Wednesday, March 19, 2014

Early history of the New York State personal income tax

            New Yorkers who feel the pain when they have to prepare and pay their state income tax this time of year have every right to blame Prohibition for it. Faced with a multi-million dollar deficit because of the loss of revenue from the state liquor tax, lawmakers instituted a state personal income tax in 1919 to fill the anticipated hole in the state’s coffers.


            The New York State Legislative Committee on Taxation and Retrenchment which had been created by the legislature to figure out what to do to replace the anticipated loss of liquor taxes in 1920 when Prohibition was scheduled to go into effect, hired two nationally-known experts on public finance to advise it and prepare legislation. Professors E.R.A. Seligman of Columbia and Charles J. Bullock of Harvard recommended that New York State adopt a graduated personal income tax.
            Republican State Senator Frederick M. Davenport of Clinton, Oneida County, was chairman of the committee. He had run unsuccessfully as the Progressive Party’s candidate for lieutenant governor in 1912 when Theodore Roosevelt’s candidacy for president led to a split in the GOP, and unsuccessfully again in 1914 for governor.

State Senator Frederick M. Davenport

            On March 28, 1919, Davenport introduced a personal income tax bill in the state senate. Republican Assemblyman Franklin W. Judson, a farmer from Gates in Monroe County, introduced a similar measure in the assembly.
            Davenport said the new income tax “meets the demands of justice and fairness.” Other legislators would not go that far in support of the bill but given the loss of liquor tax revenue due to Prohibition, they said the new tax was “the only way out.”
            Many political figures adamantly disagreed. State Comptroller Eugene M. Travis, a Republican from Brooklyn and president of the Travis Fruit Company of New York City, led the opposition. He characterized the bill as dishonest and unnecessary and challenged the income tax supporters to submit the proposal to a vote of the people. Travis said, “The people of New York State do not want this bill.” He argued that it would be resented, evaded and avoided, and would result in people moving out of state because of “this unjust scheme.”

Comptroller Eugene M. Travis

            Travis proposed that instead of adopting a personal income tax to make up the anticipated deficit, lawmakers should amend the inheritance tax, stock transfer tax, and corporate income tax, and impose new taxes on motor vehicles and soft drinks.
            Other opposition to the new income tax came from upstate legislators. They objected to the way the proceeds from the income tax were going to be distributed. The bill called for them to be divided equally between the local and state governments. However, the division would be “in proportion that the assessed valuation of the real property in each county bears to the aggregate assessed valuation of the real property of the state.” In other words, cities would get more than rural districts because city property had a higher valuation.
            Proponents of the new income tax eventually won the day in the Republican-controlled state senate and assembly and the bill passed both houses. Governor Alfred E. Smith, a Democrat from New York City and a strong opponent of Prohibition, signed the bill on May 15, 1919. The deadline for filing the first New York State personal income tax returns was March 15, 1920.
            The state income tax law called for a 1% tax on personal incomes up to $10,000, 2% on incomes from $10,000 to $50,000, and 3% on incomes above $50,000. Not surprisingly, even after inflation is taken into account, the tax bills for 1919 income were lower when compared to today’s bills. For example, a married couple in 1919 who had a taxable income of $4,000, or about $52,000 in today’s money, would have to pay a $40 state income tax bill, or about $470 in today’s money. According to current state income tax rates, the tax on $52,000 for a married couple filing jointly is $2,703.


            The personal exemptions in the state’s first personal income tax law were also much more generous than they are today. A married couple in 1919 was allowed to exempt $2,000 from their income, or about $26,000 in today’s money. A married couple under current state income tax provisions is not allowed to take any exemptions for themselves!
            The exemptions for children on state income tax returns for 1919 were also more generous than they are for today’s returns. State taxpayers were allowed to exempt $200 for each dependent child 18 or under in 1919, or about $2,600 in today’s money. The exemption for each dependent in 2014 state returns is only $1,000.
            Prohibition was repealed in 1933 by the 21st Amendment and calls for repeal of the state income tax were immediately sounded. They fell on deaf ears. New York lawmakers were busy passing a new tax on alcoholic beverages.


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