Right now in Washington, some members of Congress are discussing a major tax increase that would hit New York City taxpayers disproportionately hard.
There is no question that Congress must raise revenue to get its fiscal house in order. But rather than allowing the Bush tax cuts to expire for all income groups, a step I support because it is fair to everyone, some members of Congress are looking for ways to raise revenue without raising tax rates.
This makes sense — up to a point. Congress should end tax subsidies for favored industries and close tax loopholes that benefit special interests, such as the “carried interest” benefit for money managers.
Still, these steps will only generate so much revenue. And so to avoid the appearance of increasing taxes, Congress is pretending to hold the line on taxes while considering eliminating some tax deductions.
I could support a carefully targeted effort to limit some deductions, so long as everyone shares in the costs, and charitable deductions — which are so essential to hospitals, social service organizations and cultural institutions — are fully protected.
But eliminating taxpayers’ ability to deduct state and local taxes from their federal tax returns — as some in Washington are discussing — would leave New York City residents holding much of the bill. Many in the rest of the country pay very little.
State and local income taxes are used to support services that the federal government does not adequately fund. New York, New Jersey, Pennsylvania California, Illinois, Maryland, Massachusetts and other states all use such taxes to pay for everything from schools and health care to public safety and transportation.
It is for good reason that those tax payments are not now subject to federal taxes.
In New York, here’s an example of how it works: If you earn $100 of income, the city and state tax you a total of about $9, leaving you with $91. When you file your federal tax return, you pay taxes on $91 of income, so you don’t get taxed on the $9 in taxes you’ve already paid.
Eliminating that tax deduction would mean you would be taxed twice for the same income — once by the city and state, and once by the federal government. It’s a bad deal for taxpayers, and it’s an especially bad deal for New Yorkers, because we already pay far more in federal taxes than we get back in services.
The state and local tax deduction mitigates some of that imbalance. But if Congress were to remove it, we would be sending even more money to Washington and — given the likelihood of budget cuts that target urban areas — getting even less back in return.
Eliminating the state and local tax deduction would cost New York City residents approximately $3 billion. To put that in perspective: A married couple living in New York City with $160,000 in combined income would face a federal tax increase of $4,616. Meanwhile, that same couple living in many other parts of the country would face very little increase.
If, instead, Congress were to allow the Bush tax cuts to expire, couples making $160,000 — whether they live in Brooklyn or Boise — would all face roughly the same increase (about $2,400-$2,900) in taxes.
If Congress ends the state and local tax deduction, not only would many New York City residents get stuck with larger-than-anticipated tax bills, but others might simply choose to leave.
Consider that about 18,000 city residents — a half of 1% of all taxpayers — pay 40% of our city tax revenue. If some of these individuals move out of the city as a result of losing the deduction, or if they start to spend 183 nights in Westchester or Connecticut, our tax base would be decimated. We would have billions of dollars less for our schools, parks, police, social services, transportation and cultural institutions.
That would do real damage not only to our local economy but also to the national economy, because New York City is the nation’s largest economic engine.
For every 100 jobs that were lost in the national recession, the rest of the country has gained back only 40. In New York City, we’ve gained back 200. And those jobs generate tax revenue that in turn supports services in the rest of the country.
New York has a strong delegation in the House and Senate, and we need them to continue standing up for our city and state. If the proposal to eliminate state and local tax deductions is included in a last-minute backroom deal, they should vote against it — even if it means voting against their party.
As those in Washington seek to avoid the fiscal cliff, we must not let them throw large cities and counties over it in a short-sighted attempt to raise more revenue. We are all in this together, and we will emerge stronger if Washington stops pitting regions and classes against one another.
Bloomberg is the mayor of New York.
