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Deal in Albany Would Extend Higher Taxes on Top Earners

New York Governor Andrew Cuomo
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New York Governor Andrew Cuomo

Congress dodged the so-called fiscal cliff in part by raising taxes on high incomes. California voters addressed their state's school budget troubles with a surcharge on big incomes. And now Albany has decided to raise revenue with a high income tax rate for people with seven-figure incomes.

Gov. Andrew M. Cuomo and legislative leaders are finalizing a surprise deal to extend a high-tax bracket for the state's top incomes. The bracket, first approved by lawmakers in late 2011 as a temporary response to disappointing revenues, does not expire until the end of 2014. But that year is an election year, and by deciding to renew the bracket now, Mr. Cuomo and lawmakers can avoid debating high tax rates while running for re-election.

Mr. Cuomo, who in 2011 described a new high tax bracket as a "short-term solution" to help the state weather a financial emergency, did not mention his desire to extend the new tax bracket when he publicly announced his budget proposal in January, or in the weeks since as he and his cabinet members have crisscrossed the state, promoting his spending plan to residents.

The Legislature has not held any hearings or debate about the tax proposal, and Mr. Cuomo's office has declined to provide details while it is being negotiated. The State Democratic Party has even broadcast television advertisements praising the lack of any tax increases in the spending plan that Mr. Cuomo proposed.

But the emerging deal follows similar actions in Washington and in other states to improve shaky balance sheets by generating more revenue from those with top incomes. In its deal to resolve the so-called fiscal cliff, Congress agreed in January to raise taxes on individuals with incomes higher than $400,000 and couples with more than $450,000. And in November, at the urging of Gov. Jerry Brown, California voters approved a temporary income tax surcharge on the state's highest incomes.

While some states are moving in the opposite direction — seeking to eliminate income taxes in an effort to spur growth — others like New York are embracing the idea of generating more revenue from those who make the most. Maryland raised income taxes on high incomes last year, and Minnesota is considering an increase this year.

"I think partly there's some recognition that the level of income inequality has grown, and the level of income inequality has especially grown in places like California and New York," said Kim Rueben, a senior fellow at the Tax Policy Center.

In New York, the high-tax bracket, with a marginal rate of 8.82 percent, applies to individuals who make more than $1 million and married couples who make more than $2 million, about 32,000 filers. The negotiators have not finalized the new expiration date of the high bracket. Discussions have included extending it through 2017.

The emerging tax deal is already drawing consternation from fiscal conservatives and business groups. The Partnership for New York City, a leading business group that has supported Mr. Cuomo's agenda, warned that the renewal of the top tax bracket could drive the wealthy to leave the state — an assertion that is disputed by some.

The business group said that the deal to increase federal taxes brought the combined marginal effective tax rate for New York City's highest incomes to 54 percent, and that the extension in Albany would only further the state's reputation for high taxes.

"These are highly mobile people that have options and are being solicited daily by governors of Florida, Texas, Puerto Rico, Utah — lower-tax states — and it feels like Albany was not considering the implications of the combined tax burden," said Kathryn S. Wylde, the president of the Partnership for New York City.

She added, "The reaction I've gotten from people who pay the tax is that clearly this is a message that suggests the state does not really value this very important group of job creators and taxpayers."

Kevin S. Law, the president of the Long Island Association, also a business group, said the tax bracket extension "caught us off guard, because we weren't expecting to deal with it until next year."

"At this point in time, we believe it sends the wrong message, as we're going through this slow and bumpy recovery, to be increasing taxes for anybody," Mr. Law said.

But Ron Deutsch, the executive director of New Yorkers for Fiscal Fairness, a liberal advocacy group, said the state needed the extra revenue from high incomes, especially with the tight budgets that are afflicting many school districts and local governments.

"The reality is we have record hunger, record homelessness and child poverty rates at 50 percent or higher in many of our cities — those are things that need to be addressed for a healthy economy," Mr. Deutsch said. "I think there are a lot of wealthy New Yorkers who realize they love this state, they want to be part of the solution, and they are happy to pay a little bit higher income-tax rate."

The timing of Mr. Cuomo's move was unexpected because the governor had promised to seek a long-term overhaul of the state's tax code — not another short-term extension — when he negotiated the tax rate changes in 2011.

Mr. Cuomo did not appoint a promised tax commission until December; his office said it had given no timetable to the commission, but a person familiar with the commission's work said it did not plan to report back to the governor until late this year.

The legislative leaders also plan to renew more modest tax cuts for middle-class incomes that had been approved along with the high-tax bracket for top incomes. Mr. Cuomo's budget office had projected that the tax code changes enacted in 2011 would generate roughly $2 billion a year in extra revenue.

"It's a very good idea," the Assembly speaker, Sheldon Silver, a Manhattan Democrat, said Tuesday when asked about the idea of extending the temporary tax brackets. "It has made our tax code more progressive, and I think that's a good thing to do."

And the Senate Republican leader, Dean G. Skelos of Long Island, said, "That's still on the table, but there's a good possibility that's going to happen."

Asked if he favored extending the high-tax bracket, Mr. Cuomo responded by saying, "I am in favor of tax cuts if we can find a way to pay for them, and that's what the discussion is."

"I believe in cutting taxes for the middle class, for small businesses — stimulating the economy," Mr. Cuomo added. "Can you afford them? Where does the money come from? And that's one of the areas we're discussing."

An administration official said the revenue generated by extending the top tax bracket would go toward unspecified tax cuts for middle-class families and small business. Among the tax cuts that Mr. Cuomo and lawmakers have agreed to are a $350 tax-relief check for families with at least one child, and a refundable credit for employers with workers under the age of 20 to offset an increase in the minimum wage.

The extension of the tax bracket was the most surprising change to come out of this year's budget negotiations, which Mr. Cuomo and legislative leaders were close to wrapping up on Tuesday. The budget is supposed to be adopted by April 1. The leaders have sped up negotiations this year in an effort to allow lawmakers to get home for Passover and Easter.

The budget agreement will also include a gradual increase of the minimum wage over the next three years, and Mr. Cuomo and lawmakers were discussing whether to include language intended to reduce the number of low-level marijuana arrests that result from police stops in New York City. They are also negotiating changes to the gun laws that were enacted in January.