Controversial changes in the recently passed 2009-10 New York state budget is intended to raise roughly $4 billion to address a severe budget crisis.

According to a press release from the Empire Center for New York Sate Policy, a project of the Manhattan Institute for Policy Research under the Boston-based Beacon Hill Institute at Suffolk University, these changes will result in a 15 percent tax increase for filers earning over $20,000 and a 31 percent increase for filers in the highest bracket that now starts at $500,000.

For singles making $200,000 per year, heads of households earning over $250,000 and families with incomes between $300,000 to $500,000 per year, the top income tax rate will increase from 6.85% to 7.85%. Both singles and families earning more than $500,000 per annum would pay a new top tax rate of 8.97%. The 6.85% tax rate, formerly the maximum rate, is applied to those earning over $20,000 per annum.

CPAs in New York and New Jersey will likely see significant impact of the tax changes on their small business clients: proprietors, partners and shareholders, because most of these small business stakeholders pay taxes through the personal income tax. Under these tax changes, roughly 50% of the tax revenue to be raised from the tax hikes will be from small business profits.

As any accountant knows, reducing the net income of a small business, or any business, effectively reduces a primary source of working capital, adversely affecting their ability to hire and retain staff.

In fact, using a New York version of the Beacon Hill Institute’s State Tax Analysis Modeling Program

(STAMP), named the “Empire STAMP,” Empire Center estimates that the tax increases will cause the loss of approximately 15,500 private sector jobs, but will sustain or create about 18,000 public sector jobs.

“There should be no surprise that this tax increase will cost private-sector jobs,” said David Tuerck, executive director of the Beacon Hill Institute. He continued: “Workers who find themselves burdened by the higher tax will move to states with lower taxes. Likewise, employers will shift operations to the low-tax states in order to protect their own salaries and those of their workers from the higher taxes. Some second-earners in two-earner households will decide that it’s no longer worth going to work. Employers who want to keep their employees on the job will have to raise salaries. The result will be higher labor costs combined with fewer jobs – a result borne out by decades of research on tax policy issues. And all this will happen for the sake of creating or protecting public sector jobs that represent a permanent burden on the shrinking private sector.”

Note: “Empire STAMP” is a computable general equilibrium model that uses thousands of statistical variables to estimate the impact of tax rate changes on revenues and employment. The technical documentation for the Empire STAMP CGE model can be downloaded at http://www.empirecenter.org/files/Empire STAMP 2008.pdf

The New York state budget includes “benefit recapture” provisions that convert both of the top two new rates into flat rates applied to all taxable income, not just a marginal tax increase on income above the threshold bracket. Therefore, contrary to the initial intention of the changes to bring New York’s income tax rates on par with New Jersey rates, accountants know that New York taxpayers affected by the budget’s tax changes will pay substantially more tax than the current comparable state income tax burden in New Jersey.

In addition, the budgetary tax increases will amplify the competitive gap between New York and the adjacent states of Connecticut (5.00%), Pennsylvania (3.07%) and Massachusetts (5.30%), who already have lower rates than New York (now 8.97%). At 10.55%, California currently has the highest state tax rate.

The bottom line: the combined state and local tax burden for New York City residents will increase to 12.62%, the highest in the nation and at the highest rate in over 20 years. In addition, the higher tax rates will apply to a wider income base than before the federal tax reform of the late 1980s.

Accountants note that the tax rate increases in the new budget constitute the largest boost in New York State income taxes in over 40 years. Then-Governor Nelson Rockefeller initiated a program of tax increases in 1961 that succeeding Governors Hugh Carey, Mario Cuomo and George Pataki took decades to reverse.

Exacerbating the impact of the higher state personal income taxes are the planned 2011 federal income tax increases in 2011. The current proposal from the Obama administration will amplify the net tax cost of New York filers by reducing their ability to deduct their state and local taxes, an issue CPAs in New York and New Jersey will have to address in their client’s tax planning.

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