America's Invisible Rich

Governors don't usually deliver primetime TV addresses. That's something Presidents do. But late last month New York Gov. David Patterson did take to primetime -- to declare a state budget "crisis" and call lawmakers back to Albany for a special session.

New Yorkers, pollsters announced last week, share the governor's unease. A whopping 86 percent agree that the state has a fiscal crisis. New Yorkers also agree on a solution: tax the rich. By a 78 to 18 percent margin, New Yorkers favor hiking taxes on households that make over $1 million a year.

Those households currently abound in the Empire State. New IRS statistics, released July 31, show that New York has the nation's most top-heavy distribution of income in the entire United States.

In 2006, New York's top 1 percent of taxpayers -- that's everyone making over $517,800 a year -- grabbed 28.7 percent of the state's income, nearly three times the total income of the state's bottom 50 percent of taxpayers. No other state in the nation sports a wider income gap between top 1 and bottom 50.

Nationally, the top 1 percent of taxpayers in 2006 collected just over a fifth of all personal income in the United States, 21.1 percent. In ten states, including New York, the top 1 percent claimed an income share over that 21.1 percent level.

These ten states also share something else in common. All ten, the Washington, D.C.-based Institute on Taxation and Economic Policy charged last week, have tax systems that "generally ignore" the considerable deep-pocket presence within their borders.

Four of the ten -- Texas, Florida, Nevada, and Wyoming -- have no state income tax. Two, Massachusetts and Illinois, subject all taxpayers, no matter how rich, to the same flat income tax rate, and Connecticut, with just two tax rates, almost has a flat tax, too.

New York and California, meanwhile, "have weakened the progressivity of their income taxes since the 1990s," notes the Institute on Taxation and Economic Policy, "providing enormous tax cuts to the very wealthy and leaving a lasting legacy of structural budget deficits."

New York's fall from progressive tax grace has been particularly steep and severe. Just 30 years ago, millionaires in New York faced a 15.375 percent tax rate on income in the state's highest income bracket. That top-bracket rate now sits at just 6.85 percent.

Under the current New York tax code, a married couple making $50,000 a year pays taxes on all income over $40,000 a year at the same rate as a married couple making $5 million.

"Restoring some of the New York tax system's lost progressivity," Frank Mauro of the Fiscal Policy Institute, a state research group, noted last week, "should be part of the state's effort to balance its budget."

New York Governor David Patterson apparently disagrees. Patterson has no "millionaire's tax" in his package of proposals to cut the state's $6.4 billion budget deficit. The governor seems to buy the line, wildly popular on Wall Street, that upping tax rates on the rich will lead to a massive statewide exodus of New York's wealthy.

That's what a former New York governor, George Pataki, claimed back in 2003 when lawmakers voted to place a temporary 7.7 percent tax on income over $500,000 and a 7.5 percent tax on any income that couples report over $150,000. Pataki vetoed this tax hike on New York's most affluent, but lawmakers then enacted the measure over his veto. What happened? Over the next three years, with the tax hike on the wealthy that Pataki vetoed on the books, the number of taxpayers in New York making over $200,000 actually increased by 31 percent.