Taxing Times in New York

It's a done deal. Legislative leaders and Governor David Paterson have figured out their tax and spend plan for the fiscal year, and it's not pretty at all. While folks in other parts of the country might think that people making $250,000 per year are not in the middle class, in New York City and the metro area, it is.

While the state proponents for the taxes call this a millionaire's tax, the fact is that many of those who are going to get slammed by the tax hike are in the middle class - because of the high cost of living in the region.

They're going to get hammered. Hard.

The two-tier tax plan would bring in $4 billion annually, in part by hiking income taxes a stunning 31 percent for all New Yorkers making more than $500,000 a year, the sources said.

A second, slightly lower tier would increase incomes taxes by 14.5 percent for singles earning $250,000 to $500,000 annually and for married and joint filers earning $300,000 to $500,000.

Taxpayers now hit the current top rate of 6.85 percent when their incomes reach $65,000. The Paterson plan would tax top-tier earners at 8.97 percent and second-tier earners at 7.85 percent.

The staggering hike was one of the last elements of a $121 billion spending deal Paterson and legislative leaders forged behind closed doors in a race to make the April 1 budget deadline.

Sources said that other elements of the deal include:

* $6.5 billion in spending cuts;

* $6 billion in federal stimulus money, and

* Numerous other taxes and fees including expanding the deposit law to include plastic water bottles.

Don't buy into the part about the $6.5 billion in spending cuts. If that were truly the case, the state budget would be smaller than previously. With a sleight of hand, the cuts do not exist - particularly because the state is using the federal money to fill that gap. Any cuts are merely for show because the ultimate state budget will remain higher than last year when all dollars are counted.

The state has 200,000 employees. Paterson had claimed that he would cut 8,900 - or less than one half of one percent 4.45% [ed: correction courtesy of Jason Van Steenwyk in the comments] of the state workforce. That raised such hackles with the unions that he's backed down. The unions pulled the strings and Paterson balked, even though he was right to put those jobs down for good. A bloated state workforce is a luxury that the state cannot afford. It hasn't been able to afford the huge state workforce for years, but the costs are now ballooning out of control because revenues simply can't cover the costs hence the tax hikes all over the place.

The state's forecasts for revenue generation will come up short because people will spend even less and those who are hit hardest by the tax hike - many of whom are connected to Wall Street - will contemplate moving out of the state, whether to Connecticut, where the tax rates are significantly less (ranging from 3% to 5%) or even to Pennsylvania, where the rate is 3.07%. New Jersey's current top tax rate is 8.97% and the state is in nearly as bad fiscal shape as New York. However, New Jersey does benefit from having lower overall sales and use tax rate compared with the NYC metro area rates that can top out at just under 10% compared with 7% for New Jersey (or 3.5% for enterprise zones that include Paterson, Elizabeth and Jersey City). There's a huge reason that so many New Yorkers do their shopping in New Jersey; they're coming for the favorable tax rates. New Jersey also benefits from having good transit options to Manhattan, which makes it a favorable option to moving to Connecticut or the more distant Pennsylvania from which commutes could take 3-4 hours each way.

The state's revenue projections will come up short, and not just on the personal income tax revenues. Other state revenues will drop as well as the disposable income of those taxpayers is eroded by the still higher taxes, meaning that sales and use tax revenue will decline, corporate franchise tax revenues will decline, as will other taxes and fees that are generated from the purchasing power from those affected individuals.

The kicker to this situation is that it was done in complete secrecy in back room deals between the the two legislative leaders - Assembly Speaker Shelly Silver, Senate Majority Leader Malcolm Smith, and Gov. Paterson. It's no different than any of the budgets produced in the past decade despite claims that Albany would open up the process and be more inclusive of other legislators.

There's plenty of corruption everywhere you look in Albany and new scandals crop up regularly. In the past two weeks, there were two prominent scandals, one involving the former state tax commissioner, and the other involving aides to former comptroller Alan Hevesi (who himself was ousted on corruption and criminal charges).

And the lack of transparency over the legislative process means that the legislative leaders throw around their weight and determine the issues that will proceed and bottle up those that they oppose, even if members of their caucus want them. Throw in the fact that you have people like Silver working at Weitz and Luxenberg (a very prominent personal injury lawfirm that engages in class action suits on asbestos, tobacco, and other major damages cases), but who refuses to divulge his income from that association despite working with the firm for years and the dysfunction in Albany is far worse than you can imagine.

These are truly taxing times in New York.