Are the rich making enough of a contribution to society? Are they bearing their fair share of taxes? Many New York legislators don’t think so.

Following the elections of November 2020, the State’s Democratic party secured a veto-proof supermajority not only in the Assembly, but also in the Senate.[i] This development was significant because, until then, the State’s chief executive, Governor Cuomo – ironically, also a Democrat – had been the major obstacle standing in the way of tax increases on the State’s businesses and on its wealthier residents.

In recognition of this change in circumstances, Mr. Cuomo’s proposed budget[ii] for the State’s Fiscal Year beginning April 1, 2021 includes an income tax surcharge (i.e., increase) on certain high-income individuals, that would only apply for the 2021, 2022 and 2023 taxable years. The addition of this “temporary” surcharge would effectively increase New York’s highest marginal income tax rate for individuals, which is currently set at 8.82 percent[iii] for married taxpayers filing jointly with taxable income of $2.155 million and up.[iv]

Specifically, the Governor’s $193 billion budget plan calls for five new rate brackets, based upon taxable income, to which varying surcharge tax rates ranging from 0.50 percent to 2.0 percent would be applied. In the case of a resident or nonresident taxpayer with New York taxable income of:

  • More than $5 million but not more than $10 million, the income tax surcharge would be 0.50 percent;
  • More than $10 million but not more than $25 million, the surcharge would be 1.0 percent;
  • More than $25 million but not more than $50 million, the surcharge would be 1.50 percent;
  • More than $50 million but not more than $100 million, the surcharge would be 1.75 percent;
  • More than $100 million, the surcharge would be 2.0 percent.[v]

In conjunction with the release of Mr. Cuomo’s budget, his Budget Director, Robert Mujica, explained in the FY 2022 Executive Budget Briefing Book[vi] that:

“The State has no choice. Unlike the Federal government we cannot print money and must balance our budget. Every spending decision is zero sum: Any area where we don’t reduce spending means deeper reductions in another. If $15 billion in Federal funding materializes, the tax increases that will make New York less competitive and the spending reductions that hurt New Yorkers go away. If they fail to act, the State’s ability to meet even the most basic funding needs will be cut for universities and affordable college programs, childcare, combatting homelessness, and much more.”

Change in “Circumstances,” Indeed

A lot has happened since the release of the Governor’s budget proposal.

In February, the first of several sexual harassment allegations were brought against Mr. Cuomo.[vii]

Approximately one week later, the Governor was implicated in an alleged cover-up of COVID-related nursing home deaths,[viii] which the FBI is reported to be investigating.

Then, on March 11, 2021, Mr. Biden signed into law the $1.9 trillion Federal relief package known as the “American Rescue Plan,”[ix] pursuant to which Congress provided $350 billion dollars in emergency funding for state and local governments, including $23.8 billion for state and local governments in New York. Unfortunately for Mr. Cuomo, the roughly $12.6 billion that will be going to the State is below the $15 billion that the Governor sought.[x]

Most recently,[xi] many New York and Federal lawmakers (including leaders of the Governor’s own Democratic Party) have asked that Mr. Cuomo resign, the State Attorney General has started an investigation into the allegations of sexual harassment, and the Assembly has launched an impeachment investigation.

In other words, the Governor’s political capital has been greatly compromised, and it appears that the State legislature – which has long sought to increase the tax burden on New York’s more affluent residents – is ready, willing and, perhaps, able to take advantage of the situation.[xii]

“Tax York?”[xiii]

On March 14, 2021, the Assembly[xiv] and the Senate each passed its amended version of the Governor’s proposed budget for the 2021-22 fiscal year.[xv] As if sensing the opportunity, the changes proposed by the two chambers include approximately $7 billion in new taxes on wealthy New Yorkers and on businesses for the upcoming fiscal year.

The Assembly and the Senate seek to modify[xvi] the Governor’s proposal to:

  • Personal Income Tax. Establish a new progressive personal income tax surcharge on taxpayers with incomes over $5.0 million:[xvii]
    • Beginning with the taxable year ending December 31, 2021, increase the current 8.82 percent rate to 9.85 percent for single filers earning more than $1.078 million but less than $5 million, and for joint filers with over $2.155 million of taxable income but less than $10 million;
    • Establish two new brackets as follows:
      • 10.85 percent for single filers with between $5.0 million and $12.5 million of taxable income ($10 million and $25 million for joint filers), and
      • 11.85 percent for single filers with over $25 million of taxable income
        • Under the Senate’s version, the 11.85 percent rate would apply to single filers with over $50 million of taxable income; and
      • These bracket and rate increases would be “permanent,” unlike the Governor’s, which would expire after 2023.
      • For purposes of these new rates and brackets, ordinary income and capital gain (including gain from the sale of one’s business) are treated the same.[xviii]
    • Capital Gain Tax. Establish a new one percent surcharge – i.e., on top of the personal income tax described above – on the capital gains of taxpayers with adjusted gross incomes of over $1.0 million per year.
      • The surcharge would apply to the “capital gains” of both residents and nonresidents
        • the tax would not apply to those individuals with New York taxable income of less than $1.0 million.
        • This provision, if enacted, would take effect immediately and apply to taxable years beginning on or after January 1, 2021.
      • The Senate would impose the surcharge on income from capital gains for resident taxpayers subject to the top State personal income tax rate
        • It would apply to both net long-term and short-term capital gains
      • It appears that gain realized from the sale of one’s business is not distinguished from gain realized on the sale of one’s investment property.[xix]
  • Corporate Income Tax. Establish a new temporary (five-year) 18.0 percent surcharge on the tax liability of C corporations with entire net income in excess of $1 million.
    • The surcharge would apply to taxable years beginning on or after January 1, 2021.
      • The Senate would permanently increase the corporate franchise[xx] tax rate by three percentage points, from 6.5 percent to 9.5 percent, for corporations with a business income base in excess of $5.0 million, for taxable years beginning on or after January 1, 2021.
  • Corporate AMT. Reinstate an alternative minimum tax on business corporations at the rate of 0.15 percent the taxpayer’s total business capital.
    • This is aimed at corporations with relatively low taxable income, but with valuable capital resources.
      • The Senate would also reinstate the business capital base tax for all C corporations, other than “qualified” New York manufacturers, at a business capital tax rate of 0.125%.
  • Pied-a-Terre Tax. Establish a progressive state tax on the owners of certain high-value secondary homes – “non-primary residential properties” – located in New York City,[xxi] consisting of a sliding tax rate, which is based on the type of real property and value of the home.
    • For family residences of one to three units, the tax rate would range from 0.30 percent to 4.0 percent of the property’s market value in excess of $5.0 million; and
    • For condominiums and co- operatives, the rate would range from 10.0 percent to 13.5 percent of the property’s assessed value in excess of $300,000.
    • This provision would take effect immediately.
  • Estate Tax. Increase the top rate of the estate tax by four percentage points, from 16.0 percent to 20.0 percent, for estates with a value over $10.1 million.
    • The Senate would increase the rate by two percentage points.
    • Either way, planning for New York’s “cliff” and claw-back” rules will take on even more significance.

April Fool’s Day

As we approach the first day of the State’s next fiscal year (April 1st), three things are clear: first, the State’s Democrat-controlled Legislature is eager to raise taxes on the rich; second, both Chambers of the Legislature share a common vision of how to achieve that goal; and third, Mr. Cuomo may not be able to stop them.

In the face of this momentum, last week many of New York’s business leaders expressed their concerns to Albany regarding the possible impact of what they described as the largest tax increases in the State’s history.[xxiii]

The enactment of the American Rescue Plan and its infusion of Federal fiscal aid, they argued, eliminated the need for new State taxes. What’s more, they continued, significant corporate and individual tax increases would make it more difficult to restart the State’s economic engine.

For better or worse, these business leaders stated, the pandemic demonstrated that the workforce is more mobile than was imagined; indeed, they observed that many of their employees have already resettled in other locations, generally with far lower taxes than New York. The proposed tax increases, they concluded, would make it harder to get these folks to return.

What to Do?

Will the Legislature heed the concerns of the business community? Will the Assembly and the Senate override Mr. Cuomo if he should veto most of the above-described tax increases?

We will know soon enough, though I regret to say that I am inclined to answer the first question in the negative, and the second in the affirmative.

What, then, should taxpayers be doing?

For one thing, wait for the final bill – provisions may still change in the sausage-making process that is legislation. Remember, even the consequences of provisions with retroactive effect to the beginning of the taxable year may be ameliorated, to some extent, during the balance of the year.

If practicable, taxpayers and their businesses may consider voting with their feet. Many have already done just that over the last twelve months. Before embarking on such a move, however, it is imperative that the taxpayer consult with their advisers, lest they remain subject to New York’s taxing jurisdiction notwithstanding their physical departure from the state.

Assuming such a move is not possible, or desirable, taxpayers will have to account for an increased state tax burden – i.e., economic cost – in their dealings with customers, suppliers, and potential suitors or targets. For example, the structure and pricing for the sale of a business will have to consider this additional tax, both in terms of how much the seller may retain after taxes and how quickly the buyer may recover their investment.

Although we have focused on many of the negative aspects of the Legislature’s budget proposals, there is at least one relatively bright spot on which taxpayers should focus some attention: the elective “workaround” that would enable the owners of pass-through business entities to circumvent the SALT deduction limitation under federal law, and to thereby reduce the impact of an increased state tax burden.

Stay tuned.


[i] With the elections of 2018, the Democrats won a majority of the Senate, but not a supermajority. At that point, the two chambers of the State Legislature seemed poised to enact income tax rate increases. They were thwarted, however, by Mr. Cuomo’s threat to veto any “tax the rich” legislation because, he stated, it would drive many of the State’s wealthier residents – along with their considerable economic activity and taxable income – out of New York.

An override of the Governor’s veto requires a two-thirds vote of the Assembly and a two-thirds vote of the Senate.

In 2019, Mr. Cuomo responded to calls for additional taxes on the rich: “Tax the rich. Tax the rich. Tax the rich. We did that. God forbid the rich leave,” he said.

In light of Mr. Cuomo’s stance, and probably in recognition of the fact that they lacked a supermajority in the State Senate that could override any veto, the State Legislature and the Governor danced around the issue of a tax that would target affluent New Yorkers.

In 2020, after the State began to feel the effects of the pandemic, a number of State and NYC lawmakers again urged the Governor to support tax increases for the wealthiest New Yorkers. In response, the Governor again said that he did not support the idea, claiming that the ultra-rich would just leave New York.

[ii] Released on January 19, 2021.

[iii] Don’t forget to add New York City’s top rate of 3.876 percent for City residents.

[iv] It is worth noting that the 8.82 percent tax rate was enacted in 2009 as a temporary, three-year, surcharge (i.e., an increase) in response to the fiscal crisis brought on by the Great Recession. Before then, New York’s top rate was 6.85% for individuals with taxable income in excess of $215,400. Since that time, the “temporary” tax surcharge has been extended several times; it is now scheduled to run through 2024. Would I be surprised if the budget’s proposed “temporary” surcharge follows this pattern? Not at all – in fact, I expect the tax will be extended (and re-extended), especially if it does not have the adverse effect of prompting taxpayers to leave New York.

[v] Yes, these brackets represent significant amounts of income. How many New Yorkers would actually be subject to this surcharge? In New York City,[xvi] over 30,000 residents reported earning $1 million or more in 2018; of these, 2,626 residents reported income of between $5 million and $10 million, and 1,786 (representing 0.05 percent of all filers) reported income in excess of $10 million. What if we looked state-wide? New York taxpayers with taxable income of $1 million or more accounted for just 1 percent of all filers in tax year 2016, but they accounted for 37 percent of the total personal income tax liability.

Query how many of these taxpayers attributed their multi-million dollar incomes to a one-time event, such as the sale of a business? The addition of the surcharge should certainly be considered by a target company’s owners in determining whether a prospective buyer’s offering price is sufficient; remember, at least for now, that New York does not tax long-term capital gain at a preferred rate relative to ordinary income.

[vi] .

[vii] .

[viii] .

[ix] P.L. 117-2.

[x] .

[xi] ,.

[xii] This has the makings of a Greek tragedy. The erstwhile hero’s own hubris – his arrogance and pride which, in the eyes of the ancient Greeks, rose to the level of impiety – is the cause of his downfall. Sophocles would have had a field day.

[xiii] There was a time when Massachusetts was known as “Taxachusetts.” Given the mood in Albany, “Tax York” may be appropriate for New York.

[xiv] The Assembly’s “Yellow Book” describes the Governor’s proposed budget: The Senate issues a comparable “Blue Book.” Ironically, Yellow and Blue combine to give us Green – perhaps Red would have been more appropriate?

[xv] Both proposals call for more than $200 billion in spending.

[xvi] Any changes that the Legislature makes to the Governor’s proposals will be sent to him for approval. The Governor has line-item veto authority to reject specific items, though his veto may be overridden by a vote of two-thirds of the members of each chamber.

[xvii] The brackets shown are for married individuals filing jointly.

[xviii] This is effectively what Mr. Biden and the progressives in Congress would like to achieve at the Federal level.

[xix] Arguably, they should be.

[xx] Article 9-A of the N.Y. Tax Law.

[xxi] The bill refers to “a city with a population of 1 million or more” – currently, only New York City.