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Stay-and-pay fallacy

New York adopted the millionaires’ tax in 2009. Shortly afterward, Paychex Inc. founder Thomas Golisano told Albany what he thought of it: He said he would move to Florida.


Nearly a decade later, New York’s “temporary” surtax on high earners is still in place. And though it is scheduled to expire on Dec. 31, Gov. Andrew Cuomo and others are campaigning hard to make sure that does not happen.


Those who favor the higher rates for filers with big incomes often argue that the concern about the wealthy fleeing New York is overblown. IRS data appear to back them up: From 2010 to 2014, the number of tax filers in this state earning $1 million or more jumped more than 32 percent.


If the surtax is chasing wealthy filers from the state, why are their ranks in New York growing?


The answer, in part, is that the period from 2010 to 2014 was marked by a strengthening economy and especially by a surging stock market. 


But the full answer is more complicated. As E.J. McMahon of the Empire Center for Public Policy explained last week in testimony in Albany, the number of nonresidents among New York taxpayers with annual incomes exceeding $1 million now accounts for nearly half of all filers subject to the surtax. 


Why does that matter? Because, he noted, nonresidents pay tax “only on their New York source income, mainly salaries and profit shares from New York businesses, and not on their capital gains, dividends and interest that make up the bulk of their personal income.”


By his calculation, even if only 10 percent of nonresident filers moved their main residence to New York, it would generate more than $1.5 billion in additional revenue—without the surtax.


There are other strong arguments against the surtax: It is anti-competitive because most other states have lower personal income tax rates and it discourages expansion by owners of small firms who report their business income on their personal returns.


But the notion that New York’s high earners will simply stay and pay does not hold up under scrutiny.


2/17/2017 (c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.


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