Bloomberg News

NYC’s Well-Off Households Would Lose Under Tax-Cut Repeal

April 17, 2012

Among U.S. households making more than $200,000, New Yorkers had the highest average adjusted gross income in the nation with $1.01 million. Their average capital gains, $200,376, trailed only Palm Beach County, Florida’s $207,838 average. Photographer: Scott Eells/Bloomberg

Among U.S. households making more than $200,000, New Yorkers had the highest average adjusted gross income in the nation with $1.01 million. Their average capital gains, $200,376, trailed only Palm Beach County, Florida’s $207,838 average. Photographer: Scott Eells/Bloomberg

Wealthy New York-area households that benefited from a decade-long break on federal individual income taxes stand to lose the most if the Bush-era tax cuts are repealed next year.

Among U.S. households making more than $200,000, filers in Fairfield County, Connecticut paid the top effective individual income tax rate in the nation at 25.6 percent, according to Internal Revenue Service data compiled by Bloomberg. The wealthy in Manhattan paid 24.9 percent. Those in Essex County, New Jersey, handed over 24.3 percent of their income to the government. The average U.S. household that made more than $200,000 paid an effective rate of 22.6 percent in 2008, the latest year for which data are available.

Among that group of higher-income households, New Yorkers had the highest average adjusted gross income in the nation, $1.01 million. Their average capital gains, $200,376, trailed only Palm Beach County, Florida’s $207,838 average.

The figures highlight how wealthy taxpayers benefit from breaks set to expire next year by paying a far lower rate on income from investments and dividends than the 35 percent rate assessed on all taxable income over $388,350.

The wealthiest taxpayers “pay a lower rate, because so much is capital gains,” Michael J. Graetz, a Columbia University tax professor and former Treasury Department counsel, said in a telephone interview. “But a lot of people earning more than $200,000 are going to be paying full freight on income from salaries.”

Political Capital

Mitt Romney, the front-runner for the 2012 Republican presidential nomination, came under fire earlier this year for reporting an effective tax rate of 13.9 percent. The former Massachusetts governor paid $3 million in 2010 on earnings of $21.6 million. He paid a top rate of 15 percent on more than half his taxable income, rather than the 35 percent rate.

President Barack Obama, who reported last week that his family paid 20.5 percent on $790,000 in adjusted gross income, campaigned for legislation that would have levied a minimum 30 percent tax on millionaires. The measure, which was defeated yesterday in a procedural vote in the U.S. Senate, would have raised $47 billion over the next decade, according to an estimate by the congressional Joint Committee on Taxation last month. The 51-45 Senate vote fell short of the 60 needed for the bill to advance.

‘The Buffett Rule’

The legislation was dubbed “the Buffett rule” after billionaire investor Warren E. Buffett. Buffett, the chairman of Omaha, Nebraska-based Berkshire Hathaway Inc. (A:US), had complained last year that his 17.7 percent effective tax rate was far lower than the rate his secretary paid in individual income taxes.

Even without the bill, taxes on wealthy households could still be raised at year’s end, when Bush-era tax cuts automatically expire. The cuts, passed in 2001 and 2003, dropped the marginal tax rates from 36 percent to 33 percent for households making between $195,500 and $383,350, and reduced the marginal rates from 39.6 percent to 35 percent for households reporting more than $383,350 in earnings.

Wealthy Americans also face an increase in the capital gains tax, which could rise to 25 percent from the current 15 percent as a result of the Bush cuts’ expiration, a provision in Obama’s health-care overhaul and legislation that reduces the value of high-income taxpayers’ personal exemption. Dividends also would be treated as ordinary income if the tax cuts lapse.

‘Raise Taxes Significantly’

Taxing dividends as ordinary income “will raise taxes significantly,” said Curtis Dubay, senior analyst at the Heritage Foundation, a Washington-based research organization that promotes conservative public policies, according to its website.

“You’re going to see a significant gain in effective tax rates if that happens,” Dubay said in a telephone interview.

Individual income taxes made up 45.4 percent of all federal revenue in 2008. IRS data show taxpayers claimed $271 billion in deductions for state income taxes, $463.7 billion in mortgage interest and $167.9 billion in property taxes.

New York taxpayers earning more than $200,000 a year had the highest average amount of itemized deductions at $212,553 per household; Santa Barbara ranked second at $138,796, and San Francisco was No. 3 with an average $138,611.

Three of the lowest effective rates were paid in Riverside County, California, where the typical wealthy taxpayer handed over 19.5 percent of income to the government; San Bernardino, California, at 20.2 percent; and Loudoun County, Virginia, at 20.3 percent. Loudoun County, a suburb of Washington, D.C., reported the lowest average capital gains in the nation among wealthy households, with $18,340.

To contact the reporter on this story: Frank Bass in New York at fbass1@bloomberg.net

To contact the editor responsible for this story: John Voskuhl in Miami at jvoskuhl@bloomberg.net


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