Forbes: New York Legislators Just Did The Unthinkable, And Voters Will Love It
Last Monday night, state legislators in New York did the unthinkable: theycut taxes. Let me reiterate that. New York lawmakers cut taxes, while passing a $140 billion budget, instead of increasing them. While some tax reform measures included in the 2014 budget come in the form of property tax rebates and a three-year phase out of the utility tax surcharge, the most notable tax cut involves the Empire State’s corporate income tax.
For the first time since 1917, manufacturers will no longer be responsible for paying corporate income tax in the state of New York. Prior to the passage of the 2014-2015 state budget, manufacturers owed 5.9 percent of their earnings to the state. In addition to eliminating the corporate income tax for manufacturers, non-manufacturing corporations will see their rates decrease from 7.1 percent to 6.5 percent – the lowest it has been since 1968. What the passage of the budget has effectively done is take Governor Andrew Cuomo’s Start-Up NY initiative, which would create select tax-free zones, and apply it throughout all of New York. Thus, this provides all businesses with the same opportunity that initially was going to be awarded to areas hand-picked by the governor.
So what does all this mean for New York, and why is it such a significant moment in the state’s history?
For starters, it means all the talk about New York’s incredibly high tax burden and poor businessclimate (ranked dead last in 2014 by the Tax Foundation) has finally begun to take root in Albany. With governors from low-to-no-income-tax states – such as Texas Governor Rick Perry – launching ads and visiting New York businesses to recruit them to relocate to their state, New York needed to make this change, especially given that businesses continue to relocate jobs outside the region and leave the state altogether. While reducing the corporate income tax is a step in the right direction toward lowering the total tax burden on residents and the businesses that employ them, Albany needs to look at reducing the personal income tax rate to not only attract businesses, entrepreneurs, and workers (and their working wealth) back into the state, but also to keep its current residents and businesses from leaving. This is a make-or-break move for the state considering New York is gaining AGI from one out of the remaining forty-nine states.
From 1992 to 2010, New York experienced a continuous net gain of AGI from only one state: Michigan. According to Internal Revenue Service data contained within my book How Money Walks, New York has seen $142.33 million in working wealth come into the Empire State from the Great Lakes State. However, New York now risks losing this stream of AGI, as Governor Rick Snyder has not only passed significant corporate tax reform, but is now looking to reduce the personal income tax as well.
In 2011, Governor Snyder eliminated the dual corporate tax system called the Michigan Business Tax in favor of a flat corporate income tax rate of 6 percent: overall, a $1.7 billion tax cut. This year, Michigan is operating with a budget surplus of $971 million and aims to reduce the income tax burden from its flat rate of 4.25 percent to 3.9 percent by 2017. If nothing changes on this front in New York, the Empire State’s first of its eight income tax brackets will be higher than Michigan’s flat rate.
With $68.10 billion – or $7,200 per minute – in adjusted gross income leaving New York over the eighteen-year period mentioned above, the move to reduce the state’s corporate income tax shows that lawmakers are paying attention to their constituents’ concerns. Without the gain in AGI from Michigan, New York will have no net gain of AGI into the state. The Empire State will, however, continue to see billions of dollars – $3.9 billion between 2010 and 2014, based on our projections – in working wealth leave for states with significantly lower tax burdens. The tax cuts contained within the state budget are good “start-up” for New York’s economy, but the governor and legislature need to see tax reform through, from start to finish, if the Empire State is to experience any economic growth.