How Not to Deal with the Oncoming Depression: The Case of New York StateNews at Home
New York State's public services—particularly education, healthcare, and programs for the poor—are currently in turmoil thanks to state budget slashing led by Governor David Paterson.
In the spring of 2008, shortly after the legislature adopted the 2008-09 budget, Paterson ordered a 3.35 percent cut in the operating budgets of state agencies. Later in the year, pointing to a $630 million deficit that had opened up in the 2008-09 budget and to a projected $6.4 billion deficit in the one for 2009-10, he ordered state agencies to make additional 7 percent cuts. In August, under pressure from the governor, the New York State legislature enacted measures that will cut back expenditures significantly in both fiscal years. And in mid-November, Paterson proposed an additional $2 billion in spending cuts for 2008-09.
Why is the New York governor doing this—particularly when, with the economy deteriorating, home foreclosures mounting, unemployment spreading, and hunger growing there is an increasing need for government to expand public services, not reduce them?
Paterson, business leaders, and others who advocate their slash and burn approach to state services point out that New York State is required by its constitution to maintain a balanced budget. Therefore, they argue, with the declining economy leading to a drop in state income, and with that drop in state income knocking the budget out of balance, they are forced to cut expenditures.
But what they do not say is why the state's budget is out of balance or how it might be balanced once again without cutting vital public services.
The major reason the New York State budget is out of balance today—and has been intermittently for decades now—is that, for the last thirty years, the state has been cutting the tax rate for the top income New Yorkers. Specifically, driven by the desire to create a "business-friendly environment" in New York State, successive governors have succeeded in gradually lowering the tax rate for people in the top income bracket from 15.38 percent to 6.85 percent.
Thus, today, despite its liberal image, New York has a rather flat income tax rate, ranging from a low of 4 percent to a high of 6.85 percent. And without a genuinely progressive tax structure that taps more than a tiny portion of the vast income of the wealthiest New Yorkers, the state does not bring in enough revenue to cover its expenditures.
This tender concern for safeguarding the fortunes of the rich at the expense of people dependent upon public services has not escaped critics of the latest budget cuts. Speaking at a public rally outside the state capitol on November 18, Richard Iannuzzi, president of the New York State United Teachers, declared that "this is not a time to look at the schoolchildren who are suffering, this is not a time to look at the elderly, this is not a time to look at those who are serviced by our health care institutions and to say to them, `Give more.' They have given enough." Instead, "it is time to look at the progressive income tax." Mark Dunlea, executive director of the Hunger Action Network of New York State, declared that New Yorkers are "tired of politicians who bail out Wall Street while the poor and middle class are threatened with the loss of their homes and don't have enough to feed their families. Even Republican voters in New York believe that millionaires deserve a tax hike."
This idea of a "millionaires' tax" is quite popular in New York. An August 2008 Quinnipiac University opinion poll found that, by a 78 to 18 percent margin, New York voters support raising the state income tax on people who earn more than $1 million per year. As Dunlea maintained, even Republicans support the tax hike, by 56 to 36 percent.
The idea is also popular with some eminent economists—among them Dr. Joseph Stiglitz, University Professor at Columbia University and recipient of the 2001 Nobel Prize in Economics. In a March 2008 letter to Governor Patterson and state legislative leaders, he wrote: "New York State's overall tax structure is in need of overhaul. It is regressive generally in asking households of modest means to pay a greater share of their incomes in state and local taxes than the share paid by higher income households. The long-run solution is to look more to the broad-based state personal income tax, with a graduated tax structure." He concluded: "The `millionaires' tax' is an important step in that direction."
One of the state's highly-respected think tanks, the Fiscal Policy Institute, estimates that a very small, temporary increase in the tax rates on the highest-income New Yorkers could yield as much as $7 billion per year—more than enough to cover the state's projected fiscal woes.
Those opposed to such tax hikes have insisted that higher taxes for people in the top income brackets would not work, for they would simply move to other states. But, not long ago, this argument proved fallacious. In 2003, to balance the budget, the New York State legislature, over the furious resistance of Governor George Pataki, slapped a temporary tax surcharge on the state's top income earners. The governor insisted that this measure would destroy the state's economy and lead to a massive flight by the richest New Yorkers. In fact, however, over the next few years, the state's economy improved significantly while the number of top income taxpayers in New York not only failed to decline but nearly doubled.
Furthermore, critics of the budget cuts have called attention to three additional sources of revenue for the state. One is the state's Tax Stablization Reserve Fund. Specifically designed to cover unplanned deficits, this "rainy day fund" has more than a billion dollars sitting in it. Even Dean Skelos, the Republican State Senate leader, has proposed dipping into this fund, declaring pointedly: "Governor, it is raining!" A second is federal assistance to the states that will almost certainly be provided by the incoming Obama administration's economic stimulus package. In 2003, under the conservative Bush administration, the federal government provided $20 billion in fiscal relief to the states, including over $2 billion to New York. Finally, a small stock transfer tax—which would fall very lightly on long-term investors but more heavily on speculators and computerized trading programs—could bring the state billions of dollars in additional yearly income.
Most of these proposals to balance the budget by drawing upon new sources of revenue have been made repeatedly by the Better Choice Budget Campaign and the One New York: Fighting for Fairness coalition, which bring together over two hundred non-profit groups, service providers, unions, and faith-based groups. And yet, curiously, the governor has refused to consider them or even to acknowledge that they exist. On November 18, after a protest rally of thousands outside the state capitol, he told the press: "No one has actually offered any alternatives to my plan."
Of course, the case against cutting government expenditures goes beyond the need to maintain public services. As Americans have known since at least the 1930s, government spending—and particularly spending that is funded by taxes on the wealthy—can also help to jump start the economy. In March 2008, Stiglitz told state government leaders that, faced with the choice of cutting state expenditures or raising taxes on the wealthy, "economic theory and evidence give a clear and unambiguous answer: it is economically preferable to raise taxes on those with high incomes than to cut state expenditures."
He went on to explain:
In a recession, you want to raise (or not decrease) the level of total spending—by households, businesses and government—in the economy. That keeps people employed and buying things, and makes it more likely that business will want to invest to serve that consumer demand. Budget cuts reduce the level of total spending. Raising taxes on high income households also will reduce spending, but by less than the amount of the tax increase since those with plenty of income typically spend only a fraction of their income—and some of what they spend is spent on luxury goods made abroad.
By contrast, every dollar of state and local spending enters the local economy right away, generating a greater economic impact. The impact is especially large when the money goes for salaries of teachers, policemen and firemen, doctors and nurses and others that provide vital services to our communities.
These ideas are not especially novel, particularly in New York State. After all, during the first years of the Great Depression, when Franklin Roosevelt served as governor, New York was one of the incubators of the New Deal's Keynesian approach. A staunch backer of unemployment insurance, Roosevelt became the first governor in the nation to demand state aid for relief. Moreover, New York's Temporary Emergency Relief Administration served as the first state relief agency in the country. Governor Roosevelt was also a keen advocate of expanding New York State's investment in public power programs and of having the state buy up abandoned farms for the purpose of reforestation. In New York City, too, the municipal government reacted to the Great Depression by investing heavily in upgrading the city's infrastructure. It established new (and free) city colleges like Brooklyn College (in 1930) and Queens College (in 1937), and opened its first city-owned subway line (in 1932).
By contrast, as the new depression rolls in and engulfs the nation, the Paterson administration is slashing funding for everything from the city university to Medicaid, from legal services to breakfast programs for the homeless. At the state university, where faculty and staff are already being terminated and administrators are weighing plans to shut off the lights and the heat, students are threatened with a sudden midyear tuition increase that, for those on the economic margin, will effectively end their college education.
All in all, New York's governor could hardly adopt a more regressive, unnecessary, and counterproductive approach to the growing economic crisis. What remains to be seen is whether the public and the state legislature will go along with it.
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Gary Ostrower - 12/5/2008
Well, I'm replying four days after the last post, so I'm not sure anyone will read this. Still, a response to Mr. Wittner's response in in order. Perhaps 15 states indeed have higher income tax rates than NY, along with higher growth rates, but calculating costs for business involves more than just income-tax rates. Add to those income taxes the cost of other taxes. Our local, county, and school property taxes are among the highest in the USA. Then toss in our sales taxes and vehicle fees, after which you add in our notoriously high utility fees. that's when you discover that NY becomes a very uninviting place to do business. Just ask yourself, why have so many business left NY and fled to states where the cost of doing business is lower?
In short, I want to preserve jobs, not punish the rich in an already punishing economic climate.
Lawrence S. Wittner - 12/2/2008
The facts do not bear out the critics of restoring some progressivity to the tax structure in New York State. Fifteen states currently have higher income tax rates than does New York State. Each one experienced positive private sector job growth from 2000 to 2008, with an average growth rate of 6.3 percent. By contrast, New York's private sector job growth during this period was 0.88 percent.
Also, even if we leave aside the fact that New York's regressive tax structure has a relatively poor record of producing new jobs, do you think that it is fair that, in New York, multi-millionaires pay at the same income tax rate rate (6.85 percent) as those earning $20,000 a year?
Bryan Mullinax - 12/2/2008
I think its a wonderful idea for New York to raise its taxes. So maybe a 50% rate on 100K and 99% on 250K and 105% on 500K - and then the state will have all the money it needs.
Or maybe it will still be crying poor because everybody who can will leave the state. But those who are left will be very progressive.
Think that will actually give you more money? Only until everybody who can will flee the state.
Government is an unending maw into which more money must be inserted. Of course the 'cuts' being discussed are only cutting the rate of growth of the beast. Just what year has New York actually spent less actual dollars than the year before?
Arnold Shcherban - 12/1/2008
Prof. Wittner has already answered your concerns, jentlemen, by providing recent historical precedent and respective data that defeats your "business-like" scare tactics.
Jules R. Benjamin - 12/1/2008
Concerning Mr. Ostrowers comment: His logic is impeccable. I ought to know. I live in North Carolina among all those formerly New York businessmen. Here we regularly read news articles about the need to keep business taxes low so that North Carolina firms do not migrate to Mexico. I would not be at all surprised to discover that legislators in Mexico City speak along the same lines concerning the likely departure of "Mexican" businesses to Chile. I guess the lesson in all of this is: Put Your Money into Antarctican Start Ups!
Gary Ostrower - 12/1/2008
In order to balance NYS's budget, Prof. Wittner argues that NYS should not slash expenditures that deprive the poor of social services. Instead, he writes, NY should increase taxes on the wealthy. He even notes that 80% of state residents favor a "millionaires tax."
Ignoring the fact that most people, rich or poor, want others to carry the tax burden, Mr. Wittner's plan has one serious flaw. By making NY even less inviting for commerce than it is now (many businesses have already fled NY's high taxes and high utility fees), we will see the unemployment rate climb even higher than it is now.
I happen to live in NYS's poorest county. We are a part of Appalachia, and we cannot afford to lose more businesses to N.C. and Texas and other low-tax havens. In short, while I admire Mr. Wittner's goals, I think his tax-hike plan is self-defeating.
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