Top Tax Rate In NYC Would Be 61.2%, 59.7% In California Under House Dems' New Tax Plan

Tyler Durden's Photo
by Tyler Durden
Monday, Sep 13, 2021 - 11:25 PM

Update (1130ET): At least one influential Democratic lawmaker is claiming that the leadership has promised to kill the SALT deduction cap as part of Biden's newly revised budget plan.

Despite it not being included in the outline released by House Ways and Means earlier today, New York Rep. Tom Suozzi has just released a statement claiming that the leadership have committed to removing the cap for SALT deductions.

To be sure, it's not exactly clear what this 'meaningful change' will be.

* * *

Update (1100ET): CNBC has just produced the first analysis of what the Dems' new tax proposal would do to the overall tax rate of the wealthiest class of taxpayers.

Top earners in NYC would face a combined city, state and federal income tax rate of 61.2%. For the top marginal federal income tax rate - which is the rate that taxpayers pay on every dollar of earned income above the threshold - would be 46.6%

In NYC, the combined top marginal state and city tax rate is 14.8%. So, city taxpayers who earn more than $5MM a year would face a combined city, state and federal marginal rate of 61.2% if the House plan becomes law. These would be among the highest tax rates seen in the last 40 years.

Things aren't much better on the west coast. Top-earning Californians would face a combined marginal rate of 59.7%, while those in New Jersey would face a combined rate of 57.2%. Hawaii could face a combined rate of up to 57.4%. Meanwhile, there are no signs that the House will roll back any of the less popular tax hikes from the Trump plan, the SALT deduction cap, which has been a target of Democratic lawmakers since it was passed.

However, some sources close to CNBC said it's possible the House might seek to scrap the SALT deduction cap at a later time.

* * *

Update (0915ET): The House Ways and Means Committee has just released the new Democratic package of proposed tax hikes (which we previewed below, courtesy of BBG) as Dems take the first step toward revising their budget, now that Sen. Joe Manchin has made clear the $3.5 trillion pricetag wouldn't work.

The plan focuses on trying to lower taxes for the smallest businesses. In addition to an increase in the corporate tax rate to 26.5%, the Dems also want to impose a 3% wealth surtax on taxpayers with income above $5MM (or in excess of $2.5 million for a married individual filing separately), while increasing the top capital gains rate to 25%. Dems are also calling for a top personal rate of 39.6%, up from 37%.

As Republicans and Moderate Dems expressed resistance to the $3.5 trillion figure in Biden's budget plan, odds of a major hike have fallen, while the market's expectation for a modest hike in corporate taxes, and in taxes for the wealthy, have emerged. And while there are plenty of other factors to blame for the recent market turbulence, tax hikes are certainly looming on the horizon with Dems in control of both houses of Congress.

A team of Goldman Sachs strategists led by David Kostin, their top equity strategist, warned clients in a report that they probably aren't taking the market risks of a tax hike seriously enough.

"Tax reform, not reduced economic growth forecasts, is the key risk to US equities through year-end 2021," they add, refering to increasing concerns among clients about what softer growth outlook means for equities. "The market appears to be only partially pricing an increased tax rate in 2022," the strategists wrote.

The Ways and Means Committee is planning a vote later this week.

* * *

Now that Sen. Joe Manchin has officially come out against President Biden's $3.5 trillion spending package, the Democrats are being forced to rethink their budget plans - starting with the 'income' side, since President Biden has promised to offset additional spending with tax hikes. And so, just hours after Manchin confirmed his opposition to the budget in a series of interviews, Bloomberg reports that the Dems have drafted a new package of tax increases that falls well short of Biden's ambitious targets.

The new proposal would raise the top corporate rate from 21% to 26.5%, less than the 28% Biden had sought, people familiar with the matter said Sunday night. Meanwhile, the top rate on capital gains would rise from 20% to 25%, instead of the 39.6% Biden had originally proposed, per Bloomberg.

The new set of "business minded" tax increases is estimated to raise more than $2 trillion, which still might not be low enough to appeal to moderate Democrats like Manchin.

Still, the plan was criticized by conservatives, a preview of the fight ahead as the House Ways and Means Committee prepares to meet Tuesday to debate the tax portion of the economic package.

Americans for Tax Reform, a conservative group that fights for lower taxes, said the proposed tax hikes would lead to an immediate increase in consumer utility bills and make the US less competitive on the world stage.

"Democrats want to take the current rate of 21% and raise it to 26.5%, higher than communist China’s 25% and higher than the developed world average of 23.5%. This does not even include state corporate income taxes, which average another 4 - 5% nationwide," the group said.

The tax increases described in the document, which is circulating among lawmakers of both parties, would raise $2.9 trillion in revenue when combined with $700 billion in revenue and cost savings from Medicare drug price changes. To fully pay for the president’s plan, the proposal factors in $600 billion from the estimated economic growth effects of the spending increase.

What's more, the proposal would raise an estimated $16 billion by limiting deductions for executive compensation and $96 billion by higher taxes on tobacco and nicotine products, including e-cigarettes.

Despite pushback from the crypto community, Dems are still planning to include cryptocurrency in general tax rules allowing for cryptocurrencies to be treated the same as other financial instruments and to prevent taxpayer abuse of the rules.

Other new taxes in the new plan include: a proposal to cut in half the $24,000 estate and gift tax exemption for married filers on Dec. 31, 2021, four years earlier than set in the tax cuts passed under former President Donald Trump.

Notably absent from the document is any discussion of lifting the $10,000 cap on the state and local tax deduction, raising questions about the fate of that costly proposal.

The Ways and Means proposal "meets two core goals the President laid out at the beginning of this process - it does not raise taxes on Americans earning under $400K and it repeals the core elements of the Trump tax giveaways for the wealthy and corporations that have done nothing to strengthen our country’s economic health," White House spokesman Andrew Bates said in a statement.

While the numbers are still subject to change before the proposal is officially released, such scaled-back plans would amount to an acknowledgment that even higher rates would have a tough time getting through Congress after some moderate Democrats expressed objections.

With thin majorities in both chambers, Democrats can afford just three defections in the House and none in the Senate as they try to use a process called "reconciliation" to get their budget passed.