credits than New York. Four states provide smaller credits while these families have no income tax liability in seven states and a positive income tax liability in 28 other states.
  • Since 1991, New York has increased its two-parent four-person family income tax threshold — the income level at which such a family has state income tax liability — by $9,000. Only Pennsylvania, California, Minnesota and Colorado have increased their income tax thresholds by greater amounts.
  • Only nine states (Arizona, Minnesota, Pennsylvania, Vermont, Rhode Island, Colorado, Connecticut, California and Maryland) had higher 1999 income tax thresholds for two-parent families of four than New York’s $23,000.
  • Only six states (California, Minnesota, Vermont, Rhode Island, Colorado and Maryland) had higher 1999 income tax thresholds for single-parent families of three than New York’s $21,800.
  • New York is one of eleven states that has already enacted legislation which will increase its income tax thresholds in the future and one of the three states, together with Maryland and Massachusetts, which will use an expanded state EITC to accomplish this threshold increase. New York’s EITC is scheduled to increase from the current 20 percent of the federal EITC to 22.5 percent of the federal EITC for the 2000 tax year and to 25 percent of the federal EITC for 2001.

Most tax relief for low-income families comes from the state EITC.

Virtually all of this tax relief for low-income working families is attributable to New York’s Earned Income Tax Credit (EITC). Enacted in 1994, during Governor Cuomo’s last year in office, the state EITC is a powerful tool for supplementing the income of working families and offsetting the regressive burden of state and local sales, excise and property taxes. In 1994, New York set its state EITC at 7.5 percent of the federal EITC for 1994, 10 percent of the federal EITC for 1995, 15 percent for 1996 and 20 percent thereafter. The multi-year tax cut enacted in 1995 under Governor Pataki accelerated the EITC’s implementation, increasing the state EITC to 20 percent of the federal EITC one year early, in 1996. The 1995 tax cut, however, contributed very little in terms of reducing the tax burden on low-income working families on a continuing basis, despite its current $5 billion per-year price tag.

Since 1994 the income level at which a two-parent family of four incurs positive tax liability has risen from $14,000 to $23,000. Over 90 percent of this increase is due to the EITC enacted in 1994. Likewise, the income threshold for a one-parent family of three has nearly doubled, rising from $11,500 to $21,800. Almost 90 percent of this increase is due to the 1994 EITC.

Income taxes on poor New York families have decreased substantially since 1994. A two-parent four-person family with income at the 1999 poverty level would have paid $116 if the pre-1994 law were still in effect, but receives a $490 refund under current law. Likewise, a one-parent three-person family with income at the poverty line receives a $697 refund under current law but would pay $82 in state income taxes if the pre-1994 law were still in effect. The 1994 tax cut accounts for 94 percent of these declines; the 1995 tax cuts — despite costing $4.8 billion per year — account for only 6 percent of these savings.

The scheduled expansion of the New York State EITC will provide additional relief to low-income working families in 2000 and 2001.

State income tax burdens for New York’s low-income working families will decrease even more when the 1999 increase in the NYS EITC begins to take effect. Under legislation enacted in 1999, the NYS EITC will increase to 22.5 percent of the federal EITC for 2000 and 25 percent of the federal EITC for 2001. If the expanded NYS EITC credit had been in effect in 1999, the tax credit for a family with minimum wage earnings ($10,712) would have been $954 rather than $763, a savings of $191.

Unfortunately, the continuation of the 25 percent state EITC has been tied in law to the continuation of the state’s ability to use federal Temporary Assistance to Needy Families (TANF) block grant funds or state matching (Maintenance of Effort, MOE) funds to pay for the state EITC. Specifically, the law increasing the state EITC from 20 percent to 25 percent of the federal EITC provides that this rate will revert back to the 20 percent level beginning with any tax year in which any federal action (as certified by the Commissioner of the Officer of Temporary and Disability Assistance):

  • materially reduces or eliminates New York state’s TANF block grant allocation,
  • or materially reduces the ability of the state to spend federal TANF block grant funds for the EITC or to apply state general fund spending on the EITC toward the state’s TANF maintenance of effort (MOE) requirement.

In practice, New York is moving to use TANF funds to pay for a substantial portion of its state EITC.2 For example, the Governor’s most recent Executive Budget projects using TANF funds to cover $174 million of the $420+ million that the state EITC is expected to cost during the 2000-2001 fiscal year.

While there are arguments for and against using TANF funds for this purpose, as long as the authorization to do so remains in effect, there is no justification for making the continuation of this particular tax reduction contingent on federal welfare policies while having no similar “fiscal prudence” trigger for the other $13.5 billion in annual tax cuts that are now on the books and either in force or scheduled to take effect over the next several years.

In addition, this provision has significant technical shortcomings,3 and it will create a great deal of uncertainty for a very vulnerable population over the next two years as the U. S. Congress considers the reauthorization of the 1996 federal welfare reform law that established the TANF block grant mechanism. This law is currently scheduled to expire on September 30, 2002.

In recognition of the importance of the EITC in providing tax relief to a very hard-working but frequently-ignored population, this so-called “reversion” provision should be repealed. If state legislators believe that the state’s overall tax reduction program is too large to be sustained without this use of federal funds, it should reduce or eliminate other less meritorious tax cuts that are scheduled to take effect over the next several years.

 

March 22, 2000

Endnotes1. State-by-state comparisons and rankings in this report come from the Center on Budget and Policy Priorities (CBPP) report, State Income Tax Burdens on Low-Income Families in 1999, March 2000. Current tax thresholds and tax liabilities (credits) are also taken from the CBPP report. Calculations of historic and prospective tax thresholds and tax liabilities (credits) were done by the Fiscal Policy Institute. 

2. The final TANF regulations adopted by the U. S. Department of Health and Human Services last April gave the states the ability to use TANF block grant funds to pay not only for EITC expansions but for the entirety of the portions of state EITCs (whether pre-existing and/or new) that are actually refunded to TANF eligible families. TANF block grant funds can not be used to cover either the portions of state EITCs used by TANF eligible families to reduce their tax liabilities to zero or any portions of state EITCs going to taxpayers who are not TANF eligible. To take maximum advantage of this opportunity, New York State recently amended its state TANF plan to define all families with children that meet New York’s financial criteria for the EITC as being TANF eligible, although they would not be able to receive traditional cash assistance unless they met other more restrictive criteria.

3.  For example, this provision makes the continuation of a part of the state’s tax law subject to a determination by a state administrative official that a federal administrative, statutory or regulatory change has “materially” reduced the state’s ability to use funds for a particular purpose without giving any guidance as to what would and what would not be material in such a context.

Table 1  

New York State’s 1999 Income Tax Thresholds*

1993 Law  

Without the Cuomo (1994) or Pataki (1995) Tax Cuts

1994 Law  

With the Cuomo (1994) but Without the Pataki (1995) Tax Cuts

1999 Law  

With both the Cuomo (1994) and Pataki (1995) Tax Cuts

With the Expansion** of the NYS EITC to 25% of Federal EITC
Two-parent family of four $14,000 $22,260 $23,000 $23,854
Single-parent family of three $11,500 $20,500 $21,800 $22,774
* A threshold is the lowest income level at which a family has state income tax liability. The threshold calculations include earned income tax credits, or other general tax credits, exemptions and standard deductions. Credits that are intended to offset the effects of taxes other than the income tax or that are not available to all low-income families are not taken into account.** The New York State EITC will increase from 20 percent of the federal EITC to 22.5 percent in 2000 and 25% in 2001.
Table 2  

New York State Income Tax Liability*

1993 Law  

Without the Cuomo (1994) or Pataki (1995) Tax Cuts

1994 Law  

With the Cuomo (1994) but Without the Pataki (1995) Tax Cuts

1999 Law  

With both the Cuomo (1994) and Pataki (1995) Tax Cuts

2001 Law  

With the NYS EITC equal to 25% of Federal

Two-parent family of four
With minimum-wage earnings ($10,712) $0 ($763) ($763) ($954)
With poverty-level earnings ($17,028) $116 ($455) ($490) ($632)
With near-poverty-level earnings ($21,285) $301 ($90) ($140) ($238)
Single-parent family of three
With minimum-wage earnings ($10,712 $0 ($763) ($763) ($954)
With poverty-level earnings ($13,290) $82 ($647) ($697) ($879)
With near-poverty-level earnings ($16,613) $216 ($373) ($423) ($735)

*Negative liability is a refund to the taxpayer.

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