Statement on the Solomon/McCall Tax Reform and Fairness Commission Report

November 14, 2013. Statement from Ron Deutsch, Executive Director, New Yorkers for Fiscal Fairness, and Frank Mauro, Executive Director, Fiscal Policy Institute.

Any discussion of fair taxation in New York must acknowledge that our state has the greatest income inequality in the nation and that our tax system is partially to blame. We are experiencing record child poverty rates and levels of hunger and homelessness that are unprecedented. Too many of our residents are suffering and struggling to make ends meet and today’s report by the Governor’s Tax Reform and Fairness Commission does little to address this growing problem. The report discusses expanding the Earned Income Tax Credit, which we believe would be a great mechanism to begin to help these desperate families. Noticeably absent are any proposals to address the state’ income tax structure which needs to be made more progressive in order to begin to raise the needed revenues to address our growing income inequality and which the Commission was originally charged with examining.

The Governor’s Tax Reform and Fairness Commission has developed a package of tax options that is literally a smorgasbord of reforms with a little something for everyone. We support many of the proposals from the Commission and strongly support scaling back our system of tax credits to big business and making them more accountable and transparent.

While the commission did meet with our organizations and a number of business, labor and tax reform groups, the broader public, the people that pay taxes, need a chance to weigh in. We strongly recommend that the Governor’s office and the Commission hold a series of public hearings to get input from the general public on these critically important tax issues. We further recommend that the Commission develop a website to post their findings and take recommendations from the public.

We applaud the commission for submitting revenue neutral recommendations. Further draining state revenues at a time when needs are so great would be a huge mistake. Further cuts in essential state and local public services would create an unwarranted drag on the economy in the short run and hurt the state’s economic competitiveness in the long run.

The report raises a number of questions:

The report mentions the possibility of providing some sort of targeted property tax relief for residents (by tying your property tax burden to your income—commonly called a circuit breaker). We believe that this is the most important and critical tax relief mechanisms recommended in the report and were happy to see its inclusion.

A Fiscal Policy Institute analysis of the US Census Bureau’s American Community Survey (ACS) microdata confirms that hundreds of thousands of low, moderate and middle-income families in New York State are already paying an inordinate share of their income in property taxes on their primary residences. The situation in which these families find themselves will not be addressed by New York’s cap on the growth of local governments’ property tax levies. Only a middle-class Circuit Breaker can provide effective relief for these families in a targeted and cost-efficient manner. The report recommends that $400 million of the revenue that would be generated by eliminating the sales tax exemption on clothing under $110 be used to “provide broad-based real property tax relief.”  We believe that $400 million is woefully inadequate given the enormity of the excess property tax burden borne by many low- and middle-income households.

The report does, however, say that some or all of another $1 billion that could be generated by other sales tax base broadening could be used for “future” property tax relief.  But it also leaves open the possibility that some or all of this revenue could be used for personal income tax relief. It would be extremely unfortunate if some of these resources went to reducing the top rate on the income tax for high-income households at a time when the property tax remains so burdensome for so many low- and middle-income families and when the state continues to cut needed services and insist that it cannot afford to fully fund its foundation formula for public schools.

The Commission’s proposal to eliminate the sales tax exemption on clothing under $110 also requires additional scrutiny. While this proposal is regressive in nature, the Commission recommends “targeted tax relief to ‘make whole’ low- and middle-income taxpayers impacted by the sales tax base broadening.” But the report never presents an incidence analysis of the clothing sales tax exemption; nor does it indicate the income thresholds for this “targeted” tax relief. The report, however, does provide the following information regarding the impact of the state’s sales tax exemptions for “certain necessities” including clothing:

Of the $3.2 billion the State annually forgoes in revenues as a result of these tax exemptions, only $900 million—less than one-third—benefits households earning under $50,000, while households earning in excess of $100,000 reap $1 billion in tax savings.

The report uses this information to argue that exempting necessities from the sales tax is a “highly inefficient way to protect lower income households.” But it never mentions that these figures mean that $1.3 billion of these “savings” go to households with incomes between $50,000 and $100,000. Nor does it indicate how households with incomes in this range would fare on net, factoring in both the elimination of the clothing exemption and the “making whole” of middle-income taxpayers.

The Commission proposes to raise the threshold on the Estate Tax from $1 million to $3 million stating:

The current exemption threshold of $1 million has been criticized as too low given significant increases in the value of assets and concerns that it may serve as a factor in taxpayer migration from New York to other states (e.g. Florida) that do not impose any estate tax.

There seems to be a great deal of worry about wealthy people migrating out of New York State with little concern for the low and middle income families that are moving because they cannot afford the property tax burden. While New York had a high rate of net domestic out-migration from 2000 to 2010, the IRS’s bottom line income tax data shows that New York’s share of the nation’s highest income taxpayers and its share of the income of the nation’s highest income taxpayers increased over this ten-year period. The number of federal taxpayers with Adjusted Gross Income (AGI) above $1 million increased 17.1 percent nationally between 2000 and 2010 but 38.9 percent in New York State! And, the amount of these taxpayers’ AGI increased 20.8 percent nationally but 57.4 percent for federal taxpayers from New York.