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Opinion: Surcharge doesn't erode tax base

Photo Credit: Martin Kozlowski illustration

Douglas Massey is a professor of sociology and public affairs at Princeton University. Howard Chernick is a professor of economics at Hunter College and the Graduate Center, City University of New York.

New York desperately needs a rational conversation about budget balancing. Unfortunately, certain myths are making that difficult.

The worst: Millionaires flee states that raise top income tax rates. Last month, the Partnership for New York City business organization asserted -- without evidence -- that New York's wealthy have decamped because of the surcharge on high earners, passed in 2009.

Yet a multitude of serious academic work suggests the opposite. New York's modest surcharge -- 1 percent to 2 percent on individual filers over $200,000, heads of households over $250,000, or joint filers over $300,000 -- was enacted to help the state weather the recession. It's done just that, raising about $4.6 billion annually. But the surcharge is set to expire at the end of the year, and Gov. Andrew M. Cuomo and State Senate Majority Leader Dean Skelos (R-Rockville Centre), seem determined to see it go.

The question is, do these sorts of surcharges diminish New York's population of high earners? Signs point toward "no," though the necessary data aren't available to prove this.

Here's what's certain: Even with the surcharge, New York retained one of the densest concentrations of high net-worth households in America.

This isn't a surprise. The business and cultural amenities of New York City -- where most of the state's income is generated -- make it uniquely attractive for the rich. The city's status as a finance capital means that even if bankers left for Connecticut, many would commute to Manhattan -- and pay New York State income taxes.

A small number of the wealthy may leave altogether, or decide against locating here, if the surcharge is extended. But evidence suggests that these few would relocate within the region, and New York's economy would still benefit. Why? Wealthy residents of Connecticut and New Jersey visit Manhattan as tourists and often do business with New York-based firms.

Let's not forget: Wealthy Americans just received a mammoth federal tax break, averaging $124,000 per year for the top 1 percent of New Yorkers. By extending the surcharge, New York can recoup a modest portion of that ideologically driven windfall without hurting its economy.

Finally, the added revenue can fund important public investments, like infrastructure maintenance and better health care. These services are important for all residents and businesses.

This is especially true for small business owners, who are frequently cited as a key reason not to extend this tax. According to the Fiscal Policy Institute, only 5 percent of business owners statewide who report profits as income are subject to the surcharge. And the few who are affected are even less likely to move than a wage earner due to the high cost of out-of-state relocation.

In sum, the benefits of higher taxes to high earners -- and business owners -- are likely to outweigh the disadvantages.

Our work backs this up. Professor Chernick's comprehensive study of long-term state-level economic growth indicates that higher taxes on the rich don't impact the rate of growth of all taxpayers' total income in that state.

Professor Massey's 2008 Princeton investigation shows that slightly increased New Jersey taxes -- to a rate that is the same as New York's current top surcharge rate -- increased revenue without undermining the tax base. If anything, it was the poor rather than the wealthy who moved out of New Jersey, both before and after the tax increase.

For all but Wall Street elites, the recession continues. Food stamp use is skyrocketing, the foreclosure crisis drags on and job growth is anemic.

The most effective solution? Generate revenue by progressive taxation. Use it for public investments like mass transit, community health services and cash assistance for the needy. These create far more jobs per dollar of spending than breaks for the wealthy.

New York's policy choices must be grounded in economic facts. Extending the "millionaire's tax" should be a crucial part of the budget package.

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