New York’s Income Tax System Among the Best
for Working Families
Most Relief Comes from the State Earned Income Tax Credit
Enacted in 1994
New York has among the lowest income tax burdens in the country for low-income working
families.1
- Of the 42 states with income taxes, only Vermont and Minnesota do a better job than New
York in shielding both poverty-line incomes and minimum wage-earnings from income
taxation.
- New York is one of only four states in which near-poor two-parent families of four
— those with incomes at 125 percent of the poverty line — receive a refundable
tax credit rather than having an income tax liability (32 states) or no liability (6
states).
- For near-poor single-parent families of three, only Vermont and Minnesota provide higher
refundable tax credits than New York. Four states provide smaller credits while these
families have no income tax liability in seven states and a positive income tax liability
in 28 other states.
- Since 1991, New York has increased its two-parent four-person family income tax
threshold — the income level at which such a family has state income tax liability
— by $9,000. Only Pennsylvania, California, Minnesota and Colorado have increased
their income tax thresholds by greater amounts.
- Only nine states (Arizona, Minnesota, Pennsylvania, Vermont, Rhode Island, Colorado,
Connecticut, California and Maryland) had higher 1999 income tax thresholds for two-parent
families of four than New York’s $23,000.
- Only six states (California, Minnesota, Vermont, Rhode Island, Colorado and Maryland)
had higher 1999 income tax thresholds for single-parent families of three than New
York’s $21,800.
- New York is one of eleven states that has already enacted legislation which will
increase its income tax thresholds in the future and one of the three states, together
with Maryland and Massachusetts, which will use an expanded state EITC to accomplish this
threshold increase. New York’s EITC is scheduled to increase from the current 20
percent of the federal EITC to 22.5 percent of the federal EITC for the 2000 tax year and
to 25 percent of the federal EITC for 2001.
Most tax relief for low-income families comes from the state EITC.
Virtually all of this tax relief for low-income working families is attributable to New
York's Earned Income Tax Credit (EITC). Enacted in 1994, during Governor Cuomo's last year
in office, the state EITC is a powerful tool for supplementing the income of working
families and offsetting the regressive burden of state and local sales, excise and
property taxes. In 1994, New York set its state EITC at 7.5 percent of the federal EITC
for 1994, 10 percent of the federal EITC for 1995, 15 percent for 1996 and 20 percent
thereafter. The multi-year tax cut enacted in 1995 under Governor Pataki accelerated the
EITC's implementation, increasing the state EITC to 20 percent of the federal EITC one
year early, in 1996. The 1995 tax cut, however, contributed very little in terms of
reducing the tax burden on low-income working families on a continuing basis, despite its
current $5 billion per-year price tag.
Since 1994 the income level at which a two-parent family of four incurs positive tax
liability has risen from $14,000 to $23,000. Over 90 percent of this increase is due to
the EITC enacted in 1994. Likewise, the income threshold for a one-parent family of three
has nearly doubled, rising from $11,500 to $21,800. Almost 90 percent of this increase is
due to the 1994 EITC.
Income taxes on poor New York families have decreased substantially since 1994. A
two-parent four-person family with income at the 1999 poverty level would have paid $116
if the pre-1994 law were still in effect, but receives a $490 refund under current law.
Likewise, a one-parent three-person family with income at the poverty line receives a $697
refund under current law but would pay $82 in state income taxes if the pre-1994 law were
still in effect. The 1994 tax cut accounts for 94 percent of these declines; the 1995 tax
cuts — despite costing $4.8 billion per year — account for only 6 percent of
these savings.
The scheduled expansion of the New York State EITC will provide additional relief to
low-income working families in 2000 and 2001.
State income tax burdens for New York's low-income working families will decrease even
more when the 1999 increase in the NYS EITC begins to take effect. Under legislation
enacted in 1999, the NYS EITC will increase to 22.5 percent of the federal EITC for 2000
and 25 percent of the federal EITC for 2001. If the expanded NYS EITC credit had been in
effect in 1999, the tax credit for a family with minimum wage earnings ($10,712) would
have been $954 rather than $763, a savings of $191.
Unfortunately, the continuation of the 25 percent state EITC has been tied in law to
the continuation of the state's ability to use federal Temporary Assistance to Needy
Families (TANF) block grant funds or state matching (Maintenance of Effort, MOE) funds to
pay for the state EITC. Specifically, the law increasing the state EITC from 20 percent to
25 percent of the federal EITC provides that this rate will revert back to the 20 percent
level beginning with any tax year in which any federal action (as certified by the
Commissioner of the Officer of Temporary and Disability Assistance):
- materially reduces or eliminates New York state's TANF block grant allocation,
- or materially reduces the ability of the state to spend federal TANF block grant funds
for the EITC or to apply state general fund spending on the EITC toward the state's TANF
maintenance of effort (MOE) requirement.
In practice, New York is moving to use TANF funds to pay for a substantial portion of
its state EITC.2 For example, the Governor's most
recent Executive Budget projects using TANF funds to cover $174 million of the $420+
million that the state EITC is expected to cost during the 2000-2001 fiscal year.
While there are arguments for and against using TANF funds for this purpose, as long as
the authorization to do so remains in effect, there is no justification for making the
continuation of this particular tax reduction contingent on federal welfare policies while
having no similar "fiscal prudence" trigger for the other $13.5 billion in
annual tax cuts that are now on the books and either in force or scheduled to take effect
over the next several years.
In addition, this provision has significant technical shortcomings,3
and it will create a great deal of uncertainty for a very vulnerable population over
the next two years as the U. S. Congress considers the reauthorization of the 1996 federal
welfare reform law that established the TANF block grant mechanism. This law is currently
scheduled to expire on September 30, 2002.
In recognition of the importance of the EITC in providing tax relief to a very
hard-working but frequently-ignored population, this so-called "reversion"
provision should be repealed. If state legislators believe that the state's overall tax
reduction program is too large to be sustained without this use of federal funds, it
should reduce or eliminate other less meritorious tax cuts that are scheduled to take
effect over the next several years.
March 22, 2000 |
| Endnotes 1. State-by-state comparisons and rankings
in this report come from the Center on Budget and Policy Priorities (CBPP) report, State
Income Tax Burdens on Low-Income Families in 1999, March 2000. Current tax thresholds
and tax liabilities (credits) are also taken from the CBPP report. Calculations of
historic and prospective tax thresholds and tax liabilities (credits) were done by the
Fiscal Policy Institute.
2. The final TANF regulations adopted
by the U. S. Department of Health and Human Services last April gave the states the
ability to use TANF block grant funds to pay not only for EITC expansions but for the
entirety of the portions of state EITCs (whether pre-existing and/or new) that are
actually refunded to TANF eligible families. TANF block grant funds can not be used to
cover either the portions of state EITCs used by TANF eligible families to reduce their
tax liabilities to zero or any portions of state EITCs going to taxpayers who are not TANF
eligible. To take maximum advantage of this opportunity, New York State recently amended
its state TANF plan to define all families with children that meet New York's financial
criteria for the EITC as being TANF eligible, although they would not be able to receive
traditional cash assistance unless they met other more restrictive criteria.
3. For example, this provision makes the continuation of a
part of the state's tax law subject to a determination by a state administrative official
that a federal administrative, statutory or regulatory change has "materially"
reduced the state's ability to use funds for a particular purpose without giving any
guidance as to what would and what would not be material in such a context. |
