When Donald Trump and the Republicans swept control of Washington, the markets took it as a clear signal that 2017’s steep tax cuts will be extended before they sunset at the end of 2025.
That would be an unbridled boon for wealthy New Yorkers who likely would have faced higher tax bills in a Harris administration. The corporate tax rate, cut to 21% in 2017, would have risen to something closer to its former 35% level. Earnings from partnerships, such as law firms or private equity shops, would have been taxed at higher rates, too.
The expected extension would put more money into the pockets of wealthy New Yorkers. Fully 10% of New York households earn $300,000 a year or more, well above the 6% share of households that earn that much across the U.S., said Barbara Denham, senior economist at Oxford Economics.
“The tax cuts are regressive so they will benefit high-income households more so than middle-income and lower-income households,” Denham said. “New York has a larger share of high-income households than most cities, so the tax cuts will boost consumer spending in New York more than in other cities.”
That suggests spending on apartments, restaurants and luxury goods should get a considerable boost.
In addition to extending the tax cuts, Trump has promised to expand them to exempt income taxes on tips and overtime pay — tax cuts that would also give a boost to the city’s lower-wage workers. More than 320,000 New Yorkers, 7% of the city’s workforce, are employed in food service or drinking establishments.
The nonpartisan Tax Foundation also anticipates the creation of an itemized deduction for auto-loan interest and the elimination of green energy subsidies in the Biden administration’s signature achievement, the Inflation Reduction Act.
There’s also a chance Congress will raise the amount of state and local tax payments that New Yorkers can deduct from their federal returns to $20,000 a year. Lawmakers in 2017 capped the SALT deduction, which used to be unlimited, at $10,000 to raise revenue lost by cutting taxes on businesses. Fully restoring the SALT deduction is a nonstarter because it would add trillions to the deficit over time, Denham said. But a boost in the cap would put a lot more money in New Yorkers’ pockets.
Tax cuts were one of the few policy changes the White House and Republican-controlled Congress managed to agree on in the first half of Trump’s first term. But getting a new tax package through Congress this time around will be no slam dunk.
“There’s no sign the Republican Senate and razor-thin Republican House majority are anywhere close to agreeing amongst themselves, not to mention the incoming administration,” wrote Sarah Bianchi, deputy U.S. Trade Representative from 2021 to 2024 who is now an analyst at securities firm Evercore ISI.
Incoming Senate Majority Leader John Thune has set out a plan for Congress to vote on extending the tax cuts. But in exchange he wants to get additional spending on the border and defense in the first 30 days of Trump’s second administration. Some House Republicans want to vote on tax cuts before border or defense spending, however.
More fiscally-minded lawmakers are concerned that deficits will rise if an already expensive tax cut is extended, not to mention the costly additions promised by Trump. Policymakers could get around this nettlesome math by shortening the timeline of tax-cut extensions.
One way or another, it seems inevitable something will pass. The question then becomes how the market will react if spending isn’t reduced accordingly.
