Tax Justice Digest stories about New York


More than ever, deficit-plagued states need to find new revenue sources to balance their budgets while simultaneously fostering an economic climate that is conducive to job creation. This week, the New York State Senate Select Committee on Business and Tax Reform sought to move forward on both fronts, and held a hearing to discuss ways in which the state's corporate tax base could be expanded by eliminating corporate tax incentives that don't achieve their stated economic development goals.

The Institute on Taxation and Economic Policy (ITEP)
submitted testimony discussing the contradictory and potentially harmful incentives created by several corporate giveaways. One was enacted by the state less than five years ago (the "single sales factor" for manufacturing companies). Another, the "cancellation of debt income" or "CODI," was foisted on the states by this year's stimulus bill. The CODI provision, which created a new break for corporations in the federal tax code, was ranked by CTJ as one of the worst six provisions in the stimulus bill passed out of the Senate and unfortunately it was included in the final law that was enacted. Because most state corporate income taxes are linked to the federal corporate income tax, this new giveaway reduces state revenue as well as federal revenue.

The Fiscal Policy Institute also presented
testimony
on sensible loophole-closing options. The Center on Budget and Policy Priorities released a
new paper this week that explains the CODI provisions and identifies the many states that could raise additional revenues by decoupling from this provision.
In the wake of the worst fiscal crisis in decades, several states -- most notably, New York and Hawaii -- have recently adopted income tax increases targeted at upper-income individuals and families.  As the Center on Budget and Policy Priorities has documented, they may well be joined by several other states in the coming months as more lawmakers realize that this is the most responsible way to address budget shortfalls.

Critics of progressive income tax increases like to suggest that such changes will only spur the wealthy to pack up and head to more tax-friendly climes like, say, Wyoming or South Dakota.  Yet, as ITEP
observed earlier this week, at least three of the states that turned to income tax increases during the last fiscal crisis (New York, New Jersey, and Connecticut) saw an upturn in the number of affluent taxpayers over the ten year period from 1997 to 2006.  Guess it's hard to find the equivalent of Per Se or Le Bernardin in Sioux Falls
Few would envy the position most state lawmakers now find themselves in.  Nearly every state is required to balance its budget each year and the vast majority of states face substantial budget deficits in the coming years. Those lawmakers will have to support either cuts in essential public services or increases in politically unpopular taxes -- and do so in the midst of a deepening recession.

 

Under these circumstances, the best way to eliminate state budget deficits is through tax increases on upper-income individuals and families, as such changes would reduce consumer demand the least.  Three states in the northeast -- New York, Connecticut, and Delaware -- seem ready to do just that.

 

In the Empire State, Governor David Paterson and members of the legislative leadership this week reached agreement on a plan to close a $17.7 billion budget gap. The centerpiece of the plan is the addition of two new tax rates. A rate of 7.85 percent would apply to income in excess of $300,000 and a rate of 8.97 percent would apply to income above $500,000.  While those changes would only be temporary in nature (lasting only through 2011) they are expected to bring in about $4 billion per year in revenue. 

In the Nutmeg State, budget deficits are projected to total $8.7 billion over the next two years. In response, the Assembly's Finance Committee
approved legislation that, among other changes, would add four new income tax brackets, with rates ranging from 6 percent to 7.95 percent, all affecting married Connecticuters with incomes over $250,000 annually (and single taxpayers with incomes above $132,500). 

Finally, in the
First State, Governor Jack Merkell has put forward a broad-ranging budget plan that would take the constructive step of raising Delaware's top income tax rate from 5.95 percent to 6.95 percent, the first income tax increase since 1974. Even though it would impose pay and benefit cuts on state employees and rely more heavily on gaming and excise tax revenue, this budget plan is a step forward on progressivity.
As we noted last week, up until now, New York has been the most encouraging example of a state considering a progressive approach to filling its budget gap.  Now, with the unveiling of Wisconsin Gov. Jim Doyle's proposed budget, another state can be looked to by progressives as an example to be followed.

Gov. Doyle's budget includes two main progressive reforms.  First, the income tax rate on income over $300,000 per year would be raised by one percentage point.  Second, the state's unusual exemption of 60% of capital gains income would be lowered to 40%.  While a 40% exemption is still unnecessary and regressive, this change would be a major first step toward taxing those who live off their wealth at a rate more similar to those who work for a living.  Both of these changes would primarily affect the upper-income individuals most capable of making it through this economic storm.

More good news for tax fairness advocates comes from a recent poll of New York State voters conducted by Quinnipiac University.  As the poll shows, it turns out that progressive solutions make sense not just on policy grounds, but on political grounds as well.  The poll found that nearly 80% of New York voters support raising the income tax on income over one million dollars.  That number falls only slightly when New Yorkers are asked if they support raising income taxes on income over $500,000.  Additionally, proposals to raise tax rates on income over $250,000 enjoy well over 50% support in New York. 
Click here for the complete poll results.

Finally, in addition to the progressive reforms described above, the Wisconsin governor is also pushing a proposal to institute combined reporting of corporate income.  Enacting such a proposal is an absolutely vital part of maintaining the viability of any state's corporate income tax. 

Even though the conference committee significantly scaled back state aid relative to the House version of the bill, states can still expect some pretty significant assistance in the near future.  Unfortunately, those states are also facing even more significant budget gaps, which are likely to continue to grow larger in the coming months.  To make up the difference, states will have to take responsibility for finding ways to close their budget gaps. 

Policymakers in
New York are readying themselves for the challenge.  As the New York Times reported earlier this week, members of the state Senate are preparing legislation to close $6 billion of the state's roughly $14 billion budget deficit by raising income taxes on individuals and families making more than $250,000. 

In particular, the bill would impose a tax rate of 10.3 percent on those taxpayers with incomes in excess of $1 million.  In other words, faced with a mammoth fiscal and economic crisis, legislators in
New York seem ready to respond accordingly -- with a proposal that reforms their tax structure in a fundamental and progressive fashion.  Their counterparts in other states (many of whom are trying to muddle through with a combination of budget gimmicks, one-time fixes, and minor tweaks to sin taxes) should do the same. 

For more on the steps needed to tackle
New York's budget problems, see this commentary by Frank Mauro and James Parrott of the Fiscal Policy Institute.

The New York Times reported earlier this week that the Empire State may use tax increases on the very wealthiest residents to help close a budget gap of roughly $15 billion.  This is common sense, particularly since, as the Times notes, "Over the last 30 years, the trend has been to pare back income tax rates on the rich, federally and in the state. Since the mid-1970s, the state has cut its top tax rate from 15.375 percent to 6.85 percent."  For more on New York's fiscal condition and ways to improve it, see this presentation by the Fiscal Policy Institute. 

 

Progressive tax reform may also be on the horizon for Illinois.  Much hope accompanies newly elected Illinois Senate President John Cullerton. Cullerton replaces retiring Senate President Emil Jones who often stood with Governor Rod Blagojevich against constructive tax changes to solve Illinois' budget woes. Senator Cullerton recently hinted that needed tax hikes may be in the state's future, alluding to the fact that all options to solve the state's infamous budget shortfall are on the table.

 
In a speech to the Senate Cullerton said, "In recent years, we have seen all the gimmicks and listened to all the quick-fix promises. But, we know they won't solve our problems. Instead we need a cooperative partnership -- and that requires sacrifice." Let's hope Cullerton can work to solve the state's budget with progressive solutions like increasing reliance on income taxes and lowering the state's dependence on property taxes instead of the litany of solutions floated in recent years (like increased borrowing and dependence on gambling) to solve the state's fiscal woes.

The news out of New York in recent weeks hasn’t been especially encouraging for those concerned about the impact of the recent economic downturn on vulnerable lower-income families.  Unfortunately, that trend seems to be continuing, as New York Governor David Patterson proposed a budget this week devoid of the type of progressive tax increases the state needs to responsibly make it through the current recession.  This is despite the fact that just days earlier, over 100 economists joined the New York-based Fiscal Policy Institute in calling for tax hikes on high-income earners as a way to avoid painful cuts in the state services lower- and middle-income families rely upon.  All told, the Governor’s budget relies about twice as heavily on spending cuts as it does on tax and fee increases.

On the revenues side of the budget, the proposal lacks broad-based increases and instead takes a more piece-meal approach.  While this is far less than ideal, it is worth noting that some of those piece-meal items are certainly worthy of being included in the final budget deal.  An expansion of the sales tax to include more services, limitations on the deductions claimed by wealthy families, and a scaling back of some of the state’s “broken” tax breaks for businesses are among the revenue raisers included.  The Governor’s budget also includes a new “luxury tax” on items such as yachts, jewelry, and furs.  While such a tax would most likely be progressive, it’s hard to see what advantages it brings over simply enhancing the progressivity of the state’s income tax.

To enjoy an interesting and heated sub-plot, check out this New York Times piece on the tax on “unhealthy” beverages that the Governor has included in his budget plan. Despite insistence that the idea is motivated by concern over the public health ramifications of these drinks, it’s hard to take seriously such claims when New York is facing a budget deficit.  More meaningful, broad-based tax reform would be a preferable route to addressing the budgetary issues.

…and, Some Ideas to Reject

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Of course, not every idea floated during these tough fiscal times is worth adoption or even consideration.  Some are just downright bad.  Take New York, for instance.  As the National Conference on State Legislatures (NCSL) indicated earlier this week, the Empire State is expected to face a budget deficit of $12.5 billion in the coming fiscal year.  Unfortunately, that dire outlook has not stopped Governor David Paterson from continuing to embrace an ill-advised property tax cap.  On December 1, New York’s Commission on Property Tax Relief issued its final report, recommending a 4 percent limit on annual property tax growth.  Governor Paterson had backed the idea previously and does not seem likely to change his position any time soon, remarking upon the report’s release that “Property taxes … have been the enabler of Albany's dysfunctional culture.”  As the Fiscal Policy Institute and others have observed, the problem with tax caps are legion and could be particularly harmful if put in place during a recession.

 

Similarly, North Dakota Governor John Hoeven, as part of his budget plan for the 2009-2011 biennium, has proposed cutting property taxes by $300 million and income taxes by $100 million.  Fiscal circumstances in North Dakota are, to be sure, markedly different than those in New York; after all, the Peace Garden State is one of the few expected to experience a budget surplus by the end of the current fiscal year.  Yet, as the Grand Forks Herald recently warned, “oil prices already have plunged, threatening the energy boom that has dramatically boosted the state’s surplus,” suggesting that state legislators should proceed slowly and carefully.  Caution certainly seems to be what the voters of North Dakota want anyway – in November, they resoundingly defeated a ballot measure that would have cut income taxes by more than $200 million.

 

Legislators in Virginia, despite that state’s $2 billion plus budget deficit, seem bent on cutting taxes too, as a special House-Senate subcommittee has recommended that the state offer a new corporate tax break known as single sales factor.  Where North Dakota officials should listen to the recently expressed views of their constituents, Virginia should follow the hard-learned lessons of other states.  Simply put, single sales factor is a costly and ineffective means of spurring economic activity.  Just ask Massachusetts:  In 1995, Massachusetts adopted single sales factor for manufacturers, a move that was hailed by some proponents as “a bold step towards restoring Massachusetts as a manufacturing state.”  After thirteen years – and millions of tax dollars and thousands of manufacturing jobs lost – it’s clear that that restoration has not occurred.

Late last month, Rep. Dennis Kucinich (D-OH) held a hearing on Capitol Hill to investigate the nearly $950 million in tax exempt bonds approved to build the new Yankee Stadium. One of the most egregious discrepancies so far is that the appraiser hired by the city estimated the value of the land for the new stadium at about $40 million. The figure used in documents city officials turned in to the IRS to qualify for tax-exempt bonds was $204 million. Even a columnist for ESPN cited New York Assemblyman Richard Brodsky's report which said that taxpayers will be charged between $550 and $850 million for the new stadium. To add to taxpayer outrage, the Yankees have even raised their ticket prices significantly for next year, even though the Yankees didn't make it to the playoffs. Assemblyman Brodsky put it best when he said, "We do things for professional sports we wouldn’t do for any other business. When it comes to professional sports, we become socialists; for everyone else, we’re capitalists.” Good Jobs First New York has followed the development of the new stadium for some time. To read more about how New Yorkers won't benefit from the stadium deal, check out Good Jobs First New York.

Four of the nation’s most populous states, together home to more than one out of every four Americans, are facing serious budget problems.  Important new developments occurred in each of those states this week, the theme of which is perhaps best conveyed through California Republican Mike Villines’ question: “How many times can we say no to taxes?” State residents will soon learn that this is really saying "no" to keeping alive public services like education, transportation and health care that families depend on.

See the following posts on the budget situations in California, Florida, New York, and Virginia.

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