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.

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]

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]

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.

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.