Will the Rich Take Their Rolls?

Do we need a “millionaire’s tax” to solve New York’s budget crisis? Advocates of the tax say we do because New York doesn’t make the rich pay their fair share.

Opponents say that is not true and counter that hiking taxes on the very wealthy will only cause them to move out of state, depriving Albany of hundreds of millions, if not billions in tax revenue.

So who’s right? Get Real cuts through the crap and tells the truth:

New York State taxes are too regressive meaning the rich don’t pay their fair share.

That’s the claim and in one sense it is accurate — the wealthiest pay a smaller share of their income in total state and local taxes than do people with lower incomes. But in another sense the statement is actually pretty silly. Read on.

Advocates cite statistics from the Institute on Taxation and Economic Policy showing that the “effective tax burden” on the poorest fifth of New Yorkers is 12.6% (the highest for any group) and just 6.5% for the wealthiest 1%.

That’s interesting but these numbers represent the tax burden including ALL state and local taxes – including real estate and sales taxes. Not just income tax. Advocates also point to this:

That’s also interesting and accurate but only half the story – think about it: On one hand we learn people making 40K a year are paying the same tax rate as a millionaire while on the other we are told millionaire’s pay just half the tax rate of someone making a working class wage. Both are technically correct but neither prove that New York State’s taxes are particularly regressive.

For instance EJ McMahon of the conservative Empire Center for New York State Policy points out that:

“Exemptions, deductions and credits—which are phased out or capped for high-income taxpayers—play as large a role as the marginal tax rate in determining taxes for most families.  Middle-class New Yorkers pay lower graduated rates on the first $20,000 to $40,000 of their income, while those earning more than $150,000 pay a flat rate of 6.85% on all income. Thus, for example, a family of four earning $60,000 pays an effective rate of 2.5% (about $2,100), while a family with income of $1 million pays an effective rate of more than 6% (over $60,000).”

In other words the rich pay a higher effective income tax rate than the middle and working classes.

McMahon uses different stats to try and refute the advocates’ contentions about NY’s allegedly regressive taxes: “The highest-earning 1% paid 41% of income tax in 2007, up from 26% in 1994.  The top 1% will still be paying 35% this year, despite income and market losses.”

McMahon’s numbers demonstrate that as the rich have gotten much richer they have paid more in total taxes, which is also interesting, but it too does not directly address the issue:
Are New York State’s taxes regressive?

The answer seems to lie in another chart that advocates have included in their presentations – the same chart as the first one we showed you but with a breakdown of which taxes make up the “effective tax burden.”

Note that the lowest-earning fifth of New Yorkers do not pay income taxes at all and in fact get money from the state thanks to the nation’s most generous Earned Income Tax Credit. Note also that the income tax burden increases as the groups get wealthier. What’s interesting here is that the poorest fifth of the population pay the highest effective state and local tax rate and that’s because of sales and excise taxes. This group spends the largest share of its income on taxable goods (which makes sense since the working poor often live paycheck-to-paycheck while millionaires are able to live well and save large amounts of their earnings).

Advocates say that is precisely the point – the poor pay the biggest share of their income on taxes overall and that is regressive. But that’s because New York’s sales and property taxes are among the highest in the nation. Sales taxes are indeed considered regressive (poor pay higher percentage of their income than rich) but property taxes are less so.

So what’s the answer?

New York’s reliance on sales and real estate taxes coupled with a relatively high income tax puts more of the tax burden as a share of income on those in the lower-earning three-fifths of workers. That does make the state’s tax policies regressive but compared to taxpayers in other states not remarkably so.

More directly to the point – and why the claims made for a millionaire’s tax are more smoke than fire: If we want to make the income tax more progressive, ought we not also lower the sales tax to make it less regressive? After all, New Yorkers who are in the bottom fifth of the income ladder don’t even pay income taxes. Making the rich pay more won’t change that. On to the other major claim….

Wealthy New Yorkers will flee the state if their income taxes are hiked.

Governor Paterson has most famously used this argument to explain why he was opposed to a millionaire’s tax. But there’s strong evidence to suggest that’s unlikely to happen.

Both sides like to use New Jersey as an example and for good reason. In 2004 the Garden State hiked it’s top income tax rate from 6.35% to 9% on those making more than a half-million bucks a year. What happened? Depends on who you ask.

The Fair Share Tax Reform group cites a study done late last year by Princeton University’s Policy Research Institute for the Region. The report (with the eyes-glazing-over-as-we-read title “Trends in New Jersey Migration: Housing, Employment, and Taxation”) showed that the number of people earning more than $500,000 a year grew by 70% after the tax hike, resulting in an additional billion dollars a year in revenue for Trenton.

McMahon, on the other hand, notes:

“The Garden State has become one of the nation’s worst economic and fiscal basket cases. For tax years 2004-2006, the first three years after New Jersey raised its top rate, its population of high-income filers (those earning over $200,000 in adjusted gross income) increased by 44 percent, compared to a national rate of 59 percent. New Jersey’s growth rate in high-income taxpayers ranked 47th out of 50 states during that period; only Ohio, Connecticut (which also raised its top rate) and Michigan were lower.

The point is well-taken and begs the question: What does the experience of the boom years 2004-2008 have to do with what might happen as we slide into a very deep recession? The fact is neither side knows because there is no relevant research to look at.

But you have to ask: If New Jersey’s total tax burden (including property and sales) is the highest in the nation at 11.8% and Connecticut’s is third-highest at 11.1%, are wealthy New Yorkers who currently live in the second most-taxed state at 11.7% really going to move across the river or the border to save what would amount to them as little more than a few pennies?

It seems very unlikely. In fact the US Census Bureau asked about moving in the 2000 Census and found that 78% of those who moved said they did so for either family or housing reasons. In fact housing was the primary reason for moving among the wealthiest and best educated.

Certainly even this research misses the incredible changes in technology that allow people to work from remote locations – Jackson, Wyoming has millionaires galore who work from their ski lodges via blackberry and computer.

But based on what we know now, if Albany were to institute a higher tax on the state’s wealthy, there is no reason to believe any substantial number of them would leave.

Finally it’s worth noting that the “millionaire’s tax” has recently be redefined as a “quarter-millionaire’s tax” with the Fair Share Tax plan being promoted. The arguments being made are still the same, even if the number of people effected is much, much larger.

Now you know.

Wish You Were Here? Maybe Not.

New York’s budget hole is huge and growing as Governor Patterson reminded us all on Wednesday but if you want to see how bad things can get, go west.

As the LA Times lays out in painful detail, California’s budget woes are much worse than ours. New York faces a $14 billion gap this coming budget year while California’s deficit is $42 billion over the next 15 months.

Paterson has repeatedly warned that if Albany’s legislative leaders don’t agree to structural spending changes New York “might end up like California.” Here’s what he means:

Gov. Arnold Schwarzenegger and the legislative leaders in California’s capital, Sacramento, have agreed to cut spending on schools, colleges, and public transportation while increasing some key taxes and borrowing against future lottery earnings. That seems pretty sound, no? (Especially that borrowing bit….)

Here’s what the LA Times learned: “The deficit would be wiped out with $15 billion in cuts; $14.4 billion in new and increased taxes on sales, vehicles, gasoline and personal income; $12 billion in borrowing against future profits from the lottery; short-term loans; and various accounting maneuvers.” And you thought Albany was bad.

The deal comes less than a week after Schwarzenegger forced more than 200,000 state employees to take an unpaid day off last Friday meaning almost all state offices and services shut down. That’s expected to happen twice a month for the foreseeable future.

And while New York is debating whether to raise income taxes on those making more than $250,000 per year and to tax sugary drinks, all Californians will face a 2.5% income tax hike, sales taxes that reach nearly 10% in Los Angeles, and huge spikes in car registration and gas taxes.

Most striking to New Yorkers is the proposed $8 billion cut to education. Schools in California, like New York, are one of the biggest areas of state spending and are therefore impossible to ignore. California spent more than $35 billion on education last year while New York spent roughly $20 billion. But while California appears ready to deeply slash education spending, Paterson’s proposal to increase school aid by “only” $1.5 billion has been met with howls of protest. And remember: New York already spends about 60% more per pupil than our friends out west do.

All of this has been cobbled together without including any Federal stimulus funds. When that pile of cash comes to California (and come it will — the House Speaker is from California and the state is a huge Democratic winner for Presidents) the plans will certainly change, especially as regards any borrowing. But at the end of the day California may get $10 billion from Washington and that’s just a down payment on their problem.

Fortunately it looks like Albany will be crafting it’s budget deals after DC doles out the stimulus dollars which will help to make the choices clearer. But nothing should chasten New York’s lawmakers more than what’s happening in California.

Sacramento has spent years failing to match government spending to tax revenues (largely because California voters love to approve propositions that mandate spending and those that mandate cutting taxes, but that’s a story for another day). Albany has done the same. The bill is due.

Assembly Speaker Silver and Governor Paterson

There’s really nothing quite so annoying (aside from your boss) as Albany’s A-team proclaiming themselves “great” leaders for solving some terrible crisis or another when they in fact do nothing of the sort.

Today’s episode features absurd statements from Democrats and Republicans alike after the Democratic majorities of the Assembly and State Senate reached an agreement with the Democratic Governor to close a $1.6 billion gap in the current budget (which ends in less than two months).

The agreement essentially avoids almost any of hard choices by using more than $630 million in unspent state and federal funds, $300 million in health insurance fee hikes, $100 million in delayed payments to NYC,  a SUNY tuition hike, and a bunch of other little things.

Governor Paterson said “these are real, and half of them, recurring cuts,” detailing a few of the programs (arts grants, environment, member items) that he wished weren’t being cut but had to be, he said,  considering the economy.

Newly-installed Senate Majority Leader Malcolm Smith declared, “We are prepared to make the tough decisions that were not made two months ago,” at a news conference trumpeting the agreement. You’ll recall in Mid-November Republicans, then in control for only another six weeks after losing seats in the election, refused to even deal with Governor Paterson on his deficit reduction plan which contained politically toxic mid-year cuts to school aid and to the growth in the health care budget.

So of course, then-Majority Leader now-Minority Leader Senator Dean Skelos wants nothing to do with the agreement. Skelos called the health care cuts/fee hikes a disaster for “hard-working families.” Yet he offered no alternatives.

On the other hand Assembly Speaker Sheldon Silver said the deal was “a prudent and thoughtful response” making “difficult choices in difficult times.”

Oh please! Politically prudent perhaps but when 50% of the $1.6 billion in “tough choices” involves using unspent money, unexpected court settlements, or by delaying payments by a month,  the definition of “tough choices” is stretched. And despite all the belly-aching about fee hikes on health insurance, New York will still spend more than last year on health care and still rank #1 in per capita Medicaid spending by a very wide margin (twice what other big states and 25% more what other Northeastern states spend).

Carol Kellermann of the Citizens Budget Commission called the agreement “disappointing” with “no structural change.” She also pointed out that the health fees will be paid by health insurance companies. Paterson has said those companies could fund these increases through “their reserves” while at the same time saying the state couldn’t use it’s rainy day fund because it wouldn’t be smart. I guess what’s good for the goose may not be good for the gander….

To his credit Paterson has been crying “crisis” since the day he took office and not many have wanted to hear it. His multiple proposals for budget cuts all last year have faced very tough opposition from unions, industry groups, and Albany lawmakers. Maybe this is the best he could get for now. It does not bode well, however, for the next round of negotiations on how to close the $13 billion deficit in the next budget — which is due April 1.

New York State Capitol

While we all wait to see exactly what the US Senate comes up with for it’s version of the stimulus package it seems certain that the total amount will easily blow way past the $819 billion House plan which passed Wednesday. So what will it mean for New York? Especially the state government which is facing a $15.4 billion budget gap?And what about New York City where Mayor Bloomberg is unveiling his doomsday budget today?

Monetarily Sen. Chuck Schumer calculates the state and cities will get roughly $15 billion over the next two-plus years.The biggest chunk of help will come in Medicaid funding which happens to be the largest part of the state budget. But whatever portion of that $15 billion the state gets it assuredly will not be enough to close the deficit. That means all of Governor David Paterson’s doomsday talk and his resulting doomsday budget is still relevant.

Paterson’s budget, filled with fees and cuts, has met with pretty much total silence from Legislative leaders in Albany who have said it made no sense to even talk about what might need to be cut or what taxes and fees might need to be raised until the size of the Federal “donation” was understood. Well we’re pretty close to understanding now.

Paterson’s budget proposed roughly $9.5 billion in cuts — the lion’s share out of the two biggest areas of the budget, education and health care. Since the state can expect about $10 billion in Medicaid help over the next two years and roughly $5 billion in education assistance during the same period (not all of which goes to Albany — $11B is what one analyst said is likely to be Albany’s take), a quick back-of-the-envelope calculation shows that if lawmakers only wanted to use the Federal cash to offset budget cuts (as opposed to making the cuts and using the cash to reduce the tax and fee hikes) the number to cut comes down to a more manageable $4 billion.

While budget watchdogs and even the Governor may scream that the current crisis should be used to reform health care and education funding in NYS (which are generally far above what almost any other state spends with no benefit to show for it) we’ve all seen this scene before.

Under Republicans and Democrats New York’s government has almost always taken the easy way out, using one-shot asset sales, windfalls, and various accounting tricks to avoid facing the hard truth: New York State spends too much and New York citizens get too little for it.

You’d think the prospect of a second Great Depression coupled with a 15 billion dollar Federal gift might persuade the Legislature to fix the chronic budget mess under the cover of crisis. But you’d probably think wrong.

As for the city, Schumer says Gotham should get around $3.4 billion in health and education funding or about $1.7 billion this year and the same next year. The Independent Budget Office just estimated the city’s budget gap for 2009 has grown to $4.3 billion. The Mayor’s budget will count on that Federal cash but he will propose a sales tax increase, service cuts, and worker benefit changes to close the $2.6 billion gap that will remain.

Of course the politics at City Hall will be somewhat different because while the Mayor and most of the council members are running for reelection this November they don’t have the luxury Albany has of “creative budgeting”. That’s because back in the 70′s Albany made New York City adhere to very strict balanced budget rules. Too bad Albany won’t live by the very effective rules it sets for others….