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October 29th, 2004, 07:03 AM
October 29, 2004

Region Gets Less Federal Money for Taxes Paid, a Study Finds


NEW BRUNSWICK, N.J. Oct. 28 - If the tristate region seceded and established itself as a separate country, it would replace the United States as the second-wealthiest nation in the world behind Luxembourg in terms of per capita income, according to a new study by Rutgers University.

Given their wealth and the nation's progressive tax system, taxpayers in Connecticut, New York and New Jersey pay a disproportionately high share of the nation's federal income and employment taxes, the study found. Those states rank 49th, 40th and 50th, respectively, in the amount of federal aid they receive per tax dollar, according to the study.

With 10.8 percent of the nation's population, the tristate region had 13.1 percent of the nation's personal income in 2003, and was responsible for 15.8 percent of the income and employment taxes collected by the federal government.

In New Jersey, the gap between what was sent to Washington in tax dollars and what came back to the state in federal assistance was $26 billion, an amount greater than the state's 2003-2004 budget. New Mexico, on the other hand, got $2.08 in aid for every dollar of federal income tax its residents paid.

James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy and principal author of the study, said the figures underscore the responsibility that comes with affluence in a system of progressive taxation.

"To the degree that the money is going for valid public policy purposes, it is fine," he said. "But if it goes for subsidies and unfair tax breaks for cowboy capitalists in other states, then it is not fair."

The study,"Tri-State Affluence: Losing by Winning," was the first, Mr. Hughes said, to view the three states as a group in analyzing the return they get for federal tax dollars. Similar studies for New York were done in the 1970's as the city grappled with a fiscal crisis and sought a rationale for increased federal aid.

Joseph Seneca, a faculty member at the school and a co-author of the study, said the region has been the nation's richest since the 19th century, and had "reinvented itself" as manufacturing declined to become a hub for service and financial businesses, which boomed in the 1990's.

In the study, Connecticut ranked first in per capita income in 2003 at $43,173, New Jersey second at $40,427 and New York fifth at $36,574. The national average is $31,632.

In terms of median household income, New Jersey led the nation with $58,588 annually, 34 percent above the national average. Connecticut ranked third with $56,803, while New York was 17th with $46,195.

The study found that those higher incomes were not consistently spread throughout each state, but concentrated in a "wealth belt" made up of eight counties, including Manhattan, whose greater concentration of wealthy individuals outpaced all of the other counties in the nation in per capita income at $84,591.

The higher incomes were concentrated in Fairfield County in Connecticut; Somerset, Hunterdon, Morris and Bergen Counties in New Jersey; and Manhattan and Nassau and Westchester Counties in New York.

The wealthier areas of all three states were disproportionately dependent on the high salaries of the financial sector, said Mr. Hughes, and consequently were more sensitive to the volatile boom and bust cycles in the stock market. One consequence, he said, was that soaring tax receipts in the 1990's during the economic boom financed an expansion of government functions that became "embedded" in state spending.

With the downturn in the economy and the stock market in particular between 2000 and 2003, this level of spending became harder to sustain.


Copyright 2004 The New York Times Company

December 27th, 2004, 02:18 AM
December 27, 2004

Bush Plan Could Imperil Tax Write-Off for New York


As the Bush administration looks to revamp the tax code, New York officials say they are particularly worried about one idea being considered: eliminating the federal deduction for state and local taxes.

If the president pursues this plan, New York State would lose about $37 billion per year in federal tax deductions, more than almost any other state, according to Internal Revenue Service data. The change would affect about 3.2 million households in New York, three-quarters of which are middle- and low-income, tax records indicate.

"This change would be one of the worst things for New York to came out of Washington in a long time," said Senator Charles E. Schumer. "But if they take this route they can expect a serious fight."

With a 7.7 percent maximum state income tax rate, the second-highest in the country behind California's 9.3 percent, New York would be especially affected because its residents use those taxes to take large federal deductions. About 38 percent of households in New York file for some sort of federal deduction of state and local taxes.

New York City residents, who also pay city income taxes, would be especially hard hit as they could expect an 11 percent increase in the amount they pay the I.R.S., or an increase of about $3.4 billion, said Ronnie Lowenstein, director of the city's Independent Budget Office.

Beyond New York, eliminating the federal deduction for state and local taxes would also affect residents in New Jersey and Connecticut. Among the state and local taxes that could no longer be claimed as a deduction would be property taxes, which are particularly high in the New York City region.

Claire Buchan, a White House spokeswoman, said it was too early to discuss specific plans. "The president has yet to appoint the panel that will review the tax code and make recommendations on how it can be made simpler, fairer and more pro-growth," she said. "Until then, he will not rule any options in or out." The president will appoint the panel before the New Year, she added.

But Mr. Schumer said that the administration was already considering certain approaches. "Every plan that I've heard discussed so far by the administration includes the elimination or curtailment of state and local deductibility," he said. "This is definitely something they are already thinking about."

Tax experts say that the reason for such a change would be to offset the cost of certain tax cuts that the White House hopes to make in areas like savings and investment.

Max B. Sawicky, an economist with the Economic Policy Institute, said that eliminating state and local deductions would also enable the administration to adjust the alternative minimum tax, which was created in 1969 to ensure that the wealthy are not able to avoid paying income taxes by taking large deductions. Since this tax is not indexed for inflation, it has increasingly engulfed larger numbers of people. The administration wants to either eliminate or adjust the tax so that fewer people have to pay it each year, a change that could benefit New Yorkers, whose average incomes are much higher than in most other states.

Currently, the alternative minimum tax affects about the top 3 percent of taxpayers in the country. If it is not adjusted it will cover the top 15 percent of taxpayers within 10 years, Mr. Sawicky said.

Changing the alternative minimum tax would cost the federal government at least $400 billion over 10 years, Mr. Sawicky said, which is roughly the same amount of revenue that would be produced by repealing the state and local tax deduction.

But any change to these deductions would likely face strong opposition. "We'll fight this to the death," said Representative Charles B. Rangel of New York, the senior Democrat on the Ways and Means Committee. "Just like last time, we will mobilize the business community, labor, property owners and everyone else in the state because in New York this is about our financial lifeblood."

Mayor Michael R. Bloomberg also warned of the economic consequences of such changes.

"New York City is the economic engine of our country and we already send $11.5 billion more to Washington annually than we get back," Mr. Bloomberg said in a written statement. "This would amount to another federal tax on our citizens and I will fight it tooth and nail."

The last time the White House pushed a similar proposal to repeal state and local deductions was in 1986 as part of President Ronald Reagan's sweeping tax overhaul. That plan was defeated after fervent opposition in Congress.

"Gov. Mario Cuomo practically camped out in front of the White House on this issue last time," Senator Hillary Rodham Clinton said. "We did it before and we'll do it again."

Mr. Schumer added that there was one important difference now from prior years: New York and California, which would be hardest hit, both have Republican governors. "This could certainly work in our favor this time," he said.

Todd Alhart, a spokesman for Gov. George E. Pataki, would not comment on the possibility of a repeal of local and state deductions. But he emphasized that the president and the governor had already delivered large tax cuts that he said had helped improve the economy and create jobs for New Yorkers.

"Since taking office, President Bush has delivered $36 billion in federal income tax cuts to the people of New York, $15 billion of them for New York City taxpayers," he said. "Moving forward, we expect that President Bush will continue his strong tax cutting record for the citizens of this state and all Americans."

Pamela F. Olson, a former assistant treasury secretary for tax policy under President Bush, said, "There is a basic issue of fairness at stake here." States with higher deductions end up paying far less in federal taxes than the states with lower deductions, she said.

But for New York, the repercussions of repealing the deductions would be huge. Around 2.5 million New York households with incomes under $100,000 take federal deductions for state and local taxes. On average, these households would lose the ability to deduct about $5,600 per year.

People in the highest income brackets would also shoulder a significant burden. About 219,000 households in the state with income of more than $200,000 take federal deductions for state and local taxes. These households would lose the ability to deduct about $67,400 on average per year.

Other states would also be hit, especially those with higher average incomes that tend to be Democratic-leaning states. "I think the administration is very aware that it's the blue states that this would most affect," Mrs. Clinton said.

Nationally, the deduction for state and local taxes is one of the largest types of deductions that people take. For the 2002 fiscal year, the most recent year for which data is available, these deductions amounted to about $309 billion nationwide. The deduction for mortgage interest was about $337 billion for that same year. Deductions for charitable contributions amounted to about $139 billion, according to I.R.S. data.

New York officials also worry that the change could lead taxpayers, newly burdened with the added expense of lost deductions, to demand lower local and state taxes.

For some, that is just the point. "If you believe, as I do, that the state and local deductions encourage higher spending in states," said Bruce Bartlett, a domestic policy adviser to Ronald Reagan and a treasury official for the first President Bush, "then abolishing the deduction will help bring this spending down and will also cause people to demand lower taxation."

Copyright 2004 The New York Times Company