NYS Property Tax & Personal Income Reform

1. NYS Property Tax & Personal Income Reform Property Tax Relief for New Yorkers Funded By a More Progressive Income Tax Code Senator Jeffrey D. Klein Deputy Majority Leader 34th Senate District March 2009

2. Senator Jeffrey D. Klein Deputy Majority Leader, New York State Senate Prepared By: Alex Camarda Office of Senator Jeffrey D. Klein We welcome feedback on our reports. Please contact Alex Camarda, Policy Director, at 718-822-2049 to provide your thoughts on this report or to discuss collaboration on implementing its initiatives.

3. Dear Reader: 2009 finds many New Yorkers encountering the most difficult economic challenges of their lifetimes. What began as a crisis in mortgage securities on Wall Street is now significantly impacting Main Street. 145,000 New Yorkers have lost their jobs in the last year. 50,000 homeowners experienced foreclosure in 2008. Unfortunately, the immediate future looks no better. Tens of thousands more New Yorkers will lose their homes. Unemployment in New York City will likely surge to over 8 percent, and will hit double digits for minority workers. With New Yorkers tightening their belts during this fiscal downturn, it is essential we put money back in people’s pockets so they can meet their bills and buy essential items. That’s why I am proposing we act on long-standing efforts to reform high property taxes in New York State. It is well known that New York has the highest property taxes in the country, with the median payment in counties like Westchester nearly $8,000. This puts an undue burden on seniors living on a fixed income, new homeowners struggling to make ends meet, among other New Yorkers. My “circuit breaker” proposal will provide much needed relief through a tax credit to any New York homeowner who pays too large a share of their income on property taxes. For instance, a Westchester resident earning $100,000 a year and paying $10,000 in property taxes would receive $2,800 back under my plan. My circuit breaker proposal is paid for by reforming the state personal income tax (PIT) to make it more fair and equitable. The revenues for my proposal are generated by increasing taxes on the most fortunate and wealthy New Yorkers. It is appropriate that the wealthiest pay a bit more during this difficult economic time, given that they experienced a tremendous gain in wealth over the last three decades and have traditionally paid much more of their income in state taxes. Regards, Jeffrey D. Klein Deputy Majority Leader New York State Senate 34th District

4. Index Section 1: The Current Economic Crisis Section 2: Senator Klein’s Property Tax Reform Section 3: Senator Klein’s Personal Income Tax Proposal

5. SECTION 1: The Current Economic Crisis

6. Collapse of the Financial Sector • It is well-established that the United States is experiencing the most severe economic downturn in decades. • The recession rooted in the subprime mortgage crisis and subsequent credit crunch has acutely affected New York, the nation’s commercial capital: • The implosion of the capital markets dramatically resulted in the elimination of investment banks, as Bear Stearns and Lehman Brothers went under, Merrill Lynch was acquired, and Goldman Sachs and Morgan Stanley changed their status. 1 • Private sector financial employment dropped 13 percent in NYC from October 2007 to October 2008. One job lost in the financial sector results in two more jobs lost in other industries in NYC and 1.3 jobs lost elsewhere in NYS. 2 • Wall Street bonuses declined 44 percent to $18.4 billion from last year’s $32.9 billion, according to the State Comptroller.3 Taxes on income from Wall Street provides 12 percent of all city tax revenues, and 20 percent of all state revenues. 4

7. The Recession’s Impact on New Yorkers • The recession has moved beyond its origins on Wall Street to impact New Yorkers on Main Street: • Unemployment in NYS increased by 145,300 (to 6.1 percent from 4.6 percent) from November 2007 to November 2008. 5 • First-time unemployment claims in NYC rose 40 percent (comparing late August-late November 2008 with the same period last year). 6 Over one million New Yorkers statewide filed unemployment claims in 2008. 7 • Approximately 50,000 homes were foreclosed statewide in 2008. 8 NYC accounted for about 20,000 foreclosures. 9 • Home prices in NYC dropped 7.5 percent between October 2007 and October 2008. 10 • According to a Siena Research Institute poll on consumer confidence, a record 61 percent of New Yorkers say they are worse off today than they were a year ago. 11

8. The Immediate Future is Bleak • The Fiscal Policy Institute estimates that the city unemployment will rise to 8.5 percent by the end of 2009 from its current level of 5.7 percent. 12 For African-Americans and Hispanics, it projects a 14 and 10 percent unemployment rate, respectively, in 2009. 13 • State Comptroller Thomas DiNapoli believes 225,000 jobs will be lost statewide in the next two years. 14 • According to the Center for Responsible Lending, foreclosures in New York will total 122,192 for 2008-2009. 15 • Consumer spending also shows “little sign of improvement”, according to a Siena Institute Research poll, with purchasing plans for major expenditures like home improvements and cars down 25 percent from last year. 16 • Local consumer attitudes were reflected in national holiday retail spending. Penny-pinching resulted in a 2.2 percent year-to-year decline in retail sales at chain stores open at least a year, the worst downturn since 1970. 17

9. The Solution: Property and Personal Income Tax Reform • In order to provide financial relief to working and middle-income New Yorkers during these difficult economic times, Senator Klein proposes reform to the state’s property and personal income taxes. • Klein’s “circuit breaker” will reduce property taxes for New Yorkers making up to $250,000 and paying a large portion of their earnings in property taxes. • It will also stimulate the economy by putting money into the hands of New Yorkers to spend, thereby increasing consumer demand and helping businesses with lagging sales. • Klein’s property tax reform will be funded by reforming the personal income tax code to make it more progressive.

10. SECTION 2: Klein’s Property Tax Reform

11. What are Property Taxes? • Property taxes include school district, county, town, city, village, and special district property taxes. 18 • The largest portion of the total property tax is the school property tax. 19 • New York State collects $41 billion in property taxes (including NYC), $26.3 billion of which is collected by school districts. 20

12. New York (excluding NYC) has the Highest Property Taxes in the Nation State and Local Property Taxes Per Capita RankStateProperty Tax 1 New York $2,303 (New York State Outside NYC) 2 New Jersey $2,217 3 Connecticut $2,052 4 New Hampshire $2,034 5 New York $1,773 (All of New York including NYC) 6 Wyoming $1,758 7 Rhode Island $1,706 8 Vermont $1,705 9 Maine $1,640 10 Massachusetts $1,608 25 Ohio $1,045 50 Alabama $395 United States Average $1,134 Source: Public Policy Institute of New York State, Inc.

13. New York’s Top Ten Counties with the Highest Median Property Taxes Paid Source: U.S. Census Bureau; Tax Foundation calculations.

14. New York’s Top Ten Counties with the Highest Property Taxes Payments Proportionate to Income Source: U.S. Census Bureau; Tax Foundation calculations.

15. NYS Property Taxes are in Desperate Need of Reform • School property taxes have grown at an average rate of 7 percent per year since 2001-02 (42 percent statewide since 2000), twice the rate of inflation and twice the growth of average salaries. 21 • This steep rise in taxes has occurred despite the relief provided through the School Property Tax Relief (STAR) Program enacted in 1997. 22 • The 2008 Suozzi Commission identified high rates of education spending as the principal cause of high property taxes, with state underfunding relative to the local contribution in recent years worsening the situation. 23

16. Klein’s Property Tax Relief Proposal • In order to provide relief from high property taxes, Senator Klein is proposing a “circuit breaker.” • Under a circuit breaker, home-owners making less than $250,000 annually would receive a tax credit once their property taxes exceed a particular threshold of their income.

17. Circuit Breaker Eligibility for Downstate Homeowners • Downstate* homeowners will receive a 70 percent credit for the portion of their property taxes exceeding: • 6 percent of income for homeowners whose income is below $120,000 • 7 percent of income for homeowners whose income is between $120,000 and $175,000 • 8 percent of income for homeowners whose income is between $175,000 and $250,000 *- Downstate would include Nassau, Suffolk, Rockland, Westchester, Putnam, Orange, and Dutchess counties.

18. Circuit Breaker Eligibility for Upstate Homeowners • Upstate* homeowners will receive a 70 percent credit for the portion of their property taxes exceeding: • 6 percent of income for homeowners whose income is below $90,000 • 7 percent of income for homeowners whose income is between $90,000 and $150,000 • 8 percent of income for homeowners whose income is between $150,000 and $250,000 *- Upstate includes all state counties except Nassau, Suffolk, Rockland, Westchester, Putnam, Orange, and Dutchess counties.

19. Sample Credit for Westchester Homeowner • Suppose a Westchester homeowner pays $10,000 in property taxes and earns $100,000 a year. • The homeowner’s property taxes are 10 percent of their income so they would be eligible for the credit. • Four percent, or $4,000, would be above the threshold (recall 6 percent of income for a homeowner earning up to $120,000 is the circuit breaker). • A 70 percent credit will be applied to $4,000, resulting in $2,800 tax credit to the homeowner.

20. Circuit Breaker- Costs to State Government • According to the Fiscal Policy Institute, providing tax credits to all eligible homeowners under Senator Klein’s proposal will cost the state about $2.5 billion annually. 24 • The funding for Klein’s circuit breaker will be generated by making the personal income tax code more progressive.

21. SECTION 3: The Rationale for a More Progressive Tax Code

22. Existing New York Personal Income Tax (PIT) Rates • There are three different classes of tax filers in New York State, depending on one’s marital/family status. Income is taxed differently for each class of filers. • Income is taxed for all filers at 4 to 6.85 percent income, depending on the amount earned. • For example, a single individual earning $50,000 a year would have their first $8,000 earned taxed at 4 percent, the amount between $8,000 and $11,000 taxed at 4.5 percent, the amount between $11,000 and $13,000 taxed at 5.25 percent, the amount between $13,000 and $20,000 at 5.9 percent, and the amount above $20,000 at the highest rate, 6.85 percent.* • *= Filers may be eligible for a variety of deductions, exemptions, and credits that reduce their tax burden.

23. The Current PIT Marginal Rates Are Not Very Progressive • Currently, the NYS Personal Income Tax rate structure is not very progressive. • Individuals earning just over $20,000 a year would pay the same marginal tax rate (6.85 percent) on their last dollar earned as millionaires would (6.85 percent). Married couples filing jointly earning just over $40,000 a year would be taxed at the same marginal rate (6.85 percent) on their last dollar earned as couples making $10 million.

24. The New York PIT Rates Were Much More Progressive in the Past • The state income tax was once much more progressive, with very wealthy New Yorkers paying a much greater proportion of their income in taxes than middle-class taxpayers. 25 • In 1972, New York State had a PIT with 14 different brackets ranging from 2 percent to 15 percent. Since then, changes to the income tax have gradually made the personal income tax flatter, ultimately resulting in today’s narrow rate range of 4-6.85 percent. This movement toward a regressive income tax has benefited wealthy New Yorkers. 26

25. Federal Taxes Have Also Become More Regressive • While the New York PIT tax code has become flatter, federal taxes on income, as well as other forms of wealth, have become less progressive as well. 27 • Before the 1980s, the wealthiest .01 percent of taxpayers paid a total federal tax rate of more than 60 percent. By 2004, they paid under 40 percent. 28

26. Income Inequality Has Also Increased • While the wealthiest New Yorkers have paid less of their income and other forms of wealth in federal and state taxes over the last three decades, the income of the wealthiest has skyrocketed. Consequently, income inequality has widened dramatically. • In 1977, the median family income in the United States (adjusted for inflation) was $47,400. In 2005, it increased to $58,400. Meanwhile, the wealthiest .01 percent saw their incomes rise to $10 million in 2005 from $2 million in 1977 (adjusted for inflation). 29 • In 1975, the top 1 percent of income earners in the U.S. made 8 percent of all income earned. In 2005, the top 1 percent made 19 percent of all income earned- 11 percent more than 30 years earlier. 30

27. SECTION 4: Senator Klein’s Personal Income Tax Proposal

28. Klein’s PIT Proposal- Key Elements • Raises taxes on wealthier New Yorkers to pay for property tax reform for middle-income and working class residents. • Tax increases for those making more than $500,000, with rates increasing from 6.85 to 8.97 percent for millionaires and 10.3 percent for income above $3 million. • Klein’s proposal adds tax brackets to the current income tax structure, making it more progressive. Rates range from 4 to 10.3 percent depending on income and filing status (see next few slides, #29-#31) rather than the current, flatter structure of 4 to 6.85 percent (see slide #22). • The proposal also produces $1 billion in additional tax revenues beyond property tax relief.

29. Tax Brackets & Rates for Klein’s Proposal- Married & Filing Joint Returns & Resident Surviving Spouses

30. Tax Brackets & Rates for Klein’s Proposal- Heads of Household

31. Tax Brackets & Rates for Klein’s Proposal- Unmarried Individuals & Married Filing Separately

32. Klein’s PIT Proposal- Impact on Sample Taxpayers • Klein’s proposal will increase taxes for those making above $500,000 by mostly modest amounts.

33. ENDNOTES • Suzy Jagger, “End of the Wall Street investment bank,” TimesOnline, September 22, 2008. • BALCONY Business and Labor Coalition of New York, “DiNapoli Report: Wall Street’s Transformation Will Lead to Lower Tax Revenues; Continued Job Losses,” [http://www.balconynewyork.com/2008/11/24/dinapoli-report-wall-street%E2%80%99s-transformation-will-lead-to-lower-tax-revenues-continued-job-losses/], accessed January 7, 2009. 3. Helen Kennedy, “City takes hit as Wall Street bonuses cut,” Daily News, January 29, 2009. 4. Ibid. 5. Representative Carolyn B. Maloney, “New York State Unemployment Spikes to 6.1 percent,” [http://maloney.house.gov/index.php?option=content&task=view&id=1753&Itemid=61], accessed January 7, 2009. 6. Patrick McGeehan, “Job Losses in City Reach Up Ladder,” The New York Times, December 12, 2008. 7. Representative Carolyn B. Maloney, “New York State Unemployment Spikes to 6.1 percent,” [http://maloney.house.gov/index.php?option=content&task=view&id=1753&Itemid=61], accessed January 7, 2009. 8. “New York state foreclosures may top 50,000 in 2008,” Reuters, November 20, 2008. 9. Office of the Mayor, “Mayor Bloomberg and Speaker Quinn Join the Center for NYC Neighborhoods to Award New Grants to Help Prevent Mortgage Foreclosures,” [http://www.nyc.gov/portal/site/nycgov/menuitem.b270a4a1d51bb3017bce0ed101c789a0/index.jsp?doc_name=/html/om/html/recent_events.html ], accessed January 7, 2009. 10. Jack Healy, “Home Prices Fell at Their Sharpest Pace in October,” The New York Times, December 31, 2008. 11. Damian Ghigliotty, “NY Consumer Confidence Rebounds,” Crain’s New York Business.com, [http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20081205/FREE/812059979/0/], accessed January 7, 2009. 12. Daniel Massey, “New York Comptroller Raises Job-Loss Estimate,” Workforce Management, [http://www.workforce.com/section/00/article/26/02/88_printer.php], accessed January 7, 2009. • Ibid.

34. ENDNOTES 14. Syracuse.com, “Comptroller: Expect massive job losses across New York state,” [http://blog.syracuse.com/news/2008/11/comptroller_expect_massive_job/print.hml], accessed January 7, 2009. 15. Center for Responsible Lending. Updated Projections of Subprime Foreclosures in the United States and Their Impact on Home Values and Communities (August 2008). 16. Damian Ghigliotty, “NY Consumer Confidence Rebounds,” Crain’s New York Business.com, [http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20081205/FREE/812059979/0/], accessed January 7, 2009. 17. Stephanie Rosenbloom, “After Weak Holiday Sales, Retailers Prepare for Even Worse,” The New York Times, January 9, 2009. 18. New York State Commission on Property Tax Relief, “Final Report to Governor David A. Paterson,” [http://www.cptr.state.ny.us/], accessed March 10, 2008. 19. Ibid 20. New York State Senator Jeff Klein. Time to Save Our Homes: Controlling Property Taxes in New York State, (Summer 2008), 5. 21. New York State Senate Majority Finance. Background Memo of Options for Discussion: Middle Class Property Tax Circuit Breaker, (January 29, 2009). 22. Ibid. 23. New York State Commission on Property Tax Relief, “Final Report to Governor David A. Paterson,” [http://www.cptr.state.ny.us/], accessed March 10, 2008. 24. New York State Senate Majority Finance. Background Memo of Options for Discussion: Middle Class Property Tax Circuit Breaker, (January 29, 2009). 25. Fiscal Policy Institute, “The Path Not Taken: How New York State Increased the Tax Burden on the Middle Class and Cut Taxes for its Highest Income Taxpayers by Over $8 Billion a Year,” [http://www.fiscalpolicy.org/taxhistory2.htm], accessed December 22, 2008.

35. ENDNOTES 26. Fiscal Policy Institute, “The Path Not Taken: How New York State Increased the Tax Burden on the Middle Class and Cut Taxes for its Highest Income Taxpayers by Over $8 Billion a Year,” [http://www.fiscalpolicy.org/taxhistory2.htm], accessed December 22, 2008. 27. Thomas Piketty and Emmanuel Saez, “Lower Taxes for the Highest Earners,” The New York Times, October 31, 2007. 28. Ibid. • David Leonhardt, “Income Inequality,” The New York Times, January 20, 2009. 30. Ibid.