New York ruling changes tax law. Get ready for a marginal tax rate of 288%.

New York has decided that owners of property living in another state may still have to pay income taxes in New York. The Wall Street Journal reports:

Connecticut and New Jersey residents with a Hamptons summer cottage or a Manhattan pied-a-terre are about to get a nasty surprise: New York state wants more taxes from them.

A New York court ruled last month that all income earned by a New Canaan, Conn., couple is subject to New York state taxes because they own a summer home on Long Island they used only a few times a year. They have been hit with an additional tax bill of $1.06 million.

Tax experts and real estate brokers say this ruling could boost the tax bill for thousands of business executives who own New York City apartments they use only occasionally. It could also hurt sales in the Hamptons and New York’s other vacation-home communities.

I want to focus on this line:

Under the ruling, if an owner doesn’t spend a single a day in a home it could still count toward a permanent residence.

If every state applied this ruling and federal court does not overturn it, a person could in theory own housing property in every single state and thus owe income tax in every single state and the District of Columbia. By my rough calculation using the top marginal federal income tax rate of 35% and the sum of all the top marginal state income tax rates, a person could theoretically be taxed at a rate of 288%. (Yes, I recognize it is absurd for somebody to have property in all 50 states and DC, but the whole notion of paying income taxes in every state you own property is equally absurd.)

I urge the federal courts to overturn this ruling. A permanent residence should be and must be the state in which the person lives the most. Income should only be taxed by states once, either by residency or by where it is earned. Not both and certainly not in a state where a person is neither a resident nor an income earner.

Isn’t this why we have the interstate commerce clause in the first place? To stop states from conducting commercial and financial warfare against other states or residents of other states?

4 responses to “New York ruling changes tax law. Get ready for a marginal tax rate of 288%.

  1. This is the logical extension of the mentality behind the so-called “Jock Tax” where players are taxed based on the number of games played within a state. All they are saying now is that a house is like being in the state full-time. Though its not entirely the same sense owning a house and being physically present are not the same thing.

    Also I wonder what NY is going to do about all the tax treaties it has signed with other states governing tax nexus (who taxes what)? What will happen is what happened with the Jock Tax . . . Illinois first imposed it and then California imposed theirs in retaliation and then other states jumped in the fray. I think most states with a professional team now have a Jock Tax. Retaliation is what could make Michael’s doomsday scenario a reality. I think the Feds should have put a stop to the Jock tax as well.

    • Your “Jock Tax” is a slightly different issue. In that case, even if the player does not live in that state, he still does some of his work within that state. In this case, though, the person neither lives nor works in that state.

      Nevertheless, the “Jock Tax” has been an issue for quite a while. Derek Jeter claims he lives in Florida, a no income tax state, but he has an apartment in New York and plays half his games in New York, so New York claimed he was a resident there. In the end, Jeter and New York settled. In that case, it would probably make sense for Jeter to pay taxes on his baseball salary because he plays for New York and maybe on endorsement money too.

      Wouldn’t it be so much simpler if we relied on consumption taxes, just as Adam Smith and our Founding Fathers suggested.

  2. Michael, actually the Jock Tax does not require that the athlete actually “work.” If he/she is injured but still travels with the team, the Jock Tax applies. So it set a precedent where simple presence begins to become the tax trigger.

    Also, I made a mistake in my last comment. It was California that first applied the Jock Tax and it was Illinois that retaliated.

    And I agree, a consumption tax is ultimately the way to go 🙂

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