Some people have an epiphany during moments of hard work or intense prayer. Bob Kerrey’s came while working on his taxes.
The former U.S. senator from Nebraska moved to New York in 2001 to become president of the New School University. A Democrat, Kerrey reportedly was planning to endorse the reelection bid of the city’s nominally Republican mayor, Michael Bloomberg.
Until, that is, Kerrey sat down with his Form 1040. As recounted in Sunday’s New York Times, Kerrey was filling out his tax return (apparently in front of a TV tuned to C-SPAN, since he was simultaneously watching the House of Representatives vote to repeal the estate tax) when it suddenly hit him: Maybe he should forget about this “Democrats for Bloomberg” thing and run for mayor himself.
“I am angry about the way New York City is being treated by Washington, D.C.,” Kerrey explained. “Who is fighting these guys? What would Giuliani and Koch be doing now? They’d be raising hell!”
Unhappiness with the city’s share of federal homeland-security funding reportedly was one his concerns. But if the Times story is any indication, what really set Kerrey off was the Alternative Minimum Tax, or AMT. His personal tax calculation apparently presented him with a forceful reminder that the AMT can bite New Yorkers pretty hard. In that case, he’s hardly alone.
Indeed, if there’s an AMT epicenter in the United States, it is Kerrey’s adopted hometown, along with surrounding suburbs. Because the AMT excludes personal exemptions and deductions for state and local taxes, it primarily hits dual-earner households with kids in states that combine high living costs with heavy state and local tax burdens. In addition to New York, California, New Jersey, Connecticut are among the nation’s prime AMT hot spots.
With less than 7 percent of the nation’s population, New York State accounted for 12 percent of the nation’s AMT filers and 15 percent of AMT liability in 2004, according to the Manhattan Institute’s tax model. Those affected included tens of thousands of married couples falling well within the regional definition of “middle-class,” such as a police sergeant and a teacher with three kids.
As the law is now structured, the AMT “gotcha” is even worse for filers a little further up the income ladder. For example, New York households earning between $300,000 and $400,000 have lost more than 90 percent of their recent federal income-tax cuts to higher AMT payments. As it happens, Kerrey’s reported $340,500-a-year salary as New School president puts him squarely in the middle of that zone. Without knowing any other details of his personal finances, it’s probably safe to say his AMT runs into thousands of dollars and has stolen away much if not most of his regular tax savings since 2001.
No wonder he’s angry, then. But other than “raising hell,” it’s not clear what he means to do about it. Indeed, Kerrey’s complaint highlights a sort of schizophrenia that has long afflicted Gotham’s political elites. After all, if their preferred candidate had won last year’s election, President John Kerry would even now be striving to raise income taxes on “the wealthy” i.e., New Yorkers like them. The AMT is simply Washington’s back-door route to imposing higher marginal rates on people who appear rich by the standards of, say, Lincoln, Nebraska.
The good news for New Yorkers is that this situation can’t persist for much longer. Relief provisions designed to prevent the AMT from undercutting more of the Bush tax cuts are scheduled to expire after 2005. At that point, the AMT would start clobbering the vast majority of middle-class couples with kids all across country.
No one actually expects that to happen, of course. Far more likely is that an AMT fix will be subsumed into a broader federal tax reform, now under study by a presidential advisory panel.
New York lawmakers already are howling about one option reportedly on the table–the repeal of the state and local tax deduction. If the Bush administration tries to scrap the deduction simply as a way to raise more federal revenue, without any other reform of the tax code, New Yorkers will have good cause to complain. But if the deduction is eliminated as part of a truly comprehensive reform and simplification–one that produces a flat-rate structure, for example–the resulting tax code could actually be far better for places such as the Empire State.
Which brings us back to Bob Kerrey. As mayor, he couldn’t really do much about the AMT or any other federal issue. If he really wants to be a player in Washington, there’s another New York officeholder he should think of challenging in the next election. Someone who, to date, has essentially done nothing to reduce the federal tax bite on New Yorkers.
Hillary Clinton, call your office!
–E. J. McMahon is a senior fellow for tax and budgetary studies, at the Center for Civic Innovation at the Manhattan Institute.