A State Tax Refund Is Attractive. But Is It Wise?
Tax decisions loom – and not just the annual April 15th date with the IRS that we all face. A pressing April 1st deadline for adopting New York State’s next budget also fast approaches. As a result, tax policy now occupies center stage in Albany.
Governor Kathy Hochul’s proposed $252 billion budget for the coming fiscal year includes four notable tax policy proposals. These three essentially qualify as no-brainers:
One would more than triple, from $330 to $1,000, the annual tax credit for children under age four, and also increase the credit from $330 to $500 for children ages four to 16 starting in tax year 2026. Estimates are that this single measure would reduce child poverty in the state by 10 percent.
Another would extend through 2032 higher tax rates put in place in 2021 for very high-income filers; experience has since shown these higher rates have not prompted the exodus from the state by high-earners that some once feared.
The third would modestly, and fairly, lower State personal income tax rates paid by filers in the five lowest brackets in the tax schedule; a few modifications of the kind suggested in legislative testimony that I submitted last week would further improve this sensible measure.
Then there’s the fourth, largest, and best-known item on the governor’s tax agenda: the proposed “Inflation Refund Credit” or IRC. The governor has framed this as a one-time refund of windfall State sales tax revenue resulting from the high inflation that has battered household budgets in recent years. The IRC would appear as a one-time credit against personal income taxes owed in 2025. Its price tag: roughly $3 billion.
What’s the case for the IRC? With State tax revenues collected through December 31st running some $2.2 billion higher than were forecast last spring, the State is reliably on track to close out the fiscal year ending in March with a surplus. Meanwhile, worries about persistent inflation plague both the nation’s central bankers, who have paused their policy of rolling back interest rates, and the nation’s consumers. And with poll after poll ranking “affordability” a top concern for New Yorkers, policymakers understandably want to be seen as producing immediate relief.
On the other hand, the breadth of the IRC’s design leaves a lot to be desired. As proposed, joint-filing married couples with incomes of up to $300,000 and single-filers with incomes of up to $150,000 would be eligible, with $500 going to joint-filing households and $300 to single-filers. The credit would be the same for all filers with income below those thresholds. (Those whose tax liabilities are less than those figures would get the balance as a refund.) The credit would benefit roughly 8.6 million taxpayers – or about 93 percent of all full-year resident taxpayers.
This setup unfortunately ignores the fact that inflation’s hardest blows fall on those with the lowest incomes. That’s because lower-income households spend a far larger proportion of their earnings than higher-income households do on taxable goods and services. Exacerbating this is a trend my colleagues at the Center for New York City Affairs (CNYCA) have recently reported on: the growing income gap between the highest- and lowest-paid wage earners in the city. During the period 2019-23, the 4.3 percent increase in real wages for the top quintile of workers was three-to-four times greater than that for lower- and middle-wage workers. An ungraduated tax credit fails to offset this growing inequality.
Finally, as the 2025 economic and budget outlook CNYCA published in January pointed out, this one-time tax refund would largely or perhaps completely swallow the State’s anticipated budget surplus. This would be to the detriment of investments in longer-term education, health, and social programs – including the steep and still-unfunded mandate of reduced classroom size that the State has imposed on New York City. It would also deplete funds available to repair damage to Medicaid, SNAP (formerly called food stamps), and other social safety net programs that – if the budget resolution narrowly passed by the House of Representatives last week is any guide – may well be inflicted at the federal level this year.
In the end, the political allure of enacting immediate and broadly enjoyed State tax relief may simply overpower that last objection. In that case, however, lawmakers should at the very least consider redesigning the IRC to provide greater benefit to the New Yorkers who need the most help.
For example, if the cutoffs for the IRC were lowered to $40,000 for single-filers and $80,000 for married joint-filers, the number eligible for the credit would fall from 8.6 million to 6.6 million. If the dollar value of the scheduled credits remained the same, the overall cost of the IRC would fall to $2.6 billion from $3 billion.
The resulting savings of $400 million may, in the end, not be enough to counteract the effects on New York of future federal budget cuts; it would, nevertheless, be welcome help in stanching the bleeding.
George Sweeting is a Senior Fellow at the Center for New York City Affairs at The New School. For more than two decades, he managed research, analysis, and economic forecasts at New York City’s Independent Budget Office, ending his tenure as IBO’s acting director. This Urban Matters is drawn from his February 27th testimony to a joint hearing of the State Senate Committee on Finance and Assembly Committee on Ways and Means
Photo by: truthout.org
