Testimony Of New York City Deputy Comptroller For Budget Preston Niblack, The Impact Of The Federal Tax Law On New York City
February 26, 2018
Good afternoon, Chair Dromm and members of the Finance Committee. I am Preston Niblack, Deputy NYC Comptroller for Budget. I’m testifying today on behalf of Comptroller Scott M. Stringer, on the impacts of the federal Tax Cuts and Jobs Act (TCJA, P.L. 115-97) on New York City. I’m joined by our Director of Revenue Estimation, Steven Giachetti.
The federal Tax Cuts and Jobs Act represents the biggest change in both personal and corporate federal income taxation in a generation – since the Tax Reform Act of 1986. It could not, however, be more different in spirit and effect from that overhaul. The TCJA represents partisan policymaking at its most petty. The ways in which it appears to deliberately target higher-tax jurisdictions such as ours is unprecedented. In the long run, it profoundly undermines our City’s ability to continue to provide a robust social safety net by eroding our economic competitiveness and revenues.
There is a tremendous amount one could discuss today, so in the interest of brevity, I’m going to focus on three broad topics:
- The impacts on New York City individual taxpayers;
- The impacts on the City’s economy; and
- The interactions between the new tax law and our State and City tax codes.
I’ll conclude with a note of caution about the many unknowns and uncertainties raised by such a massive but hasty overhaul of the tax code.
The Comptroller’s analysis shows that nearly 475,000, largely middle-class New York City federal taxpayers would face higher tax liabilities under the TCJA. The capping of the state and local tax (SALT) deduction at $10,000, and the elimination of certain other deductions, is the most common reason. We estimate that roughly half of taxpayers earning between $100,000 and $500,000 in income are likely to face higher tax bills.
At the highest end of the income spectrum (above $1 million, in our analysis), the picture is more complex, and depends on various factors including source of income. New York City has an unusually large proportion of high-income taxpayers whose income is largely derived from wages and bonuses, as opposed to business income, which, as you know, is treated more favorably under the law. The cap on the SALT deduction obviously tends to raise their tax bills. Perhaps surprisingly, nearly 58% of such taxpayers could actually see increases.
Those millionaires who will get tax cuts get big ones – $337,000 on average, according to our analysis. They are primarily filers with pass-through business income, which is eligible for a 20% deduction, up to a cap, against a filer’s personal income taxes. Mere wage earners of course won’t get this deduction, and will thus be taxed at a higher rate on the same income, violating a basic tenet of tax equity.
In addition to these distributional impacts, the tax bill raises a number of concerns for the long-term economic competiveness for high-tax jurisdictions like New York.
First, because of the cap on SALT deductions, the difference in top marginal tax rates between high-tax and low-tax states has widened. The ability to deduct state and local taxes on your federal return prior to this year meant that your effective state and local tax rate was lower than your nominal rate. That is now no longer the case, with state and local tax rates effectively a third higher than they were.
The focus on this issue has often been on the very rich (i.e., those with incomes over $1 million), perhaps for the obvious reasons that they both account for a disproportionate share of taxes paid, and because they are perceived as more easily able to change their tax domicile than middle-class working households.
But it is not just a matter of departing millionaires. As I’ve noted, this also impacts plenty of middle-class filers. Being able to attract and retain the middle class is important to the City’s long-run economic and fiscal health, as well as our social fabric. The federal tax law undermines our ability to do so.
Additionally, the loss of SALT deductibility also means that many more taxpayers will likely choose the expanded standard deduction, rather than itemizing, which also has implications for charitable giving, for example. Many middle-income households may be affected by this, and while they are no doubt most often motivated by other concerns than just reducing their income tax liability, it nonetheless eliminates an incentive for charitable giving that could potentially impact the fundraising of many non-profit social service agencies and other organizations, which are of course a critical part of our City’s social services network.
Even the treatment of pass-through business income disfavors New York, because not all business income is treated the same. While the bill provides benefits to real estate partnerships, many professional services partnerships that are an important part of our economy, like accountants, lawyers, and doctors, won’t be eligible for this deduction.
The changes in federal tax law of course also impact State and City income taxes, which take federal adjusted gross income and federal deductions as their starting points. This raises the question of “decoupling” – that is, should we adjust our own tax codes so that we are not as closely and automatically tied to the federal code?
Comptroller Stringer testified about the need to decouple at the Local Government hearing in Albany last month. Our analysis indicates that the combined impact on State and City personal income tax liabilities for New York City residents would be almost $800 million without decoupling.
Governor Cuomo included legislative proposals to mitigate the impacts of the federal tax bill in his 30-day budget amendments. These included an optional payroll tax, charitable contributions for certain public functions, and decoupling certain aspects of the State personal income tax from the new federal law. Notably, the Governor included the decoupling of State and local tax deductions from the federal cap, and eliminating the requirement to use the standard deduction on the State return if you do so on your federal return. The Governor has also proposed amending State law to remove a provision that would have lowered the standard State deduction for single filers – which would cost single taxpayers $840 million on their State and City returns unless fixed.
The legislature will need to make similar changes at the City level as well, which the Mayor’s Preliminary Budget assumed will happen. Without these changes, City taxpayers will face an increased tax bill of some $365 million, by our estimate.
I will conclude with some observations on corporate tax changes, and on the tremendous uncertainties such a huge change in the tax code raises for the future.
On the corporate side, there are a very large number of unresolved implementation and legal issues and unknowns. The changes to corporate taxes and the treatment of foreign income are some of the most complex features of the Plan. Implementation issues are typical of any tax reform, but are compounded by the fact this Act was passed hastily, in a matter of months, rather than the years it took to pass the 1986 reform. Technical guidance from the IRS and even amendments to the law will be needed on many provisions of the Act.
One thing that seems clear, however, is that, in the short run at least, many companies are using their corporate tax savings for one-time bonuses, stock buybacks, and shareholder dividend payouts, rather than on raising base pay for their workers – whose wages have been stagnant during most of the current economic expansion – or making capital investments. This was an entirely predictable outcome of enacting tax cuts at a time when corporations are sitting on hundreds of billions of dollars in cash, without passing any of it along to workers in the form of higher pay.
Finally, we still don’t know how many or what kinds of behavioral responses could be triggered by the TCJA, and how these play out could have a large impact on City tax revenues.
To take just two examples: It remains unclear how the impact of repatriated profits will affect capital gains realizations and dividends. And the differential in tax rates between pass-through entities and C-corps could cause some existing partnerships to restructure as C corps. In NYC, this could be even more pronounced, given the double taxation of pass-through income at both the entity level and that of the individual taxpayer. There are reports of such restructurings already. Due to the lower corporate rate, such restructurings could ultimately result in lower revenues at all levels of government, including New York City because of its unincorporated business tax.
That was, perhaps, the intent all along. Because the worsening of the federal deficit as a result of the tax bill is not sustainable in the long run, it is clear that cuts to social services, education, healthcare, and other programs that provide critical services to many New Yorkers are next up on the agenda in Washington.
In sum, while we do know many of the impacts of the TCJA with a good degree of certainty, for all the reasons outlined above we will not know the full extent for many years to come. But there are already many reasons to be concerned about how the tax bill will ultimately affect our economy, our revenues, and our residents.
Thank you, and we are happy to take your questions.