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Published by Cara Matthews

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Published by: Cara Matthews on Dec 06, 2012
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Office of the State Comptroller
Absent Congressional action, significantrevisions to federal tax and spending policies arescheduled to take effect in January 2013. Manyeconomists warn that this combination of highertaxes and automatic cuts from baseline spendinglevels
widely known as the “fiscal cliff” – 
 could push a slowly recovering nationaleconomy back into recession in 2013.Changes in federal tax provisions would imposea total of more than $43 billion in tax increaseson New Yorkers in the coming year, according tocalculations by the Office of the StateComptroller. The largest impact would comefrom the Alternative Minimum Tax (AMT).While fewer than 500,000 New York taxpayershave been required to pay the AMT in recentyears, the number of affected State residentswould immediately jump by more than 3.4million. These New Yorkers would face sharptax increases
averaging more than $5,180 pertaxpayer
in the 2012 federal income tax theymust pay in full less than five months from nowon April 15, 2013.Other tax changes scheduled to take effect,including a 47 percent increase in the SocialSecurity payroll tax, would immediately reducepaychecks for New York State residents of allincome levels. Additionally, the federal child taxcredit would be reduced by half, from $1,000 to$500, and refundability of this credit would belost for many low-income families. Takentogether, the pending tax increases would reducedisposable incomes and
diminish New Yorkers’
ability to provide for household needs, to savefor college and retirement, and to makepurchases that support jobs in local communities.On the expenditure side, the federal BudgetControl Act of 2011 imposes cuts or a
of funds in a wide variety of programs affecting state and local governments.The New York State Division of the Budget hasestimated that if sequestration goes forwardunchanged, New York State and its localitiescould lose approximately $5.0 billion in federalaid over nine years. Federal Funds Informationfor the States has identified $609 million in aidreductions for New York State that would occurin the federal fiscal year ending September 30,2013. That total includes an estimated $210million in education programs, $137 million inhealth and human services, $128 million forhousing programs in the Empire State, and $134million in other reductions. The fiscal cliff alsoincludes an end to extended unemploymentbenefits for as many as 100,000 unemployedNew Yorkers.Each of these cuts from scheduled funding levelswould reduce support for programs that areessential to families and individuals across NewYork State.
What Is the Fiscal Cliff?
For some time, there has been widespreadagreement across the political spectrum that theUnited States needs to take serious action to reinin chronic budget deficits. There is nowconsiderable agreement that such action mustinvolve both increased revenues and decreasedspending. The optimal mix of additionalrevenues and spending cuts, however, remains
Impact of the ‘Fiscal Cliff’ on New York State
Sharp Tax Increases, Reductions in Federal AidWould Hit the Empire State Starting in 2013
Thomas P. DiNapoli
New York State ComptrollerDecember 2012
Office of the State Comptroller 2
hotly debated, along with many related
 particulars. The metaphor of the “fiscal cliff”
arose to express the idea that the various attemptsto address this challenge scheduled to take effectin 2013 cumulatively create a risk of significantdamage to the economy. To understand thethreat posed by the fiscal cliff, we need toappreciate the combined effects of numerousproposed tax and spending changes.Large federal budget deficits over the pastdecade have convinced many economists, policymakers, and others that continuation of longstanding fiscal policies in Washington mayharm the national economy in the long term.Enactment of the Budget Control Act of 2011(BCA), requiring automatic spending reductionsstarting in 2013 if no alternative deficit reductionactions were taken, was one outgrowth of suchconcerns.Under the BCA,
automatic cuts (“sequestration”)
would begin in January 2013 and continuethrough 2021, translating into reductions indefense spending, mandatory programs, and non-defense discretionary programs.Although not part of the BCA of 2011, many of the Bush-era tax cuts initially enacted in 2001and 2003, as well as the more recently enactedpayroll tax cuts and provisions to extendunemployment benefits, expire as of December31, 2012. Furthermore, new taxes enacted aspart of the Patient Protection and AffordableCare Act are scheduled to go into effect at thebeginning of 2013.In addition, the Treasury Department hasindicated that the United States is again nearingthe debt ceiling imposed by current law, and willreach the limit in the coming months.The Congressional Budget Office estimates thatthe fiscal cliff involves $375 billion of taxincreases and $88 billion of spending reductionsthat will take effect in 2013 if Congress takes noaction to change current law. Those tax increasesreflect the expiration of temporary InternalRevenue Code changes enacted at various timesfrom 2001 through 2011. The spendingreductions are driven by sequestration of federalexpenditures under the BCA, and expiration of extended unemployment compensation benefitsthat Congress most recently approved inFebruary 2012.The figures cited exclude two provisions
$18billion in tax increases and $10 billion in reducedMedicaid payments to physicians
that someanalysts include in descriptions of the fiscal cliff.Both provisions are intended to help pay forexpanded health insurance coverage under thePatient Protection and Affordable Care Act andnot as part of the array of deficit-trimmingmeasures analyzed in this report.
Impact of Tax Changes on New York
While the fiscal cliff’s tax changes w
ill affectfamilies, individuals and businesses across thecountry, several major elements would hit NewYorkers especially hard.Table 1 shows the estimated impact that taxchanges associated with the fiscal cliff will have
on New York’s taxpayer 
s, by major tax category,in Federal Fiscal Years 2013 and 2014.
Table 1: Fiscal Cliff Impact
on New York’s Taxpayers
 Note: “Other” includes changes to deductions and exemptions for high
-income earners
Source: Office of the State Comptroller
Tax ChangeNew YorkCost - 2013
New YorkCost - 2014
Alternative Minimum Tax$20,800$14,200Social Security payroll tax$7,600$7,700Top marginal rates$2,900$4,300Capital gains/dividends $2,400$300Elimination of 10% rate$2,300$3,300Child tax credits$200$2,700Estate/gift tax$300$2,100Earned income tax credit$0$400Other$6,900$9,900
Total New York impact$43,400$44,900
Office of the State Comptroller 3
Figure 1: Alternative Minimum Tax Payers inNew York, Before and After Fiscal Cliff 
Source: Congressional Research Service
 Alternative Minimum Tax
Taxpayers whose incomes are above the AMTexemption level
$74,450 for couples and$48,450 for others in 2011
must calculate theirfederal income tax using both the regular systemand the AMT, and pay the higher of the two. TheAMT most commonly applies to married couplesor individuals with large families who havetaxable income in the range of $100,000 to$500,000, and pay comparatively high state andlocal taxes.
 In 2010, the latest year for which data areavailable, 5.3 percent of New York taxpayerswere subject to the AMT
a higher proportionthan in any state except New Jersey andConnecticut. According to the Internal RevenueService, 493,556 New Yorkers paid the AMT in2010.Under existing law, the AMT exemption is set at$45,000 for couples and $33,750 for others(individuals and heads of households) for the2012 federal tax year. If Congress takes nocountervailing action, the lower exemption levelmeans that the number of New Yorkers paying
Congressional Budget Office, “The Individual AlternativeMinimum Tax,” January 15, 2010.
the alternative minimum tax will jump to 3.9million
more than half of all federal incometaxpayers in the State
for 2012 returns due inApril 2013.
The Office of the State Comptrollerestimates the overall impact on New Yorkers at$20.8 billion in the coming year, an average of more than $5,180 per tax filer.
Social Security payroll tax
Legislation enacted in 2010 reduced theemployee share of the Social Security payroll taxfrom 6.2 percent to 4.2 percent for calendar year2011, as one of numerous steps intended tostimulate the national economy. SubsequentCongressional action extended the rate reductionthrough 2012.The pending return of the payroll tax rate to 6.2percent will cost New York workers $7.7 billionin 2013. Virtually all 8.9 million workingindividuals in the State will see higherwithholding from their paychecks as a result.
Figure 2: Fiscal Cliff Impacton Social Security Payroll Tax
Steven Maguire, “Alternative Minimum Taxpayers by State:2008, 2009, and Projections for 2012,” Congressional Research
Service, December 15, 2011.
Many of the tax returns subject to the AMT are from marriedcouples filing jointly, so the number of affected individuals issignificantly higher than the number of tax returns.
Under existing law, approximately 500,000 New Yorkers pay theAMT. If no action is taken, this will increase to 3.9 million.
10,000 25,000 50,000 75,000 100,000
Additional TaxCurrent taxIncome LevelOn January 1, the Social Security payroll tax will increase from 4.2percent of wages to 6.2 percent, representing a 47 percent increase.
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