The discovery that a wrinkle in the new laws covering estate taxes may drive wealthy New Yorkers to set up their domiciles in other states has led to a bit of discussion around town about the degree to which the state’s fisc more generally is mortgaged to the rich. This stems from the fact that the state’s high income residents bear a disproportionate share of the tax burden. The revenue stream of the state is so closely tied to the fortunes of the affluent as to put the budget in a precarious position. Or, as E.J. McMahon of the Manhattan Institute puts it, “When the rich get a toothache in New York, the state gets a big headache.”

The main culprit is New York’s income tax, one of the most “progressive” in the country, which provides the state with the majority of its revenue. In 1998, the last year for which the New York State Department of Taxation and Finance has the numbers broken down by income level, figures show that the wealthiest 3% of taxpayers, those who made more than $200,000, paid 42.4% of all income taxes. The top tenth of taxpayers, those who made more than $100,000, paid almost 60% of all income taxes. Now there’s talk of instituting an income tax surcharge in New York City, which already charges the richest city residents an extra 3.65 percentage points of income tax.

Even under a flat tax, rich people would pay a greater share of taxes than the poor and the middle class, since the wealthy earn a greater portion of the state’s income. But skewing the curve too far can have risks, including that the rich could flee the state. If they don’t flee, the other risk is that a bad year for the wealthy, who earn much of their income from their businesses and the stock market, can mean a bad year for the state. According to Mr. McMahon, that is at least in part what happened to New York this year. While sales tax revenue remained fairly stable, and employment dipped only slightly, income tax revenues took a hit most likely because it was a bad year for the rich.

This doesn’t mean the tax burden would be better shifted onto the middle class. New York’s income tax already hits the middle class hard, with the highest rate — 6.85% — kicking in for married couples earning as little as $40,000 and for the single payer who earns as little as $20,000. This is in contrast to our more middle-class- friendly neighbors, such as New Jersey, which saves its highest rate of 6.37% for those earning more than $150,000; Connecticut, which has a flat rate of 4.5%, and Pennsylvania, which has a flat rate of 2.8%. The way to create a more stable tax system would be to flatten rates and lower them, bearing in mind that the reduction of taxes at the top margin — meaning taxes on the next dollar earned — creates such an incentive to work that it often results in an increase of revenue.