Tax Dodgers

Governor David A. Paterson

Just after Albany enacted the $131.8 billion state budget last week, Governor David A. Paterson joked about one of its more unimportant collateral consequences. This was the announcement by motormouth, med-head radio demagogue Rush Limbaugh that he was selling his Park Avenue apartment and abandoning this state because of “these stupid, massive tax increases.”

He was fulminating about the increased tax rates for three years on individuals reporting at least $200,000, and couples with $300,000 in reported income. “If I’d known that would be the result,” Paterson cracked, “I would have thought about the taxes earlier.”

Or not. The governor had been warning of alarming results if these taxes were raised. Businesses and individuals would flee the state, he announced; the state’s economy, already damaged by the recession, would be further devastated.

In the end, Paterson went along with the two other members of the troika that really decides things in Albany, Assembly leader Sheldon Silvers and new Senate Majority leader Malcolm A. Smith, both Democrats. No Republicans voted for the budget, or the tax increase.

The governor had respectable authority for his dire predictions. The prevailing political and economic dogma that frames discussions of the subject holds any tax increases in very low esteem. For example, Mark Bils, chair of the University of Rochester economics department, told Artvoice last month, “When you raise taxes, you reduce activity and drive out residents. When you tax wealth, you get less of it.”

Last week, Artvoice contributor and former Erie County deputy executive Bruce Fisher commented in these pages on the free-market myopia of much of the economics discipline. In fact, there is little or no persuasive evidence for the governor and Professor Bils’ assertions. And Paterson, in particular, should have known better. Six years ago, he was a member of the Republican-controlled State Senate that passed, in the wake of the dot-com bust, a measure increasing taxes for three years on reported incomes of at least $500,000. The data show that job growth didn’t decline and that the number of high-income filers increased during the period the tax was in place. If that tax measure hadn’t expired three years ago, the state’s present fiscal morass, and its $17-odd billion projected deficit, would both be smaller. As well, a modest degree of equity would be restored to New York’s tax structure. (The same sort of benign consequences obtained when New Jersey imposed higher taxes on the wealthy six years ago.)

Buffalo-area Democratic Assemblyman Sam Hoyt voted against all nine of the bills comprising the budget—although, as the Buffalo News noted editorially this week, he and five other Democratic naysayers in that chamber probably knew the leadership didn’t need their votes. Hoyt argues that to vote for these taxes without commensurate reductions in spending would play into stereotypes of Democrats as tax-and-spend profligates. He says he wanted to reduce expenditures by merging redundant and overlapping state agencies—such as placing the Thruway Authority in the Department of Transportation and substance abuse services within the Department of Mental Health.

Such ideas may have merit, but as Bob Ward, the deputy director of the Rockefeller Institute of Government in Albany, observes, consolidation won’t solve New York’s budget problems. There aren’t enough dollars to be found that way, he says. The bottom line, Ward said in an interview, is that spending was increasing faster than revenue even before the recession.

Just two program areas account for two-thirds of the state’s operating budget (not including capital outlays and federal funding): education and Medicaid. New York is obligated to a court-imposed education funding increase over the next several years. As it is, holding foundational (general) aid steady in this budget will do damage to the budgets of Buffalo and other New York school systems over the next year.

What else might have been, and could be, done? To begin with, genuine reform of the tax system. State incomes taxes have been falling for three decades, but most New Yorkers have been paying more taxes. That’s because the state has shifted the burden to the middle and working classes, who pay the difference in property and sales taxes. Even the Rockefeller Institute’s Ward, no fan of taxes, favors making the new tax rates permanent. (Fourteen states have higher rates than New York.) Doing this would bring in from $3 billion to $7 billion annually, depending on the rate scheme.

The local share of Medicaid costs should be funded on an “ability to pay” basis rather than the cost of services rendered, as is now done. Remedying this would ease the strain on counties’ property tax bases, and stop penalizing poorer localities, like Buffalo, with the highest use and the lowest resources.

The state could close or reduce the loopholes through which large corporations slip to avoid taxes. Fifteen years ago, Philadelphia Inquirer reporters Donald L. Bartlett and James B. Steele noted in a book on American tax programs that corporate income taxes in New York, as a percentage of collections, had declined by almost one-half over the previous three decades. Since then, the situation has worsened. (Notice all the job growth that’s resulted from that decline?)

These and other approaches, including measures at the federal level—national healthcare, for example—could begin to reduce the burden on the state and most of its residents. But if this year’s budget deliberations are any indication, the ideological Maginot Line blocking such changes isn’t soon going to be breached or gone around by our political leaders.

—george sax