Gotham Gazette

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The Regressive Effects of a Sale Tax Increase

The one big change in Mayor Michael Bloomberg's executive budget for fiscal year 2010 is his proposed increase in the city sales tax from 4.0 percent to 4.5 percent, double the increase he proposed in January's preliminary budget. The increase is, as the New York Times put it, the "centerpiece" of $1 billion in new taxes. Added to the state's 4.0 percent sales tax and the 0.375 percent sales tax dedicated to the Metropolitan Transportation Authority, the total sales tax on goods bought in the city would be 8.875 percent.

The sales tax increase, the largest in 35 years, includes the elimination of the current exemption for clothing and footwear. It is apparently meant to be the death blow to any notion of a personal income tax increase, such as the $1 billion plan City Council Speaker Christine Quinn floated briefly in February, with new top rates for the tax (up to 4.65 percent), often called a "billionaire's tax." The mayor made his stance clear back then on the radio when he said of the Quinn plan, "The first rule of taxation should be you don't try to tax people who can move."

The Independent Budget Office in its February Budget Options report pointed out that, even when both the state and the city in 2003 temporarily raised their personal income tax rates, "There is no evidence that these affluent New Yorkers left the city." The state has again raised top state income rates this spring, to 7.85 and 8.97 percent.

The mayor's argument seems to have worked. The City Council's formal response on April 1 to the mayor's January budget plan makes no mention of the earlier Quinn plan.

Tax Policies, 1974-2009

The council's concession to the mayor's argument about peripatetic millionaires and billionaires is perplexing, given the pattern of tax policy since the city raised its sales tax from 3 percent to 4 percent in 1974 and top personal income rates first reached 4.3 percent in 1976.

Bloomberg himself has successfully used higher taxes in times of economic and fiscal emergency, with no known exodus. For instance, the top city personal income tax rate is currently 3.648 percent. Yet the mayor himself set the top rate at 4.65 percent in 2003 and kept it there through calendar 2005. And the top rate was 4.3 percent from 1976 through 1986, and 4.46 percent from 1991 through 1999.

Interestingly, in New York State from 1975 to 2008, the top personal income tax rate dropped steadily from a high of 15.375 percent in 1975 to 10 percent by 1981, 7.875 percent by 1989 and 6.85 percent by 1997, according to a recent report by the Fiscal Policy Institute. The top rate stayed at 6.85 percent from 1997 through 2008 with the exception of a temporary top rate of 7.70 percent from 2003 through 2005. The Fiscal Policy Institute points out that, were the highest state rate still in effect, the state would have about $20 billion more in tax revenues per year.

The two new top state income tax rates will restore some of the progressivity of the state's tax system. According to data from the Independent Budget Office, based on 2006 state tax data, high-income taxpayers in New York City will pay nearly $2 billion more to the state in calendar 2009. The 19,185 city residents who have more than $1 million in income will pay nearly 80 percent of that increase, with a average total payment of roughly $82,000 each. The 22,573 earning $500,000 to $1 million will pay 15 percent of the total or about $13,000 each on average.

The city, in contrast, continues to keep its own personal income tax rate, historically, quite low. In fact, as the mayor's own Tax Revenue Forecasting Document, published in September 2008, shows, the current top city income tax rate is (with the exception of only three years, 1988, 1989 and 2001) at its lowest rate since 1975.

The mayor has been quite specific in his reasons for keeping the income tax rate low. He noted in his radio interview that the top 1 percent of city taxpayers pay about 50 percent of total personal income tax revenues and added that if "a handful" of those, "about 40,000 people," moved out of the city it would wipe out any increase in revenue from the tax hike.

While a "handful" of the super-rich leaving could have such an impact, history, again, contradicts the notion. The IBO explored the question, at least in terms of the average-rich, in the February Budget Options report. A top rate of only 4.2 percent would raise $455 million in 2010 and would cost those making over $500,000 an average of $10,400 more in 2010. If 5 percent of those paying that average increase left the city, the new top rates would bring in $183 million less.

Sales Tax vs. the Income Tax

But what about the impact of the sales tax. Who pays that? As the mayor acknowledged on May 1, the sales tax is a "regressive" tax, a greater burden on lower than higher income taxpayers. He added, "Is it a good tax? No. None of these taxes are good taxes."

Well, that's a bit disingenuous. The personal income tax is certainly less regressive than the one-rate-fits-all sales tax. The personal income tax is "progressive" in the sense that higher-income taxpayers pay a slightly higher tax rate (3.648 percent) than do lower-income taxpayers (2.907 percent).

Since 1974 the city sales tax has been 4 percent (with the exception of an increase to 4.125 percent from mid 2003 through mid 2005). The mayor's proposal is thus a 12.5 percent increase in a sales tax that's been pretty much untouched for 35 years, presumably in large part because most people recognize its regressive impact.

In his executive budget, the mayor, who, according to the Times is "the wealthiest person in New York," not only claimed that the wealthy might flee an income tax hike; he suggested they would pay more with the sales tax increase, because "the people that have more money buy a lot more things, and they spend a lot more of it."

The notion that the wealthy spend a lot more than the less-wealthy breaks no new ground, but it dodges the big question: How much of the sales tax increase will the wealthy and the less-wealthy, in fact, pay?

We know that the wealthy pay the bulk of the personal income tax. In fact, the Tax Revenue Forecasting Document shows that, in the 2005 tax year, the 315,000 city taxpayers who had $100,000 or more in taxable income (only 9.2 percent of all filers) paid nearly 73 percent of the total personal income tax, even though they accounted for only 9.2 percent of all filers. Most significantly to the mayor's point, the 1 percent of filers who have incomes of $500,000 or more accounted for 49 percent of the total income tax.

Lower-income filers, of course, pay much less. The 1.64 million filers (48 percent of total filers) who have less than $25,000 of taxable income pay only 2.2 percent of total personal income taxes. That's the nature of a progressive tax system.

The sales tax presents a very different picture. A 0.5 percent sales tax increase will have a greater impact on lower- and middle-class taxpayers (and a lot of New Yorkers who pay no personal income tax at all) than higher-income residents.

The Times, using Independent Budget Office data, provided a partial answer to the impact question. The IBO estimates that a household making $35,000 a year would pay an additional $129 in sales tax, one making $125,000 would pay $356 a year more, and a household making $500,000 would pay $840 more.

Those numbers alone provide a good example of how regressive the sales tax is. For instance, the additional burden on the $35,000 household (measured by dividing $129 by $35,000) is 0.37 percent, more than twice that on the $500,000 household ($840 divided by $500,000), 0.17 percent.

Tax Politics

The last time the mayor recommended an increase in the sales tax was in November 2002, when it was part of a $3 billion tax revenue package to fill the huge deficit created by a national recession and the impact of 9/11. At that time he actually proposed a 0.25 percent increase, but the council negotiated that down to the ultimate 0.125 increase, to 4.125 percent, which was in effect from June 4, 2003 to May 31, 2005.

The council this spring has thus far rejected the mayor's proposed increase, and if history is a guide, there might yet be a compromise that lowers or cancels any increase. (Mayors often find some unexpected, non-tax dollars to fill budget gaps between May and June.) But with the exception of the City Comptroller, Bill Thompson, who has proposed the more conventional and progressive alternative of a higher personal income tax rate for those making more than $500,000, there has been surprisingly little attention to the scope of the mayor's regressive proposal.

Of course, it's an election year. The political cooperation between the mayor and the City Council leadership that led to the sudden extension of term limits seems at the moment to be holding. Apparently neither the mayor nor the council leadership wants to tax higher-income New Yorkers this year.

But the notion that the 40,000 richest taxpayers - and especially the "handful" of super-rich so much on the mayor's mind - should be protected in these tough times, while some 8 million New Yorkers pay 12.5 percent more in sales taxes, remains a curious, if not cruel, re-writing of four decades of tax policy in this city.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.

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