Last updated: October 17, 2011 8:00 pm

US budget dilemma as taxes on rich expire

With the debate heating up over a federal “millionaires tax” in the US, state surcharges on the wealthiest residents are expiring, threatening strapped budgets.

During the recession, at least seven states imposed temporary measures raising their top tax income rates. Such taxes in Maryland and California have already been dropped, and the budget battle in New York’s legislature this year included a fight over its levy.

A poll released on Monday by Quinnipiac University found 61 per cent of registered New York City voters supported extending the state’s surcharge, which has generated $4.6bn a year since it was implemented in 2009. Even Republicans were in favour of the tax, with 55 per cent supporting an extension compared with 38 per cent in opposition. Most of the state’s residents subject to the additional tax live in the city.

With the measure set to expire in December, politicians are facing pressure from two sides: Wall Street, which says high tax rates push people and businesses to leave the city; and the growing public discontent represented by the anti-Wall Street protesters.

“The notion that the wealthiest among us should contribute something to get the state and the country out of the fiscal hole we’re in has spread far and wide,” said Rory Lancman, a Democratic assemblyman from Queens who supported the tax.

Opponents counter that so-called “millionaires taxes” are punitive and do not represent long-term solutions to the government’s fiscal problems.

“People that have been successful should not be demonised. People who have been industrious should not be required to redistribute their wealth to those who have not been,” said John DeFrancisco, a Republican state senator from Syracuse.

US states budget gaps

US federal budget cuts

Explore the budget woes facing US states in this interactive graphic

New York’s surcharge was introduced in 2009 as a three-year emergency measure. The law raised the top personal income tax rate on New Yorkers making more than $200,000 a year by one percentage point to 7.85 per cent, while those making more than $500,000 saw their top tax rate go up 2.1 percentage points to 8.97 per cent.

Over the three years the law has been in place, it has generated $13.8bn in revenue, according to the state’s budget estimate.

Andrew Cuomo, governor, opposed renewing the measure. New York’s legislature passed a budget in April that cut spending by almost $10bn without raising new taxes or extending the surcharge. That means the top tax rates for all incomes more than $200,000 will reset to 6.85 per cent, the same rate for those making more than $20,000 a year.

Advocates of the surcharge argue that the additional revenue it raises is necessary to offset the cuts the state has made to close its budget gap. Next year’s deficit is estimated at $2.5bn.

“Some of that $5bn you would get if you extended the tax would significantly moderate further cuts in the budget and would allow some restoration of past cuts or make resources available for job creation investments and infrastructure,” said James Parrott, chief economist of the Fiscal Policy Institute.

Kathryn Wylde, president of the Partnership for New York City, a business advocacy group, countered that the revenue raised from such surcharges was not enough to solve the structural budget deficits facing state and local governments.

“It might numb the pain temporarily but that might be another reason for the politicians to kick the can down the road,” she said. “It won’t solve the fiscal problem the state faces and is liable to exacerbate it because people, even in that income category, feel very uncertain about their own future.”

She said the policy risked driving wealthy residents to nearby states with lower income taxes, like Connecticut.

But Mr Parrott disagreed. “There is no data to support the claim that wealthy people have left New York because of taxes,” he said. “Our economy has been doing very well whatever the state and local tax burden is. It doesn’t seem that New York state has priced itself out.”

Supporters also say that most of the tax’s burden falls on the very wealthiest New Yorkers. Three-quarters of the $4bn in revenue the surcharge raised in 2009 was paid by people making more than $1m, according to the Fiscal Policy Institute.

Democrats in the state assembly and advocacy groups are hoping to revive the surcharge in the state’s 2012-2013 fiscal year, which starts on April 1.

Mr Lancman said he supported an extension of the surtax on those making more than $1m a year.

“In so far as the state still has a significant budget deficit to the tune of $2bn and growing, and the economy is not recovering as hoped, it makes sense,” he said. “Everyone should share the burden.”

Income inequality – a core theme of the Occupy Wall Street movement – is higher in New York than any other major US city, with the top 1 per cent earning 44 per cent of total income in 2007, compared with 23.5 per cent nationally.

That had fuelled public anger, said Mr Parrott. “It’s clear that the concentration of income has translated into political power. People are seeing that and reacting to that,” he added.

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