Angry New Yorker

Wednesday, May 21, 2003
Lurking in Depths of New Budget, Bigger Bite for Some Taxpayers, by JAMES C. McKINLEY Jr.
New York Times

ALBANY, May 20 — "The budget bills that the State Legislature enacted over the governor's vetoes last week stand more than six inches tall, and include hundreds of pages of dense legal writing and numbers that are impenetrable to most people, and even hard for the lawmakers who passed them to understand.

Hidden inside those pages are scores of not-so-obvious details that will have a profound effect on some taxpayers. For instance, legislative leaders sold the personal income-tax increase as a surcharge only on the amount of taxable income a family earns above a certain level. But for people in high-income brackets, the tax is not a surcharge, but simply a tax increase on all their taxable earnings, budget officials and outside experts say.
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Other surprises are lurking in the pages of the bills. New York City residents got a backdoor cigarette tax increase, because the state will now collect its cigarette tax not just on the price of the cigarettes, but on the price after figuring in the city's tobacco tax. It is a quiet way to raise an extra $11 million without raising the tax rate, budget officials said.

After lobbying from the distilled liquor industry, the lawmakers included a provision in their budget that will allow liquor stores to open on Sundays, as long as they close one other day of the week. The Legislature's theory is that people will buy more alcohol on the weekends, and the state will collect about $11 million more in liquor taxes, though the Pataki administration doubts the validity of that assumption.

But perhaps the biggest surprise in the budget is the income-tax increase on people with high earnings. Since 1991, the state has had a provision that, in essence, says that once taxpayers' adjusted gross income reaches a certain limit — $150,000 for married couples — they must pay the highest rate of tax on all their taxable earnings, rather than paying the lesser tax rates assigned to the parts of their taxable income in the lower brackets. (The top rate was 6.85 percent.) It is known as the "recapture" provision.

On the surface, the surcharge enacted in the Legislature's budget seems simple enough. A married couple with taxable income above $150,000 must pay an additional 0.65 percent on the taxable income above that amount, which works out to be a few hundred dollars in extra taxes in most cases.

But the lawmakers also added another recapture threshold, $200,000 in adjusted gross income, after which the new 7.5 percent rate would be charged on all taxable earnings. Take, for instance, a couple with an adjusted gross income of $200,000 and a taxable income of $180,000 after deductions. They would not only pay the surcharge on the $30,000 above the $150,000 line, a cost of $195, but on their entire taxable earnings. As a practical matter, that means an additional $975, for a total of $1,170 in extra taxes. In short, they would be paying a flat 7.5 percent tax on their taxable income, when under the old law, they would have paid 6.85 percent on all their taxable income.

For those people with adjusted gross income above $500,000, the tax rate jumps to 7.7 percent on all of their taxable income. A couple with $600,000 in adjusted gross income and a taxable income of $524,000, for instance, would pay an extra $4,400 in taxes.
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The Legislature did the same thing to New York City's income tax rates, but the effect was more drastic because they also added a recapture clause, which the city has never had before. People in the top tax bracket in New York City are now looking at a combined income-tax rate of more than 12 percent, Gov. George E. Pataki said on Monday.

"For the first time, New York City taxpayers are going to be subject to recapture where some of their income that was taxed at a lower rate is all of a sudden taxed at a higher rate," he said as he denounced the Legislature's plan. "It is just obviously in my view extremely detrimental."

The Legislature kept some parts of the governor's proposed budget that many Democrats initially complained would hurt the poor. The sales tax on clothing has been reinstated, for instance, just as Mr. Pataki proposed. The only change is that lawmakers have included only two weeks a year when the tax would be lifted, rather than four as the governor had wanted.

Most of the fees the governor proposed raising are still in the plan. A title for a new car will cost $10, instead of $5. Prison-made license plates will cost $15, rather than $5.50.

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And while the Legislature raised taxes to pay for restoring school aid and medical services the governor wished to cut, it did nothing to reduce the amount of borrowing Mr. Pataki's budget. Like the governor's plan, the Legislature's budget relies on selling bonds worth $4.2 billion, backed by future payments from tobacco companies from the nationwide court settlement.

The difference is that the Legislature's final budget backs up those bonds with the state's general fund, rather than a special fund fed by the mortgage recording tax, as Mr. Pataki envisioned. The Legislature's version means a lower interest rate, but it makes future taxpayers more liable should the tobacco industry take a nose-dive and the annual payments shrink, budget analysts say.
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But outside budget analysts say it is irresponsible to use new tax revenues, which amount to about $2.2 billion, to add spending rather than reduce borrowing. "By borrowing and raising taxes and raising spending, the very best case scenario is future budget gaps at least as big as the governor's," Mr. McMahon said.

The budget is also notable for the details left out in some places. In the face of the worse fiscal crisis since the 1930's, the legislative leaders saw fit to appropriate $200 million for member items, a euphemism for money the lawmakers hand out in their districts for everything from V.F.W. halls and Little Leagues to AIDS clinics and soup kitchens.

Many years these items are detailed in long lists in the budget, but this year the lawmakers simply included the lump sum and language saying the leaders of the two houses would decide later how to spend it. This has irked Governor Pataki, who in most budgets gets to allocate a portion of the money himself, usually about $30 million." [entire article here]

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