New York Has a Spending, Not Revenue, Problem
For nearly a decade, New York state has enjoyed record tax receipts courtesy of the bull run on Wall Street. During good economic times, when treasury coffers are full, it is easy to be a legislator with plenty of taxpayer cash available to fund pet projects and reward political allies.
Unfortunately for taxpayers, the breakdown in budget discipline during good times creates a cycle of government expansion and higher taxes. Every revenue increase is met with more spending, but when things slow down, state taxpayers are on the hook to cover holes in the bloated budget.
New York is trapped in this cycle. Since 2000, the New York state budget has rocketed from $73 billion to a proposed 2008 budget of $124 billion, a staggering 70 percent increase. The current slowdown has cut into tax receipts, leaving taxpayers to cover up a $4.8 billion hole in the budget.
When a family or business faces a budget crunch, they set priorities and live within a budget dictated by economic reality. This is also what prudent legislators do to save taxpayers from the double whammy of an economic slowdown and higher taxes.
But this is not what is being proposed in Albany. In these tough times, newly installed Governor David Paterson is not restraining, or even flat lining, but actually proposing a 5 percent jump in state spending and a host of new taxes. Only in government could someone claim to be ‘cutting’ spending by reducing the rate of growth.
Under consideration is an assortment of new taxes. Politicians are treading carefully, trying to anger as few voters as possible, which is no small task: Property tax rates have soared 51 percent since 2000, New Yorkers already have the third highest state and local tax rate in the nation, and according to the Tax Foundation, New York’s business tax climate ranks third to last.
So politicians are targeting small groups in their efforts to fix the budget mess. First up are the cigarette smokers. This much maligned group is yet again being counted on to disproportionately support New York’s profligate spending ways. Cigarette taxes disproportionately hit poor and working class folks doing something perfectly legal. These regressive taxes also cause catastrophic financial losses to mom and pop convenience stores while your next door neighbors technically become criminals as they cross state lines looking for tax relief.
Cigarette taxes may allow the government to grow, but in the long run they are a declining source of revenue. Sooner, rather than later, it will fall on the non-smoking taxpayer to make up this difference.
Also being proposed at the other end of the economic spectrum is the new “millionaire” tax, based on the belief that if all else fails, you can just have wealthy people pay more. Millionaire taxes are perverse in two ways. First, taxes targeting the rich often kill the goose that lays the golden egg. These individuals have the ability to take their incomes across state and international boundaries—along with the jobs they create with them. Second, millionaire taxes have a habit of eventually expanding to ensnare middle class taxpayers. The federal Alternative Minimum Tax was originally designed to target just a few dozen individuals, but by 2010 almost one out of five taxpayers may be liable for this tax on the “wealthy.”
Before sticking the taxpayers, New York should study a similar budget problem faced by Alabama a few years ago. In 2003, Alabama’s governor was poised to raise a billion dollars in new taxes to fill a hole in the budget, but fortunately for Alabamians it first had to pass a vote of the people.
Politicians and public sector unions claimed the sky was falling. If the new tax was not passed children were going to starve, grandmas were going to be tossed into the street, and Friday night high school football was going to be canceled.
Voters knew better than to believe that nothing could be cut from the Alabama budget and defeated the new tax by a two to one majority. None of the dire predictions came true. No prisoners roamed the streets and football is still played on Friday night.
The Alabama state government had to prioritize and live within its means. What citizens did notice was a more efficient and productive state government. The tight budget paved the way for a private sector recovery, and the state quickly went from deficit to surplus. By 2006 the surplus was so large that taxpayers received refunds, and the ‘reformed’ Governor Bob Riley ran for reelection on a platform including tax cuts.
Politicians in New York have an opportunity to break the tax and spend cycle during this budget debate. Legislators can either do the hard work and set spending priorities that require the state to work within a budget, or they can pass the buck to the taxpayer and continue expanding the state’s government. Raising taxes will hurt family budgets and make the crisis worse by hindering private sector job creation. While the gaps in the budget are temporary, new taxes will be permanent. New Yorkers can only hope that the taxpayers’ interests are not forgotten in the latest round of the budget battle.
