Soak-The-Rich Strategies Backfire In State After Deficit-Ridden State
By STEVEN MALANGA
Posted 06:13 PM ET
When David Paterson became governor of New York after Eliot Spitzer's hooker
escapades, the former state senator from Harlem shocked New Yorkers by
declaring that taxes were too high and that he had many friends who had left
the state because there were better opportunities elsewhere.
New York had to grab control of its spending rather than continue raising
taxes, said the former state senator with a long tax-and-spend track record,
in what amounted to the equivalent of ideological heresy.
Still, as a political lightweight and accidental governor, Paterson quickly
got rolled by the big-government wing of his own party, which passed a
budget for this year with $6.1 billion in projected new taxes and fees, led
by sharply higher rates starting for those earning more than $200,000 a
year.
Asked if the budget made sense in the recession, an outgunned Paterson said:
"None of this makes sense."
I suppose it is cold comfort to New Yorkers that Paterson is now giving his
political enemies the "I told you so" treatment. Speaking to reporters
recently in Albany, Paterson noted that revenue from tax increases was
running 20% below projections and that, in particular, the wealthy were not
paying up. So far, the state had only collected about half of an expected $1
billion in income tax revenues from the state's wealthiest residents.
"You heard the mantra, 'Tax the rich, tax the rich,'" Paterson said. "We've
done that. We've probably lost jobs and driven people out of the state."
In a story about New York's tax woes, the Associated Press noted that other
states that had enacted so-called millionaires' taxes (most of which, like
New York's, start well under $1 million in annual income) were squirming
upon hearing the New York numbers. Actually, some of these states have been
squirming for a while.
New Jersey enacted its millionaires' tax in 2004. Pitched by the state's
unions as the cure for Jersey's budget woes, the state collected $9.5
billion in personal income taxes in fiscal 2005. Last year, four budget
cycles later, the state collected only $10.3 billion, and this year it's
estimating just $9.4 billion from the same tax.
Revenues have fallen so far below projections that Jersey has actually had
to cut its spending (not just its rate of spending, like most states) by
more than $3 billion this year despite $2 billion in federal stimulus aid
for the state budget. And even so, Jersey had to skip payments to its
pension system.
If it were a business, Jersey would be insolvent - a remarkable achievement
in a place whose residents boast the highest personal income in the nation.
Maryland enacted its millionaires' tax in the fall of 2007. Earlier this
year, the state scrambled to enact midyear budget cuts because of a sharp
shortfall in revenues. Year-to-date personal income tax collections are off
by about $650 million, and the Maryland comptroller has said: "It seems
reasonable to assume ... that there will be a significant decline in the
number of returns with taxable income over $1 million and a substantial
decline in the income reported on those returns."
In each of these states there has been a debate about whether high taxes
have driven the rich to relocate.
Shortly after the New York state budget passed, Tom Golisano, a former
Independent Party candidate and the owner of the Buffalo Sabres hockey team,
said he was moving to Florida to escape the Empire State's high taxes, which
in his case amounted to $13,000 a day.
The head of the Working Families Party, the New York party founded by the
state's unions and Acorn that had lobbied for the tax increases, said good
riddance to Golisano. The New York Times, meanwhile, observed that people
don't relocate because of high taxes, although at $13,000 a day the
motivation for leaving seems pretty high.
But the issue goes beyond very rich guys like Golisano with a big nest egg
and lots of personal mobility. Many small and midsize businesses that
organize as sole proprietorships, partnerships and S corporations report
their earnings through the personal income taxes of the partners or owners,
and hence they pay taxes at individual income-tax rates.
In fact, small-business owners and partners are the main target of tax
increases at the top rates. A 2003 study by the Tax Foundation found that
two-thirds of taxpayers in the highest tax bracket report income from
businesses on their tax forms.
So it's not surprising that high individual tax rates discourage
entrepreneurship, reduce investment and slow hiring at small firms. You
don't have to scour a state to find rich people mad enough to leave in order
to understand the impact of high income tax rates on a local economy.
Still there's more bad news for the states with the highest rates, including
California and Ohio. At the very least we are about to see the top two
federal brackets boosted to 36% and 39.6%, and who knows what other federal
tax increases are on the way.
Those rises will almost certainly depress adjusted gross income among high
earners who either seek to shelter more of their income or simply work less
because their next dollar earned is being taxed at a significantly higher
rate.
That will make it even harder for states with high tax brackets to hit
future income-tax projections.
In most states with double-digit (or near double-digit) top tax brackets,
the combined federal and state tax bite will thus soon reach 50% of income,
especially when you consider that the federal alternative minimum tax
excludes many deductions by higher-income households (including big, fat
deductions for hefty state and local taxes).
Add to that the fact that some states have further raised taxes by excluding
some traditional deductions (New Jersey, for instance, has eliminated the
property-tax deduction for most households, a cruel irony in a state with
the highest property taxes in the nation), and the result is a whole new
definition of what even constitutes taxable income.
The pain might not be so intense if residents of these states were getting
something for all of this extra taxation. But in fact, the state motto in
some of these places could be "High taxes, lousy government."
Jersey, with the highest state and local taxes, has one of the
worst-performing governments in the country, according to Governing
Magazine, and it invests so little in its infrastructure that its roads have
been rated the worst in the nation.
New York, which spends much of its state budget on a Medicaid program that
is twice as large as any other, doesn't have a healthier, better-cared-for
low-income population. California, which spent billions of dollars to lower
public school class sizes, has seen no payoff in higher test scores or
graduation results.
The really bad news, however, is that there is no easy way out of this for
many of these states. Their budget problems are structural and long-term and
can't be fixed merely by trimming a little waste and pork here and there.
Most of these states have wracked up huge debts, for instance, so that bond
payments are now weighing down their balance sheets. Their bondholders must
be fed or chaos will ensue.
These states also suffer from huge public employee pension and benefits
obligations that are often guaranteed by law. In fact, the pension funds of
these states are so underfunded that they make the Social Security Trust
Fund look solvent by comparison.
These long-term structure problems are one reason why prospects for local
tax revolts of the type we saw in the late 1970s and early 1990s have been
slow to materialize. Any reformer who looks closely at these budgets
understands that the only way out are service cuts that will be felt by
virtually everyone in the state.
Faced with unpalatable choices, these states sit and hope that the answer
comes in the form of even more stimulus money from the Obama administration
given directly to states to spend on government operations. But rising anger
from politicians and citizens in states that have been fiscally responsible
will make it harder.
In the next few years, it seems, we will truly test the notion of whether
people will get up and move simply because of high taxes. Oh, and bad
government. |
