Gov. Kathy Hochul's proposed budget would extend surcharge on wealthy NYers until 2032

ALBANY — A little noticed element of Gov. Kathy Hochul’s budget proposal would extend a temporary tax on the wealthiest New Yorkers, which she said would fund programs to make life more affordable for middle class and poorer families, but which independent analysts warn could hurt taxpayers of all income levels.

Hochul’s proposal, which touts tax breaks for the middle class and progressive spending, also would extend the temporary income tax surcharge on earners making more than $2.1 million a year in taxable income and provide the state $5 billion a year in revenue over five more years.

The temporary tax rate, which began in 2022 a nd  is scheduled to end in 2027, was created to help the state rebound from the COVID-19 pandemic. Right now, the rate is more than 23% higher than the tax rate those New Yorkers paid in 2021. Under Hochul's proposal, the surcharge would continue into 2032.

A budget document that accompanied her budget address says the provision is aimed at "ensuring that New York’s highest earners continue to pay their fair share."

That argument appeals to progressive Democrats.

Democratic legislators along with advocates for the poor want the revenue to help pay for needs in public schools, which would also reduce pressure on property taxes; for health care, including hospitals in fiscal distress, and social services for food and housing as inflation hits middle- and lower-income families hardest.

"I don’t have to tell you New Yorkers are facing a crisis in affordability," Hochul said recently, hitting a theme Republicans have used to make gains with voters in recent elections. "The cost of living just keeps going up and up and up."

However, the proposed extension of the temporary tax is a concern for fiscal analysts.

"First, it’s a question of economic competitiveness," said Patrick Orecki, director of state studies at the independent Citizens Budget Commission. "The next is the necessity of it ... this tax is just like the ‘millionaires tax’ 15 years ago that was passed to get through the recession," Orecki told Newsday in an interview. "Now, it’s built into the tax code."

That millionaires tax rate was adopted as a response to the 2009 recession, extended once and then made permanent. The current proposal to extend the temporary surcharge is in addition to the millionaires tax.

Orecki said Hochul’s proposed tax extension has the potential to continue an exodus of wealthy New Yorkers to other states with lower income taxes or, as with Florida, no state income tax. That could force reduced spending on the same education, health care and social service programs and middle class tax breaks Hochul says the tax extension is needed to help fund, financial analysts said.

Orecki also questioned the necessity of the tax extension outside a fiscal crisis or pandemic, and the unwelcoming message it sends to wealthy people considering a move into New York state.

For example, Hochul’s $252 billion budget proposal is $8.6 billion, or 3.6% more than the current budget, according to the comptroller's office.  It would increase state operating spending by 7.9%, includes a $5.3 billion surplus, spends $3 billion on one-time tax rebate checks to the middle class, would change tax rates to save middle class families $1 billion a year and includes a record $21 billion in reserves.

Kathryn Wylde, president of the Partnership for New York City business group, said Hochul’s proposal has disappointed many top CEOs.

"It’s risky to test how much they can take, in terms of New York State’s high taxes," Wylde told Newsday in an interview.

"If you are proposing this to give tax relief to the middle class, the higher earners can’t compete politically or emotionally," Wylde said. "Cutting taxes for the middle class has much more political resonance, but I think symbolism is important to wealthy people. High earners — just like everyone else — they want to be loved."

She said, however, that opposition to extending the temporary tax could end if President Donald Trump and the Republican-controlled Congress allow Trump’s 2019 cap on the deductibility of state and local taxes — known as SALT — to expire this year as scheduled. The cap has forced many middle class and wealthy families, including many on Long Island, to pay higher federal income taxes because they can’t fully deduct state income and local property taxes.

"It would make a huge difference," Wylde said. "If it doesn’t happen, it’s another reason for rich people to move to Florida."

The danger, fiscal analysts said, is New York is becoming increasingly over dependent on wealthy individuals.

The state "is playing an increasingly risky game, even with the reserves the governor has built up," Ken Girardin, research director at the Empire Center for Public Policy think tank, said.

"The state’s reliance on personal income taxes has become so extreme that an economic downturn of any significance would wipe out reserves in a year," Girardin said in an interview.

But the State Legislature continues to approve more spending even in times of surplus and pays for it, to a great extent, with higher taxes for the wealthiest New Yorkers who can afford to move, he said.

"It’s like the blinking yellow light in a car," Girardin said, "and the car keeps rolling."

State Comptroller Thomas DiNapoli raised a similar point.

"I’m particularly concerned about the out-year budget gaps of $23.2 billion for the next three fiscal years, even as the governor proposes to extend the personal income tax surcharge on high earners," DiNapoli said in his written review of Hochul’s budget.

The fiscal analysts and DiNapoli agreed the uncertainty over Trump’s policies is also a concern. Trump has threatened to claw back and deny billions of dollars in federal aid if the state doesn’t follow his executive orders on immigration, instruction in schools on race and patriotism, and more.

"The state needs to be prepared to assess any actions taken by the new administration in Washington," DiNapoli said. The state needs "a focus on the long-term sustainability of the state’s finances and maintaining a commitment to increasing statutory reserves is necessary."

State Division of Budget documents note the concern.

"Any significant reductions in federal aid could have a materially adverse impact on the financial plan," data from the Division of Budget said. "As the financial capital of the world, New York is particularly vulnerable to shifts in monetary policy and fluctuations in financial markets."

But threats to federal aid is why more money from wealthy New Yorkers is needed, said Michael Kink, executive director of the Strong Economy for All Coalition.

"We are going to need money for the things people need," Kink said in an interview.

Kink ticked off the wide-ranging programs for which Trump is trying to reduce funding: Nutrition programs for poor families; subsidized housing to help the homeless and working poor; Medicaid health care for poor families and the disabled; schools and free meal programs that Hochul’s budget would extend to all students; nursing homes and health care for working New Yorkers; law services for immigrants, and support for the elderly, public colleges and aid for college students and "anyone who takes a bus or rides on a road."

In demonstrations in Albany this year, advocates for the poor and working poor and faith-based groups pushed for a higher tax rate for the wealthy, but they want it made permanent.

"We’ve tinkered around the edges over the years with temporary rate increases," Ron Deutsch, of New Yorkers for Fiscal Fairness, said. "But now is the time to restore fairness to our tax system by asking those with the greatest means to pay their fair share and make those changes permanent."

By Michael Gormley

michael.gormley@newsday.com@GormleyAlbany

Michael Gormley has worked for Newsday since 2013, covering state government, politics and issues. He has covered Albany since 2001.