“Professor Young’s wealth migration analyses don’t capture the full breadth of tax flight by million-dollar earners,” said Andrew Mikula, co-author of “Missing the Mark on Wealth Migration: Past Studies Drastically Undercounted Millionaires.” “High-net worth households that do financial planning could move to another state before they sell million-dollar assets. They fly under the radar in Cristobal Young’s work because most of them don’t earn more than $1 million in the year before they leave.”
The graduated income tax proposal advanced by the Massachusetts Teachers Association, the Service Employees International Union, and other union, advocacy, and religious groups, defines earnings as including salary and capital gains on the sale of assets, which makes net worth a critical component of households subject to the tax.
Thanks to the recently-passed $1.9 trillion spending package, the state of New York is set to receive a whopping $23.5 billion in federal bailout money. This is more than enough to make up for any revenue gaps incurred over the last year. But progressive lawmakers are nonetheless considering a slew of new business and personal taxes—prompting 250 top business leaders to pen an open letter this week warning that these punitive tax hikes could have drastic ramifications.
“Significant corporate and individual tax increases will make it far more difficult to restart the economic engine and reassemble the deep and diverse talent pool that makes New York the greatest city in the world,” wrote the leaders, whose ranks include the CEOs of JP Morgan Chase, Blackrock, and Goldman Sachs. “Many members of our workforce have resettled their families in other locations, generally with far lower taxes than New York, and the proposed tax increases will make it harder to get them to return.”
Author(s): Brad Polumbo
Publication Date: 24 March 2021
Publication Site: Foundation for Economic Education
The state would pay for the program by adding an additional 5% on Illinois’ estate tax from 4.95% to 9.95%. That would result in a top marginal rate of 21% on value over $4 million.
“The top marginal estate tax rate under this proposal would become the highest in the country at 21%,” Tax Foundation analyst Katherine Loughead said.
Illinois is one of 12 states that tax the total value of an estate at the time of the owner’s death. Any estate value over $4 million would be subject to Illinois’ estate tax.
Don’t think that might ease your state and local tax burden. The downpour of cash on cities and states, most of which don’t need it, is all tied to a provision in ARP that bans tax cuts. It’s a mandate for statism – big government – whether states with small government philosophies like it or not.
“Thou shalt be statists and big spenders” – that’s what ARP might as well say as a direct federal mandate.
Most of ARP commentary about cities and states has wrongly focused only on the $350 billion that’s will go directly to them. That’s a small part and entirely misses the bigger picture.
Forty-three states and the District of Columbia have now published revenue data for all 12 months of 2020; in those states, revenues are up $3.2 billion in aggregate compared to the previous calendar year, thanks to robust gains in financial markets and federal assistance that has kept businesses afloat and provided benefits to individuals. Some of those are, indeed, taxable benefits, in the case of enhanced and expanded unemployment compensation benefits. For the remaining seven states, it is necessary to project revenues through the end of the calendar year based either on U.S. Census Bureau data through the three quarters, or, in Nevada and New Mexico, state data running through October and November respectively.
These adjustments yield an aggregate $1.7 billion decline in state revenues. Under the American Rescue Plan Act, states would receive $195.3 billion in aid, divided according to each state’s share of national unemployed workers. Under Senate amendments, a further adjustment is made to ensure that each state receives, at minimum, the amount it was allocated for purposes of the Coronavirus Relief Fund under the CARES Act. While some conservative lawmakers have criticized this allocation model (which benefits states with steeper job losses) on the grounds that different state policies and approaches may yield some of this variation and that the federal government should be neutral to these decisions, we have argued previously that using the change in unemployment is a more efficient targeting method than allocating aid per capita. Far less defensible, however, is the notion that aid to states should be 116 times the decline in state revenues—especially since the federal government has already provided over $200 billion in fungible aid to subnational governments.
States are discovering and news outlets are reporting some surprising features of the new law. For starters, the President Biden-approved American Rescue Plan tweaks the funding formula to distribute funding based on average unemployment during the three final months of 2020 — rewarding Democratic-controlled states like New York, California and Illinois for their draconian COVID policies that resulted in the nation’s highest levels of unemployment. And it offers states billions more in Medicaid funding if they agree to boost their own Medicaid spending.
Perhaps the most troubling is a legislative rider barring states that accept the aid from using the funds “to either directly or indirectly offset a reduction in the net tax revenue” derived “from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”
The $1.9 trillion bill marketed as Covid relief includes $350 billion in federal aid to states and localities. While states can use the money to increase spending, Congress decreed that they can’t use it to cut taxes. “A state or territory shall not use the funds,” the bill says, “to either directly or indirectly offset a reduction in the net tax revenue” from a new law or regulation.
Because the mandate applies to “indirect” revenue offsets, states are at risk of violating the law for any tax reduction “during the covered period,” which stretches through 2024. Ohio’s lawsuit by Attorney General Dave Yost argues that “this coercive offer of federal funds violates the Constitution.”
While America’s real GDP fell in 2020, states and local tax receipts actually increased—once you add in federal aid, revenues actually grew by nearly 10 percent. As their costs from fighting the pandemic grew and layoffs loomed, Congress rightly stepped up to help. There’s been $360 billion in direct relief for Covid-19 and hundreds of billions more in indirect aid—all told, Washington sent more than $1 trillion to states and localities last year.
Since the federal government is giving states money that they don’t need, there are two things state lawmakers can do: Use the federal money to grow government spending or pass that extra cash along to taxpayers by lowering their tax burdens.
However, the Senate inserted language in the American Rescue Plan expressly telling states that they “shall not use the funds provided…to either directly or indirectly offset a reduction in the net tax revenue,” or do anything that “reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”
That same section of the bill also bans states from depositing the federal bailout into their public pension funds. That’s probably a good idea, but it’s pretty ironic considering that the American Rescue Plan also contains a completely indefensible bailout of some private-sector pension funds run by labor unions.
Despite the record increase in pension expenditures in the past several decades, Illinois’ pension system remains the nation’s worst by multiple measures. According to Moody’s Investors Service, Illinois’ pension debt was equal to 500% of the state’s revenues in fiscal year 2018 and almost 30% of the entire state economy, both the highest rates in the nation. At the same time, Illinois’ credit rating has been in precipitous decline and now sits at the lowest credit rating in the nation.
As pension debt continues to increase, so do required pension contributions. Pension contributions now consume 26.5% of the state’s general funds budget, up from less than 4% during the years 1990 through 1997.
Illinoisans who thought new House Speaker Chris Welch might change the direction Illinois is headed in just got a dose of reality. Welch recently said he wants Illinois to have a second go at a progressive tax scheme, this time committing the tax hike proceeds to pensions. Illinoisans rejected Gov. Pritzker’s first attempt, he said, because they didn’t know where the tax hike dollars would go. “…folks don’t trust us,” Welch said.
Welch is right about the trust factor, but he’s wrong to think Illinoisans will suddenly approve a tax hike just because the legislature promises to funnel the new revenues to pensions. They know it’s unlikely politicians will keep their promise. And Illinoisans know the state’s unreformed pensions are a corrupted mess – that they’d be throwing good money after bad.
Numbers out of context are meaningless. Why not raise taxes by $200 billion, or heck, $90 trillion? But in the context of the New York state budget, $50 billion is an unprecedented hike. Without the pandemic and lockdowns, the state likely would have taken in $90 billion in taxes this coming fiscal year, meaning the bill’s proponents want to raise taxes by close to 60 percent.
A sample of the new taxes: first, on high-income labor. A single filer with $1 million in income would see a 23 percent state tax hike, to 8.41 percent, up from 6.85. A filer making $10 million would see a 48 percent hike, to 12.14 percent, up from 8.82 percent.
