By Jimmy Vielkind

ALBANY, N.Y. -- Democrats who dominate the New York state Assembly and Senate are pushing to increase taxes on the state's top earners beyond the level proposed earlier this year by Gov. Andrew Cuomo and have introduced a new surcharge on capital gains as budget negotiations enter their final phase.

Democratic legislators proposed tax packages that would each raise more than $6.5 billion of additional revenue with a variety of new and increased levies. The measures would boost total state spending above $200 billion by increasing outlays for education, transportation and healthcare as well as by adding grant programs for small businesses and tenants.

While they didn't advance proposals to tax financial transactions or impose a form of wealth tax on unrealized capital gains, leaders of the Senate and Assembly proposed increases to the state's personal income tax, estate tax and corporate franchise tax. The higher taxes would affect individuals reporting more than $1 million of income.

Each chamber of the Legislature this week passed a nonbinding budget resolution that lays out its position in final talks with the Democratic executive before the state fiscal year ends on March 31.

Mr. Cuomo has cut income and estate taxes since he took office in 2011, but this year he proposed a $193 billion budget with a $1.5 billion income-tax increase affecting joint filers reporting more than $5 million of income. On Monday, he warned that excessive tax hikes could prompt people and businesses to relocate.

The fiscal clash comes as the governor faces accusations that he behaved inappropriately toward multiple women and a federal probe into the state's handling of Covid-19 in nursing homes. Senate Majority Leader Andrea Stewart-Cousins has called for Mr. Cuomo to resign, and Assembly Speaker Carl Heastie announced an impeachment investigation into the governor's conduct.

Mr. Cuomo has said he wouldn't resign, and his aides say they are cooperating with the federal probe. The governor has asked people to withhold judgment until state Attorney General Letitia James completes an investigation into the harassment claims. Mr. Cuomo has said he never touched anyone inappropriately and has apologized if his behavior made anyone uncomfortable.

The budget proposals are another point of friction between the governor and legislators, who have faced pressure this year from unions and progressive groups to raise taxes on the wealthy and increase funding for social-service programs.

Both Mr. Heastie, a Democrat from the Bronx and Ms. Stewart-Cousins, a Democrat from Yonkers, said they were still planning to negotiate with the governor but to do so from a position of strength.

"There's a clear message from where the Legislature is, and we hope the governor agrees with us," Mr. Heastie said Monday. "One of the reasons we need to do revenue raisers is we need to make investments if the state is really going to recover," he said, referring to the economic impact of the coronavirus pandemic.

Freeman Klopott, a spokesman for Mr. Cuomo's budget office, said staffers for the governor and Legislature "have begun negotiations as they do every year along a constitutionally defined process."

The governor's plan would have already meant high-income residents of New York City would pay the highest combined income-tax rate in the country. Wealthy people account for most of the state's income tax base: The highest-earning 5% of filers -- who pay currently pay a top tax rate of 8.82% -- account for more than 60% of the revenue that is raised. Under Mr. Cuomo's plan, the top rate would rise to 10.82% on income over $100 million.

Each chamber in the Legislature proposed an income-tax hike that would increase rates on joint filers reporting more than $2.16 million of income to 9.85% and escalate to a top rate of 11.85%. The top rate would kick in for income over $25 million under the Assembly plan and over $50 million under the Senate plan.

Unlike the federal government, New York taxes capital gains at the same rate as ordinary income. Legislators have proposed a 1% surcharge on capital gains for millionaires. State Sen. Liz Krueger, a Democrat from Manhattan, said the new levy was a response to decreases in federal capital-gains taxes enacted in 2017.

Kathryn Wylde, chief executive of the business group Partnership for New York City, said the capital-gains surcharge would discourage initial public offerings in the state. Kevin Law of the Long Island Association, which represents businesses in Nassau and Suffolk counties, criticized what he called the Legislature's "new, unnecessary and punitive taxes that will chase businesses and individuals out of the state and slow down the post-Covid recovery of our economy."

Andrew Rein, president of the Citizens Budget Commission, a nonpartisan fiscal watchdog, said federal aid approved last week obviated the need for tax increases in New York. The state will receive $12.5 billion under the stimulus package. Mr. Cuomo's proposed budget counted on $6 billion spread across two fiscal years.

Labor leaders praised the legislative budget plans. New York state AFL-CIO President Mario Cilento said the Senate's proposal would "put our state on a clear path to social and economic recovery."

Write to Jimmy Vielkind at Jimmy.Vielkind@wsj.com

(END) Dow Jones Newswires

03-16-21 1744ET