BY E.J. McMAHON
For the better part of three years now, Governor Andrew Cuomo has been pounding SALT — the federal income-tax deduction for state and local taxes.
After President Donald Trump signed the GOP-sponsored tax-reform bill in December 2017, Cuomo called the new law’s $10,000 SALT deduction cap “an all-out direct attack on New York’s future” and never lost an opportunity to publicly complain about it.
More recently, Cuomo has added full restoration of the SALT break to his increasingly desperate demands for billions of dollars in federal aid to make up for the state’s massive pandemic-driven fall in revenues. Just last week, in a joint letter to Congress cosigned by New York labor-union leaders, the governor repeated for the umpteenth time his claim that SALT is costing New Yorkers up to $15 billion a year in higher federal taxes.
Yet just-released Internal Revenue Service data prove that Cuomo’s favorite SALT damage metric was vastly inflated — in the wrong direction. In 2018, the first year under the revamped and nearly SALT-free tax code, total federal income-tax payments by New Yorkers fell by nearly $3.4 billion, according to IRS statistics.
To be sure, the net 2 percent reduction was barely half the national average and among the smallest changes registered in any state. This is no surprise, though. After all, Empire State residents have higher average incomes, which are taxed at higher rates under the progressive federal tax structure. And thanks to their heavy state and local tax burden, New Yorkers had more of their savings undercut by the cap on the SALT deduction.
There is still no denying Cuomo’s claim that the SALT cap in particular was in large part politically motivated. Congressional Republicans, erstwhile champions of fiscal federalism, were happy to minimize a tax break that mainly benefitted the wealthier residents of deep-blue Democratic states — to subsidize bigger savings for families and businesses in red states.
Cuomo, not wanting to be seen as merely defending a tax break for the rich, had claimed the SALT cap “effectively raises middle-class and working families’ property tax 20 to 25 percent all across the state.”
In reality, the new IRS data confirm that the vast majority of New Yorkers in all income ranges still paid less in federal taxes in 2018. The largest percentage savings were concentrated in less wealthy communities of upstate New York, where the definition of “middle class” more closely resembles national norms. But average tax rates dropped at least slightly even among the SALT-encrusted six-figure middle class of Nassau and Suffolk counties.
This, too, was no surprise. In addition to capping SALT, the tax law reduced most tax rates, broadened tax brackets, expanded the child credit and doubled the standard deduction. It also rolled back much of the alternative minimum tax, which restored a small SALT break for many affluent New Yorkers (including Cuomo himself).
While the data are no surprise, they highlight the true nature of the tax-policy choices facing Washington and Albany in months ahead.
State lawmakers now clamoring to jack up state and city tax rates on millionaires insist the targeted taxpayers won’t mind — and won’t respond by simply moving. But the new IRS data add to the body of circumstantial evidence pointing to an increased outflow of high earners from New York even before the pandemic.
From 2010 through 2018, the number of New York residents with incomes above $1 million increased by 60 percent, and their incomes rose 84 percent, the IRS data showed. In other states and territories, the total number of millionaire earners doubled, and so did their gross incomes.
To his credit, Cuomo clearly recognizes what recent trends imply for state tax policy. Without full SALT deductibility, New York’s effective marginal income-tax rate already had skyrocketed to its highest level even before the pandemic. The governor made it clear this week that he is playing for time, betting on a Joe Biden presidency and a Democratic takeover of the US Senate to plug the gaping holes in the budgets of New York state and Gotham.
This could only come at the cost of a huge federal tax increase aimed at the highest earners — which the governor will happily accept, as long as New York’s piece is heavily SALT-ed.
Edmund J. McMahon is a senior fellow at the Empire Center.