ALBANY, N.Y.—New York Gov. Andrew Cuomo proposed raising the state’s top income-tax rate by 2 percentage points, an increase that would mean New York City residents in the top bracket would pay the highest combined local tax rate in the country.
Mr. Cuomo, a Democrat, included the tax increase as part of a $193 billion budget he unveiled Tuesday for the fiscal year that starts on April 1.
He said the increase would raise around $1.5 billion in tax revenue, and would be coupled with federal aid and operating cuts to cover a projected $15 billion deficit in the current and coming fiscal years.
New York’s top income-tax rate would rise to 10.82% from 8.82% under the proposal, state officials said, adding that they would create five new tax brackets that would last for three years.
The new surcharge would apply to all New Yorkers whose returns report more than $5 million in income, and the top rate would apply to income that exceeds $100 million.
Currently, single filers pay an 8.82% state tax rate on income over $1.08 million.
New York City’s top income tax is 3.88%. That means some city residents could face a combined state and city income tax of 14.7% under Mr. Cuomo’s proposal. California currently has the highest top income-tax rate, 13.3% on income over $1 million.
Mr. Cuomo said at a Tuesday press conference that he is concerned his move would prompt high-income earners to leave the state, and added that the tax proposal could be avoided if the federal government approves a large amount of aid to make up for revenue lost as a result of the coronavirus pandemic.
“If the federal government doesn’t fund state and local governments, it’s going to hurt all New Yorkers,” Mr. Cuomo said. “The new government didn’t cause the damage. But they are legally, ethically and politically responsible for correcting it.”
The governor said he is seeking $15 billion in aid from Washington over the next two fiscal years, which is the size of the state tax revenue shortfall his office attributes to the pandemic. Mr. Cuomo also said he would raise revenue by legalizing mobile sports betting and marijuana, but the measures are only projected to generate, respectively, $49 million and $20 million next year.
President-elect Joe Biden on Thursday proposed a $1.9 trillion coronavirus relief bill that sets aside $350 billion for state and local governments. U.S. Sen. Chuck Schumer (D., N.Y.), who is poised to become the chamber’s majority leader, said in a statement he was pleased with Mr. Biden’s proposal.
Business groups expressed concern over raising income taxes. The wealthiest 2% of state taxpayers—or roughly 188,000 filers—provide about half of the state’s income tax revenue. Thousands of people have left New York City and are working remotely, and higher rates could prevent their return, the groups said.
“It makes economic recovery almost impossible, since business and investment talent will be highly incentivized to permanently relocate to lower-taxed jurisdictions,” said Kathryn Wylde, chief executive of the business group Partnership for New York City.
A coalition of labor unions and progressive groups has been pushing state lawmakers to raise income taxes by an even greater amount, and impose taxes on financial transactions and unrealized wealth. They said Mr. Cuomo’s proposal was inadequate.
“New York is in economic free fall—yet in the face of widespread hunger, homelessness and unemployment, the governor is proposing piecemeal solutions,” said Rebecca Bailin, manager of the pro-tax Invest in Our New York Campaign.
Democrats who control the state Assembly and Senate have said they were open to increasing taxes to cover the current budget deficit. On Tuesday, Senate Majority Leader Andrea Stewart-Cousins, a Democrat from Yonkers, said lawmakers “have a responsibility to ensure our recovery and that this recovery is not balanced on the backs of the hard-hit New Yorkers.”
“While we desperately need help from the incoming Biden administration and our federal partners, we must also ask the wealthy to do more,” said Assembly Speaker Carl Heastie, a Democrat from the Bronx, in a statement.
Republicans said Mr. Cuomo should have directed less rhetoric at the federal government. “Most of the morning was spent passing the buck on to Washington, D.C.,” said Assembly Minority Leader Will Barclay, a Republican from Oswego County. State Sen. Tom O’Mara, a Republican from Chemung County, said raising taxes was “problematic.”
If additional federal money is forthcoming, Mr. Cuomo promised new initiatives that he said would help New York recover from the novel coronavirus.
They included $50 million of tax credits to help restaurants that were forced to close, $1.3 billion in assistance for renters who are at risk of homelessness because of the pandemic and a scheduled tax cut for middle-income New Yorkers totaling around $400 million.
The proposed budget for the coming fiscal year counts on $2 billion of federal aid that has already been approved, and $3 billion of additional unrestricted funding that Mr. Cuomo would like to see approved.
State Budget Director Robert Mujica said the state would save money by sending around $600 million less aid to public school districts, but that districts’ overall funding will increase by $2.1 billion because of $4.3 billion for schools that was approved by Congress in December.
Andy Pallotta, president of the New York State United Teachers union, said he was wary of using federal funds to supplant state support for schools.
Write to Jimmy Vielkind at Jimmy.Vielkind@wsj.com
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Appeared in the January 20, 2021, print edition as ‘Cuomo Proposes Tax Rise for Wealthy.’