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Introduction
The Bill Comes Due on
New York's Fiscal Failures
New York has lost its place as the seat of the U.S.’s economic empire,
and the state’s astonishingly high tax burden deserves much of the blame.
But it wasn’t always this way.
New York’s taxes and spending were near the national average before Nelson
Rockefeller [right] took office as governor in 1959. Even in 1962—near
the end of Rockefeller’s first term—New York’s state tax burden
relative to income was still below the national mean, and its budget was only
slightly above average on a per-capita basis. Between the early 1960s and mid-1970s,
however, state taxes and spending in New York rose significantly faster than
in the rest of the country. New York’s economic decline relative to other
states began during the same period.
New
York’s overall burden of taxation, further swollen by local taxes that
have risen even faster, has ranked first- or second-heaviest among the 50 states
since 1970. As of 2005, state and local taxes per $1,000 of personal income
in New York were 20 percent above the national average—a gulf that tends
to be even wider for the state’s most productive businesses and citizens.
These are New York’s obvious, major taxes—and they are only part
of the story. Businesses and individuals pay plenty of hidden taxes as well:
- The state now collects over $2 billion a year in unique taxes and special
assessments on private health plans—slightly more than New York collects
from the state’s main business
income tax. New York’s workers’ compensation costs, the nation’s
third-highest on a costs-per-case basis,[24] are inflated by “assessments”—that
is, in effect, $860 million in taxes added to premiums to support various special-purpose funds and the state’s
well-staffed Workers’ Compensation Board.
- New York’s electricity costs, the nation’s second-highest for all
retail customers,[25] are inflated by a “systems benefit
charge” added to all energy bills, which funds various experimental programs
and the state’s energy regulatory bureaucracy.
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My New Kentucky Home
For an example of how and why New York’s taxes really
matter, consider the experience of Bart and Lynne Vertrees.
Until recently, the couple lived in a $300,000 home in a gated golf community
near Austin, Texas. But when Bart Vertrees retired in late 2004, he and
his wife were free to move anywhere in the country.
The Vertreeses were initially attracted to Rochester, with its four full
seasons and assorted other charms, so they drove cross-country in October
2004 to house-hunt in that upstate New York city.
As a real-estate agent later explained,[34] the couple
considered retiring to a $125,000 house in Rochester but changed their
minds when they learned that their annual property taxes would be considerably
more than they were paying for a far more valuable property in Austin.
“The taxes on that house were $4,350,” Bart Vertrees said.
“We can’t put money into our community, put money into shops
and stores in Rochester, or play golf if we are spending that money on
taxes.” So they bought a 2,500-square-foot home in Kentucky instead,
with taxes under $1,000 a year.
As the Rochester real-estate agent ruefully concluded, “I lost a
sale, they lost a dream, and the community lost some potentially good
neighbors.”[35]
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What drives all this taxation? Spending—and growth in spending—that
has dwarfed New York’s rate of inflation for years.[26]
The state budget has expanded 28 percent under the five budgets enacted since
the spring of 2001—a period encompassing a national recession, a stock-market
meltdown, and the attack on the World Trade Center, all of which culminated in
the worst downturn in tax collections since the Great Depression.[27]
When Albany spends more, lawmakers and spending advocates both expect funding
increases to be permanent. But in too many cases, lawmakers rely on “one-shots”—one-time
sources of cash that pay the bill in the first year but do nothing to fund this
spending in future years. There hasn’t been nearly enough recurring revenue
to pay for these recent commitments to increase spending—yet, left on autopilot,
state spending is on track to grow another 23 percent by 2008. So, despite a
resurgent economy and growing revenues, Albany is looking ahead to multibillion-dollar
budget shortfalls as far as the eye can see.[28]
Unfortunately for New York, the rest of the world is taking notice. Rankings
of states consistently list New York among the least attractive.
New York ranked:
- 31st in the Beacon Hill Institute’s 2004 Metro Area and State Competitiveness
Report 2004.[29]
- 45th in the Small Business Survival Index 2004.[30]
- 49th out of 50 states and ten Canadian provinces in the 2005 Economic
Freedom of North America report by the National Center for Policy Analysis and
the Fraser Institute of Canada.
- 49th in the Tax Foundation’s State Business Tax Climate Index 2004.[31]
- 50th—dead last—in the Pacific Research Institute’s 2004
U.S. Economic Freedom Index.[32]
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"The state budget has expanded 8 percent since 2001, and spending
is on track to grow another percent by 2008."
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A recent study by an association of economic-development professionals was
especially telling. Based on interviews with site-selection consultants and
corporate real-estate executives,[33] it confirmed that
New York State has regularly lost competitions with other states for new plants
and jobs because its costs—especially taxes—were too high. Many executives
interviewed in the survey admitted that New York misses even the first cut because
of these costs.
The evidence is overwhelming. New York’s taxes are too high because its
spending is too high. This hurts the state’s economy—and perceptions
of it. New York has a grim future unless lawmakers reverse these trends.
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Unlike Taxpayers, Turkeys Can’t Fly
Onondaga County turkey farmer Mark Bitz began a one-man
campaign in 2004 to enact reforms to reduce New York’s taxes and business
costs. In an extraordinary op-ed piece published in the Syracuse Post-Standard
and on his own website, FreeNYS.org,[36] the businessman
noted that New York State’s major employer costs—workers’
compensation, health insurance, energy, and property taxes—were much
higher than those 
of all other states. For Plainville Farms, which has been in Bitz’s
family for six generations, these state levies gobble up $600,000 a year—money
that would be better spent increasing jobs, pay, and capital investment.
Bitz frankly acknowledges that his business is much less interesting to
potential buyers solely because it is located in New York. In fact, he estimates
that his likely
selling price would be 30 percent higher if the business were in any other
state.[37] New York’s long-term job-growth numbers
suggest that many businesses and individuals that once called New York home
did not share Bitz’s reluctance to leave. Between 1990 and 2004, while
the nation added jobs at a brisk 20 percent clip, New York’s job-growth
rate was a lethargic 2.9 percent. Unless Governor Pataki and legislative
leaders enact policy changes to help businesses like Plainville Farms compete,
more businesses and individuals will flee.
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24. See data from the National Council on Compensation Insurance
compiled at http://www.ppinys.org/reports/jtf2004/workerscomp.htm.
25. See data from the U.S. Energy Information Administration compiled at http://www.ppinys.org/reports/jtf2004/electricprice.htm.
26. E. J. McMahon Jr., "Like There's No Tomorrow," New York Sun
op-ed, March 8, 2005. Available from http://www.manhattan-institute.org.
27. See Empire Center for New York State Policy News and Commentary item posted
at http://www.empirecenter.org/2005/04/ever_upward_sti.php.
28. New York State Division of the Budget, New York State 2005–06 Enacted
Budget Report, April 18, 2005.
29. See the Beacon Hill Institute’s Metro Area and State Competitiveness
Report 2004 at
http://www.beaconhill.org/Compete04/PRCompete04FINAL.pdf.
30. Raymond J. Keating, Small Business Survival Index 2004 (Small Businesses
& Entrepreneurship Council, October 2004), available at
http://www.sbsc.org/Media/pdf/SBSI_ 2004.pdf.
31. State Business Tax Climate Index 2004, Tax Foundation. See http://www.taxfoundation.org/files/e7ed0dcfb442edeaa3d35c1c4f89a7b0.pdf.
32. 2004 U.S. Economic Freedom Index, Pacific Research Institute, available
at http://www.pacificresearch.org/pub/sab/entrep/2004/econ_freedom.
33. The study, conducted by Kate McEnroe Consulting for the New York State Economic
Development Council, is described at http://www.nysedc.org/newsletter/0305lede.pdf.
34. "Texans Drawn to Rochester but Repelled by Tax Burden," Rochester Democrat
and Chronicle op-ed, November 5, 2004.
35. Ibid.
36. Mark Bitz, “He’s Talking Turkey about What You Can Do to Reform Albany,”
Syracuse Post-Standard, September 26, 2004. The essay is still available
in its entirety at www.freenys.org/oped.php.
37. Ibid.
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