Congressional plans to fund a massive health-care overhaul could have a job-killing effect on New York, creating a tax rate of nearly 60 percent for the state's top earners and possibly pressuring small-business owners to shed workers.
New York's top income bracket could reach as high as 57 percent -- rates not seen in three decades -- to pay for the massive health coverage proposed by House Democrats this week.
The top rate in New York City, home to many of the state's wealthiest people, would be 58.68 percent, the Washington-based Tax Foundation said in a report yesterday.
That means New York's top earners, small-business owners and most dynamic entrepreneurs will be facing new fees and penalties.
The non-partisan think-tank calculated the average local tax rate in New York State at 1.7 percent, and combined it with the 8.97 percent that high-bracket state taxpayers will shell out in 2011, when the health care plan is set to take effect. Tack on the 39.6 percent federal tax rate, 2.9 percent for Medicare and 5.4 percent for the health care "surtax," and the figure is 56.92 percent for the Empire State.
In New York City, the top tax rate is 3.65 percent, making the Big Apple's top combined rate even higher.
The $544 billion tax hike would violate one of President Obama's ironclad campaign promises: No family will pay higher tax rates than they would have paid in the 1990s.
Under the bill, three new tax brackets would be created for high earners, with a top rate of 45 percent for families making more than $1 million. That would be the highest income-tax rate since 1986, when the top rate was 50 percent.
The legislation is especially onerous for business owners, in part because it penalizes employers with a payroll bigger than $400,000 some 8 percent of wages if they don't offer health care.
But the cost of the buy-in to the program may be so prohibitive that it will dissuade owners from growing their businesses -- a scary prospect in the midst of a recession.
Obama took to the airwaves yesterday with ads and TV interviews promoting the need to reform health care.
As a Senate health committee passed a different version of a health-care reform bill - a milestone for the issue - Obama said on NBC, "The American people have to realize that there's no such thing as a free lunch."
And in a Rose Garden speech, he said the "status quo" on health care is "threatening the financial stability of families, of businesses, and of government. It's unsustainable, and it has to change."
Asked if Obama supports the surtax on wealthiest Americans even though it would break a campaign pledge, White House spokesman Robert Gibbs said only, "It's a process that we're watching."
Republicans in Washington and small-business defenders in New York said the House legislation would effectively place a stranglehold on businesses while running off top earners.
"Placing a big tax burden on the small-business community would rob them of the resources they need to create the jobs that will lead us out of the recession," said Tom Donohue, president of the US Chamber of Commerce.
"If there's one sure way to kill the goose that lays the golden egg, this is it."
Richard Lipsky, a lobbyist for small stores and businesses in New York City, warned that "in the middle of a recession, it's a very strange way to legislate."
"According to what we've read, the House health-insurance plan would have a job-crippling impact on neighborhood stores and other small businesses because they put mandates on these businesses that would prevent them from hiring people because of the cost of the plan," Lipsky said.
Under the House plan, businesses with payrolls of $400,000 or more would pay an 8 percent penalty for uninsured workers, while companies with payrolls between $250,000 and $400,000 would pay slightly smaller penalties.
Adding to this burden, said Michael Moran of the State Business Council of New York, is that New York is already a high-tax state.
"Any additional taxes make New York even less competitive," he said.
New York would become the third-most-hostile place for top earners to live under the proposed new surtaxes supported by House Democrats and championed by Rep. Charles Rangel (D-NY).
Also hit would be individuals earning $280,000 annually and families making $350,000 a year.
The profits from small businesses would also be taxed on the back end.
Kathryn Wylde, president of the Partnership for New York City, an umbrella organization representing the city's major businesses, said that the estimated top marginal tax rate of 57 percent for New York actually underestimates the potential impact on businesses.
That's because it doesn't include the city's burdensome unincorporated-business tax, which snares many entrepreneurs.
"It could be between 62 and 63 percent," she said.
If the House plan passes, Wylde said, "There literally, at this point, is very strong reason to relocate your family and your business outside New York."
A lot of small businesses would be hit with the penalties for not insuring workers and get hit with the surtaxes, Moran warned.
"Many small businesses file their business taxes under personal income," he said. "That's the way the tax law is written. Small business, which is really where most of the job creation takes place, could be hit hard.
According to the city's Department for Small Business Services, there are some 220,000 small businesses in the five boroughs. The agency does not keep track of how many offer health insurance.
"It's something that's going to kill jobs. That's the result," said Stephanie Cathcart, spokeswoman for the National Federation of Independent Businesses.
Among the most egregious provisions of the House proposal, she said, is a requirement that businesses pay the cost of 72.4 percent of individual health plans and 65 percent of family plans.
Those that don't hit the mark would face the payroll tax penalty.
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