New York City Office of the Comptroller
Alan G. Hevesi, Comptroller
1 Centre Street, NY, NY 10007

Vol. VIII, No. 2
May 2000

WHO PAYS NYC’S PERSONAL INCOME TAX?

SUMMARY: New York City (NYC) has the highest personal income tax (PIT) rate of any large U.S. city that is also subject to a state PIT. In 1997 (the latest year with available data) the PIT liability of NYC residents was $3.91 billion. Of this, 57.1 percent was incurred by the 5.5 percent of filers with NY State adjusted gross income (AGI) of $100,000 or more. NYC residents’ incomes became more concentrated between 1990 and 1997. Manhattan residents filed one-fourth of the PIT returns and owed more than half the PIT. Nonresidents owed a tiny share of the PIT in 1996. Their share of the PIT dropped to zero on July 1, 1999. The commuter earnings tax ended for NY State residents by State law and for residents of other states by decision of the NY State Supreme Court Appellate Division on April 4, 2000.

• NYC residents have an average effective PIT rate of 3.05 percent, the highest average rate of any large U.S. city. The average PIT liability of NYC residents was $1,364. Liability was concentrated among high earners. Taxpayers with more than $100,000 AGI owed 57.1 percent of the PIT in 1997. The lowest-income group (AGI less than $20,000) owed 1.9 percent of the PIT.

• In 1997, NYC residents had an average AGI of $44,742. But while in 1997 the highest-income group (AGI of $100,000 or more) accounted for 5.5 percent of the number of returns, its AGI was 44.8 percent of the total. The average AGI of this highest-income group was $361,330. More than half of the returns were filed by residents with average AGIs of $10,000-$49,999, but they owed 21 percent of the PIT.

• From 1990 to 1997, the distribution of NYC residents’ AGIs and tax liability became more skewed and the effective tax rate rose 0.63 percentage points. The highest-income quintile in 1997 accounted for 6.16 percentage points more of the total residents' AGI than it did in 1990. The total number of returns increased from 2.73 million to 2.87 million; total real AGI (1997 dollars) from $117.1 billion to $128.2 billion; real PIT liability from $2.84 billion to $3.91 billion; the real average AGI from $42,898 to $44,742; and the real average PIT from $1,039 to $1,364. The effective tax rate therefore rose from 2.42 percent to 3.05 percent.

• Manhattan residents in 1997 accounted for 24 percent of the number of resident returns, 48 percent of AGI, and 57 percent of the NYC resident PIT tax liability. Most of the tax returns were from Brooklyn and Queens, with each accounting for 28 percent of the filers. Brooklyn and Queens each accounted for 19 percent of the AGI and each accounted for 16 percent of the tax liability.

• Nonresidents earned an average 1996 income twice that of residents. Nonresidents were paid 37 percent of NYC worker earnings, but owed only 7 percent of PIT; in 2000, nonresidents will pay zero PIT. Most (74 percent of) nonresident NYC workers live in New Jersey, Long Island, and Westchester. NYC employers paid an estimated 34 percent of wages to commuters in 1990; this rose to 37 percent in 1996. The average wage of filing nonresidents was much higher than that of NYC residents, but their average PIT in 1996 was $347, and this amount was up 38.2 percent from 1990. Nonresidents in 1990 owed 7.8 percent of the total PIT, but in 1996 only 7.1 percent. The commuter share of the PIT dropped to zero in 1999 because of the NY State law that year ending the commuter tax.

This report reviews the distribution of personal-income-tax (PIT) burdens among New York City (NYC) residents and nonresidents, using 1997 data obtained from the NYS Department of Taxation and Finance. Data with the detail required for this report were not available later than 1997.

The NYC PIT was first enacted in 1966, and has since been amended several times. The PIT is imposed on the taxable income of resident individuals, estates, and trusts. Until 1999, nonresidents were also taxed, at a much lower rate than residents, on earnings from NYC sources, i.e., on the wages and net earnings from self-employment, within NYC, of every nonresident individual, estate, or trust. This nonresident earnings tax is commonly called the commuter tax, but it is included in PIT data.

NYC's PIT is its second-largest source of tax revenue, after the property tax. Its share of total tax revenue has increased since the early 1990s, from 17.02 percent in FY 90 to 25.42 percent in FY 99. (See Chart 1.)

Chart 1. Share of PIT in NYC Tax Revenue, FY 90-FY 99, Percent

Source: The Comptroller of the NYC, Comprehensive Annual Financial Report of the Comptroller, June 1999.

I. THE NYC RESIDENT PIT

NYC residents had an average Adjusted Gross Income (AGI) of $44,742 and an average PIT liability of $1,364 (deductible from taxpayer income on Federal income tax returns). NYC’s PIT rate is the highest of large U.S. cities that also have a state PIT. Among 24 cities with a 1994 population of 500,000 or more, 17 did not have a PIT in 1997. The seven cities with a PIT were, besides NYC and Washington: Baltimore, Cleveland, Columbus, Detroit and Indianapolis. The effective PIT rates in four cities were between 2 and 3 percent. In one city, Indianapolis, the effective PIT rate was less than 1 percent. The average effective PIT rate for NYC residents was 3.05 percent in 1997; the top rate was 3.9 percent. The top marginal rate in Washington, DC, for incomes above $20,000, is 9.5 percent; for incomes of $20,000 the DC rate is 7 percent.

1. PIT Payers by Income Group

NYC resident PIT returns show how resident AGI is distributed and which income groups bear most of the burden of the City's income tax.

1. Most PIT Payers Earned Less than $20,000 in 1997; 5.5 Percent Earned More than $100,000

In 1997, the number of returns with average AGI less than $20,000 accounted for 46.0 percent of the total number of returns, while the number of returns with income over $100,000 account for 5.5 percent. More than 60 percent of the returns were filed by residents with incomes less than $30,000. Almost 50 percent earned less than $20,000. (See Chart 2.)

Chart 2. Number of PIT Returns by Income Group, 1997
Source: NYS Department of Taxation and Finance, Office of Tax Policy Analysis, unpublished data.

2. The 5.5 Percent of 1997 Earners Making More than $100,000 Had Two-Fifths of Incomes

While the group with the highest incomes (above $100,000) accounted for 5.5 percent of the number of returns, its AGI was 44.8 percent of the total in 1997. Residents with incomes of $50,000 or more accounted for almost two-thirds of the total AGI. The group with incomes less than $20,000 accounted for 46.0 percent of the number of returns, but earned only 9.6 percent of total AGI. (See Chart 3.)

Chart 3. NYC AGI by Income Group, 1997
Source: See Chart 2.

In 1997, the average AGI in NYC was $44,742. This was $1,845 higher than the inflation-adjusted average AGI in 1990.

In 1997, the highest-income quintile accounted for 6.16 percentage points more of the total NYC resident AGI than it did in 1990. All the other income quintiles accounted for less of the total NYC resident AGI in 1997 than in 1990. The share of the next highest income quintile ($28,611-$48,616), declined by 2.20 percentage points. The AGI of the middle-income quintile (between $16,634 and $28,610) decreased by 1.92 percentage points. For the two lowest income quintiles, $16,633 and less, the share decreased only slightly, by 1.52 and 0.53 percentage points. (See Chart 4.)

Chart 4. Percentage-Point Changes in NYC AGI by Quintile, 1990-1997
Source: See Chart 2.


3. Of Total PIT, 57 Percent Was Owed in 1997 by Those Earning More than $100,000

More than half the City’s PIT liability was incurred by the highest-income group (incomes over $100,000) in 1997. They owed $2.23 billion to the City, 57.1 percent of the total $3.91 billion. Almost one-fourth (21.5 percent) was owed by residents earning between $50,000 and $99,999. The lowest-income groups (income less than $20,000) owed only 1.9 percent of the total City PIT. (See Chart 5.)

Chart 5. Share of NYC PIT Owed by Income Group, 1997
Source: See Chart 2.

In 1997, the PIT liability for all quintiles except the top quintile decreased from 1990. The liability for the highest-income quintile ($48,617 or more) increased significantly, by 4.79 percentage points. It decreased by 2.25 percentage points for the fourth quintile, 1.70 percentage points for the middle quintile, 0.74 percentage points for the second quintile, and 0.01 percentage points for the bottom quintile. (See Chart 6.)

Chart 6. Percentage-Point Changes in Tax Liability by Quintile, 1990-1997
Source: See Chart 2.

1. PIT Payers by County/Boro

The data are also analyzed to see how income is distributed among the five counties in NYC.

1. Number of Returns by Counties

In 1997 most of the tax returns were from Brooklyn and Queens, each accounted for 28 percent. Of all the tax returns, 24 percent were from Manhattan. The lowest percentage of the total returns was from Staten Island, 6 percent. The remaining 14 percent returns came from the Bronx. (See Chart 7.)

Chart 7. Number of NYC PIT Returns by County, 1997
Note: Richmond County = Boro of Staten Island; Kings County = Boro of Brooklyn.
NYC total (5 Counties or Boros)=100 percent.  Source: See Chart 2.

2. AGI by Counties

In 1997, Manhattan accounted for 48 percent of total AGI, Brooklyn and Queens each accounted for 19 percent, while Bronx accounted for 8 percent and Staten Island for 6 percent. (See Chart 8.)

Chart 8. AGI by County, 1997
Source: See Chart 2.

3. Tax Liabilities by Counties

Manhattan residents incurred more than half (57 percent) of the NYC PIT liability in 1997. Brooklyn and Queens each owed 16 percent. Bronx and Staten Island together owed 11 percent. (See Chart 9.)

Chart 9. NYC Personal Income Tax Liabilities by County, 1997
Source: See Chart 2.

1. How Progressive Is the PIT?

The data are used to determine whether, and to what degree, the City's PIT is progressive or regressive.

1. Levels

The effective tax rate (i.e., the ratio of tax liabilities to AGI) rises with income. It rose from 0.09 percent for income below $7,857 to 3.66 percent for incomes above $48,617 in 1997. The effective tax rates for middle income quintile and two high income quintiles increased significantly from 1990 to 1997. The only income quintile for whom the tax rate went down were the second quintile, from 0.58 percent to 0.51 percent. Beginning in tax year 1991, the City imposed a three-year 14 percent income tax increase on City residents. This increase has been extended three times, in 1993, 1995, and 1997. The City also imposed a 12 percent income tax surcharge from 1990 to 1998, but it did not affect our comparison of effective tax rate between 1990 and 1996. (See Chart 10.)

Chart 10. Effective Tax Rates, 1990 and 1997
Source: See Chart 2.

2. Trends

How equally income and tax liability are distributed is measured by the Gini Index, based on adjusted gross income and tax liability data used in previous sections. The Gini Index is a special use of the Lorenz Curve to measure income inequality. It is given by the ratio of the area between the diagonal line (absolute equality) and the actual income distribution (curved line), to the entire triangle within which the curved line is

located. The range is from 0 to 1. The larger the area between the two lines, the higher the Gini Index and the greater the measured inequality. (See Chart 11.)

Chart 11. The Gini IndexNote:
The Gini Index is given by the ratio of the area between the diagonal line (absolute equality) and the actual income distribution (curved line), to the entire triangle within which the curved line is located. Absolute equality implies a Gini Index of 0. The higher the Gini Index, the greater the inequality.

The Gini Index varies between zero and one (or 100 percent), where zero means totally equal income or tax liability. Between 1990 and 1997, the Index became larger, showing greater inequality in income and tax (See Table 1.)

Table 1. Gini Index: NYC, 1990 and 1997

Note: AGI and PIT owed are inflation- adjusted.
Source: Calculated by NYC Comptroller’s Office, based on AGI and PIT data by income quintile from NYS Department of Taxation and Finance, Office of Tax Policy Analysis.

The Gini Indexes show that for the period 1990 to 1997:

1. The Gini Index for the NYC income distribution, rose by 0.043, from 0.425 to 0.468, becoming less equal.
2. The Gini Index for NYC resident PIT liabilities, rose by 0.027, from 0.547 to 0.574, also becoming less equal, but not by as much as incomes.
3. The distribution of tax liability was less equal than the distribution of income, meaning the PIT is progressive, but the difference narrowed, meaning that by this measure the PIT was slightly more progressive in 1990 than in 1997.
   

II. NONRESIDENT PIT

The NYC nonresident earnings tax, often called the "commuter tax," was enacted in 1966 and was ended by law and court decisions as of July 1, 1999. The tax is included in PIT reports. The commuter tax was imposed in 1966-1999 on wages earned, and net earnings from self-employment, within NYC, of every nonresident individual, estate, or trust. The tax rate for wages was 0.45 percent and the tax rate for self-employment earnings was 0.65 percent. The total nonresident income tax owed in 1996 was $267 million. The average nonresident income tax per return was $347 in 1996 (the latest available year).

1. Where Commuters Live

The largest sources of commuter taxes in 1996 were New Jersey and Long Island, which together accounted for 57 percent of these taxes. Most nonresident NYC workers lived in New Jersey (31 percent). Nassau, Westchester, and Suffolk counties were next with 23 percent, 13 percent, and nearly 10 percent of workers. Together, Nassau and Suffolk accounted for 34 percent of nonresident workers, more than New Jersey. (See Table 2.)

Table 2. NYC Nonresident Earnings Tax by Residence, Ranked by Percent of Total, 1996

State or County	No. of Returns	Nonresident Earnings Tax	Percent of Tax	Rank
New Jersey	238,861	74,646,541	27.96%	1
Nassau, NY	178,732	56,497,140	21.16%	2
Westchester, NY	99,112	46,016,068	17.24%	3
Suffolk, NY	79,415	20,715,809	7.76%	4
Connecticut	30,078	19,424,237	7.28%	5
NYC*	39,340	14,079,385	5.27%	6
Rockland, NY	23,941	8,578,182	3.21%	7
Other States/Nations	25,017	7,710,456	2.89%	8
Other NY Counties	9,039	6,856,217	2.57%	9
Orange, NY	12,134	2,970,852	1.11%	10
Pennsylvania	10,629	2,754,072	1.03%	11
California	5,352	2,065,220	0.77%	12
Putnam, NY	6,291	1,699,742	0.64%	13
Florida	4,618	1293478	0.48%	14
Dutchess, NY	5,170	1,248,296	0.47%	15
Ulster, NY	1,675	404,946	0.15%	16
Grand Total	769,404	266,960,641	100%

* Reflects returns indicating a NYC address although permanent residence may be elsewhere. The information for 1996 puts all five City counties under the "NYC" category, while the data for 1990 only include returns from Manhattan.

Source: NYS Department of Taxation and Finance, Office of Tax Policy Analysis, unpublished data, NYC Nonresident Earnings, Taxpayers by Place of Residence, 1990, 1996.

The liability for the nonresident PIT increased by 38.2 percent from 1990 to 1996. A 3 percentage-point increase in the "NYC" row is matched by a 3.5 percentage-point decrease in "Unclassified," suggesting that the NYS Department of Taxation and Finance changed the way it handled certain anomalous returns, such as people who had moved between the end of the tax year and date of filing. Otherwise the largest increases in percentage-point change were in "other NY counties" (2 percentage points), Connecticut (1 percentage point), and Westchester (0.6 percentage point). The largest decreases in percentage-point change were in Nassau (-2.7 percentage points), Suffolk (-0.6 percentage point), and New Jersey (-0.4 percentage point). (See Table 3.)

Table 3. NYC Nonresident Earnings Tax, Ranked by Percentage Change in Nonresident Earnings Tax,
1990-1996

Residence	No. of Returns in 1990	Nonresident Earnings Tax in 1990, $*	Percentage-Point Change in Nonresident Earnings Tax, 1990-1996	Rank
NYC**	19,779	$4,136,000	3.13%	1
Other NYS Counties	6,682	1,147,000	1.98%	2
Connecticut	26,900	12,113,000	1.00%	3
Westchester	93,525	32,057,000	0.64%	4
Rockland	23,315	5,750,000	0.24%	5
Pennsylvania	7,971	1,677,000	0.16%	6
Dutchess	3,609	720,000	0.09%	7
Orange	9,878	2,044,000	0.05%	8
Putnam	4,692	1,134,000	0.05%	9
California	5,033	1,479,000	0.01%	10
Ulster	1,408	279,000	0.01%	11
Florida	4,963	1,027,000	-0.05%	12
Other States/Nations	21,508	5,962,000	-0.20%	13
New Jersey	231,125	54,755,000	-0.39%	14
Suffolk	76,696	16,105,000	-0.58%	15
Nassau	178,977	46,047,000	-2.68%	16
Unclassified	16,759	6,683,000	-3.46%	17
Grand Total	732,820	$193,115,000

*The 1990 data excludes some taxpayers with incomes above $1 million whose returns were not available when the data were compiled by the source.

**These taxpayers include people who had a home in NYC, but who commuted to work in NYC for some period during the tax year. The information for 1996 puts all five City counties under the "NYC" category, while the data for 1990 only include returns from Manhattan.

Source: See Table 2.

2. Commuter Earnings

Commuters take home nearly 37 percent of the City payroll in 1996, up from nearly 34 percent in 1990.

1. How Much Do Nonresidents Earn in NYC Wages?

No direct data are available on the earnings in NYC of nonresidents, but the level and share of nonresidents' earnings relative to all NYC wages may be estimated using PIT data.

Nonresident wages equal taxable wages plus the non-taxed (excluded) wages, where the excluded wages are the amount of income deducted from total gross wages to arrive at taxable wages.

Nonresident wages = Taxable Wages + Exclusion

Taxable wages and the exclusion are computed separately.

a. Taxable Wages. Taxable wages equal tax collected from wages divided by the tax rate for wages.

Taxable wages =

However, tax data are available only for all earnings, which include non-wage (i.e., self-employment) earnings. To compute tax from wages only, the data must be adjusted using the following equation:

Tax from wages = (Total tax) (% of tax from wages)

The share of tax from wages is 93 percent, so multiplying total earnings by 0.93 gives earnings from wages. The 0.93 share is derived as follows: $317 billion income is from wages and $17 billion is from self-employment income in NYS in 1996. This means that about 95 percent of earnings are from wages. But 95 percent is not the percent of tax from wages since tax rates for wage and self-employment earnings are different. Using the tax rate for wages (0.0045) and the tax rate for self-employment earnings (0.0065) as weights, we derive the portion of tax from wage (93 percent).

b. Exclusion The amount of exclusion is calculated using the following equation:

Exclusion = (Average exclusion per return) (No. of returns)

(% of earnings from wages).

The average exclusion is estimated to be $1,000 per return.

c. Total Nonresident Wages Finally, exclusions are added to taxable wages to get total nonresident wages:

Total nonresident wages

= Taxable wages + Exclusion

=

+ (Average exclusion) (Number of returns) (% of earnings from wages)

= ($266,960,641 0.93) / 0.0045 + $1,000 769,404 0.95

= $55,864,109,695 or $55.864 billion.

2. What Share Are Nonresident Wages of the NYC Payroll?

The share of the NYC payroll paid to nonresidents is given by nonresident wages divided by total earnings, in $ billions. From the data above, 1996 numbers for both are:



3. How Do Average Nonresident Wages Compare with Average NYC Resident Wages?

The average wage of nonresidents per return is almost double the average wage of NYC residents working in NYC. The differences were about $27,000 in 1990 and $34,000 in 1996. (See Table 4.)

Table 4. Average Wages, Nonresidents and Residents Working in NYC,
1990 and 1996

	1990	1996
Nonresidents working in NYC	$55,377	$72,607
Residents working in NYC	$28,790	$38,177

Note: Nonresidents' average wages = Nonresidents' total wages / Number of returns. Nonresidents' total wages are from Section 1. NYC Residents' average wage = (NYC payroll - Nonresidents' wages) / (NYC employment - Number of Nonresidents' returns). An assumption of this approach is that each nonresident taxpayer fills out one return.

Source: NYS Department of Taxation and Finance, Office of Tax Policy Analysis, unpublished data, NYC Nonresident Earnings Taxpayers by Place of Residence, 1990 and 1996. NYC Comptroller's Office, NYC Employment Data.

4. Nonresidents' Wages in 1990

Using the same calculation from Section 3 to estimate nonresident wages in 1990:.

Total nonresidents' wages in 1990

=

+ (Average exclusion) (Number of returns) (% of earnings from wages)

= [($193,115,000 0.93) / 0.0045] + ($1,000 732,766 0.95)

= $40.579 billion

Percent of nonresidents' wages in the 1990 NYC payroll, in $ billions



This is consistent with the 1990 Census, which shows that nonresident earnings from NYC were $37.512 billion, 32.42 percent of total NYC earnings by workplace.

3. Tax Owed by Commuters

Nonresident earnings tax totaled $193 million in 1990 and $267 million in 1996. This accounted for 7.8 percent of total PIT (resident income tax plus nonresident earnings tax) in 1990 and 7.1 percent in 1996.

The State Legislature repealed the nonresident earnings tax for commuters who live in NY State, effective July 1, 1999. Out-of-state commuters then successfully filed a lawsuit in the NY State Supreme Court to have the repeal extended to them; the decision in their favor was upheld by the Appellate Division on April 4, 2000 and NY State has chosen not to appeal to the U.S. Supreme Court. The City has estimated the impact of the repeal in FY 00 for both in-state and out-of-state commuters to be $541 million.

III. CONCLUSIONS

The highest-income group (AGI of $100,000 or more) in 1997 accounted for 5.5 percent of resident PIT returns and half of the resident PIT revenue, a higher percentage than in 1990. The middle- and lower-income groups were paying a smaller share than in 1990. The average AGI went up significantly for high-income groups. It declined for the lowest-income group and was mixed in the middle-income groups. This is consistent with the Gini Index, which increased from 1990 to 1997, indicating that the gap between the rich and the poor widened from 1990 to 1997.

Commuters obtained more than one-third of NYC's payroll, but they owed only a small portion of the City's taxes. The estimated share of wages paid to commuters by NYC employers rose from 33.8 percent in 1990 to 36.8 percent in 1996. Yet the share of the nonresident earnings tax in total PIT (resident income tax plus nonresident earnings tax) fell from 7.8 percent in 1990 to 7.1 percent in 1996. Commuters owed very little PIT in 1996. Since July 1, 1999, they owe nothing.

To improve the lagging conditions of NYC's low-income residents, the City and the NY State should consider the following kinds of remedies:

• Raise the maximum income below which taxpayers do not have to pay income tax. Currently, this maximum income is $8,400 for single filers and $14,400 for joint filers.
• Adjust NYS and NYC income tax brackets to rise with inflation.
• Raise the NYS minimum wage, taking into account competitive factors vis-a-vis other states.
• To prevent erosion of the minimum wage through inflation, it should be tied to changes in the CPI.
• Create an Earned Income Tax Credit (EITC) as a credit against the NYC PIT. This could be linked to the NY State EITC, which has recently been increased in principle from 20 to 30 percent of the Federal EITC.