Thank you, Mr. Chairman. I would like to emphasize three
points today:
First, this economic and fiscal crisis is not just another
cyclical downturn. What we have witnessed over the past
year is the end of an era. The old Wall Street—the
industry that directly and indirectly generated much of
the growth in state tax revenues over the past 15 years—is
dead and gone. It won't be coming back in its old form anytime
soon, if ever.
This leads to the second point: in the long run, the goal
of state tax policy should be to build a more sustainable
and diverse economic base in New York. In the short run,
as you grapple with massive budget gap, your goal should
be Hippocratic: do no harm. At the very least, do as little
harm as possible.
And, third, I will conclude by calling your attention to
two things the Legislature can do right away, at no budgetary
cost, to protect middle-class taxpayers from the worst of
the economic and fiscal trends that may lie ahead.
Beginning with the economy: Wall Street's collapse exposed
the fatal flaw in New York State's public finance model.
Over the past quarter-century—and especially in the
last five years—the state budget has been geared to
run on an ever-expanding stream of high-octane revenues
generated by the profits and payrolls of heavily leveraged
securities firms.
Just how dependent on Wall Street had we become? Consider
this: in 2006, auto manufacturing accounted for 6 percent
of Michigan's economic output. The securities industry was
over 8 percent of New York's. Wall Street loomed larger
in our budget and economy than oil and gas in Texas, or
coal mining in West Virginia.
What emerges from the ashes of the 2008 financial meltdown
will be a far leaner, more risk-averse, heavily regulated
and less profitable financial sector. In the meantime, a
prime goal of state tax policy should be to avoid creating
disincentives for reconstituted financial firms to grow
here in New York.
Compounding our problems is the severity of the current
global recession. As the CEO of Microsoft put it, what we
are now experiencing is not an economic downturn but a "reset,"
in which "the economy shrinks and then it doesn't rebound,
it rebuilds from a lower base."
New York needs to adjust the size and cost of government
to reflect this new economic reality. Unfortunately, Governor
Paterson's budget relies far too heavily on stopgap tax
increases rather than structural reform.
Viewed in isolation, as a matter of tax policy, some of
the changes proposed by the governor are far more defensible
than others. For example, lifting the sales tax cap on gasoline
purchases would have little impact on consumer and certainly
would not be a shock to the system. In general, the extension
of sales taxes to high-volume, low-cost services already
taxed by other states and by New York City would not be
inherently objectionable—if we weren't sinking into
the worst recession in decades, where the main problem is
that people are not spending enough (because they previously
were spending more than they could afford). Ideally, we'd
be talking about broadening New York sales tax base in the
context of a revenue-neutral proposal to reduce our tax
rates, which are among the highest in the nation. This is
the conversation we should have been having years ago-and
hopefully, it's one we will plan on having again soon.
Taxes on digital downloads, such as the so-called iTunes
tax, are a more difficult call. On the one hand, we tax
music sold by stores in the form if CDs, records and tapes.
On the other hand, New York will hurt its own attractiveness
as a place to do business by imposing a tax that is, after
all, based on the "nexus" of a seller who could
be anywhere. Indeed, I believe we have already over-reached
in self-destructive fashion with the so-called "Amazon
tax," now in litigation—and we continue to reach
too far in our definition of the "convenience of the
employer" rule in the sphere of the personal income
tax.
A few of the governor's proposals stand out above the others
for their potential to wreak economic havoc at an extremely
vulnerable time. The largest of these is his proposed "reform"
of Empire Zones. To be sure, strong arguments can be made
for overhauling the Empire Zones program—in fact, for
shutting it down altogether, going forward. But the retroactive
revenue grab proposed by the governor betrays employers
who made good-faith agreements to build or expand in New
York, and exposes us to litigation and a loss of credibility.
On a smaller scale, the proposed 5 percent surtax on luxury
goods is a great way to hurt the livelihoods of New Yorkers
who sell the goods subject to the tax—which is just
what happened when the federal government tried a similar
approach almost 20 years ago.
As an alternative to many of these taxes-or even in addition
to them—you are now being urged to consider a significant
increase in personal income taxes, targeted to the highest
income brackets. This idea is being promoted on the grounds
that it's necessary not just to close the state's massive
budget gap, but to restore "fairness" to the tax
code.
To paraphrase the late Sen. Daniel P. Moynihan, advocates
of the so-called "millionaire tax" are entitled
to their own opinion, but they're not entitled to their
own facts. The facts don't support the claim that New York's
tax structure is tilted in favor of the rich. Nor does economic
experience support the claim that we can raise income taxes
on anyone without negative economic consequences in an already
severe recession.
In 2007, at the peak of the last boom, the highest-earning
one percent of New Yorkers generated 41 percent of the state's
tax revenues, up from 26 percent in 1995.
While the increase in the taxes for the wealthiest New
Yorkers tracks their income gains over the past decade,
their larger share also reflects the impact of the state's
1995 Taxpayers Relief Act. Under that law, the biggest tax
cuts were targeted to low- and middle-income New Yorkers—thus
shifting more of the remaining burden to the upper end of
the income scale.
More than a half-million New Yorkers were removed from
the tax rolls, and the Earned Income Credit was expanded
as a wage subsidy for the working poor. Savings for low-and
middle-income households have been further buttressed by
the creation of the Empire Child Credit.
Between the EIC and refundable child credit, a single mom
supporting two kids while working full-time in an $8-an-hour
job qualifies for a $1,559 tax refund from the state—a
negative income tax rate of nearly 10 percent that offsets
most of the other state and local taxes she would typically
pay.
Despite what you're being told by some groups, the working
poor in New York do not bear a heavier state and local tax
burden than the wealthy. In fact, when the EIC and the Empire
Child Credit are considered, the typical low-income working
New Yorker with children has a very small state and local
burden—which is exactly as it should be.
Some point to recent history as evidence an income tax
hike targeted to higher brackets would be harmless. After
all, they say, the state temporarily raised income taxes
in 2003 (on incomes as low as $150,000), yet the state's
economy rebounded and high-income payers allegedly didn't
"desert" New York over the next three years. But
proponents of this argument fail to note those tax hikes
took effect the same day as much larger federal tax cuts.
At that point, the economy and the stock market were already
poised for recovery. While the higher tax rates were in
effect, Internal Revenue Service data show, the growth in
high-income taxpayers was lower in New York than in 48 other
states, and our private sector job growth was far below
the national average. If our rates had not been raised,
we could have done better by both measures.
Obviously, economic conditions in New York now are far
worse than they were at this time in 2003, and federal tax
policy is headed in the opposite direction. While the federal
stimulus package includes targeted individual and business
tax cuts, massive federal tax increases are just over the
horizon, aiming at the same wealthy households. In a state
as diverse as New York, how do we define "wealthy"
anyway? The rent re-regulation bill just passed by the Assembly
defines those in need of protection as earning up to $240,000-just
$10,000 above the threshold of "wealth" targeted
for large tax increases by the so-called "fair tax"
campaign.
As the late Walter Wriston observed, "Capital goes
where it's wanted and stays where it's well treated."
When the global economy finds its footing, investment capital
will be more mobile than ever. Meanwhile, high-income households
have always been the most mobile of all taxpayers. States
opting to impose steeply rising income tax rates can expect
to lose some of their most industrious and talented citizens
to jurisdictions with low (or no) income taxes. Highly skilled
individuals remaining in the state make up for the larger
tax bite by charging more for their labor and services,
which further drives up the cost of living and doing business.
Individuals affected by tax hikes earn less, save less and
invest less in the state. Employers create fewer high-paid
jobs and more low-paid jobs. In effect, the "soak-the-rich"
approach ends up soaking everyone.
The real problem with New York's state and local tax structure
is not that the wealthy are under-taxed, but that middle
class residents are badly over-taxed by national standards.
But the right policy goal is to reduce tax rates on the
middle, not to increase them at the top.
While the state obviously can't afford a middle-class tax
cut now, it can take a long-overdue step in that direction
by immediately "indexing" its income tax brackets
and exemptions to inflation, as the federal government does.
This would have no fiscal impact in 2009-10, since the Consumer
Price Index is now near zero, but will protect middle-class
New Yorkers against "bracket creep" tax hikes
when inflation inevitably rises again.
Indeed, given the mounting federal deficit and repeated
"liquidity injections" by the Federal Reserve,
many economists expect a resurgence of inflation as the
economy recovers. Thus, it is essential to get indexing
in place before this happens.
At the same time, the Legislature should enact the school
property tax cap proposed by Governor Paterson and passed
by the Senate last year. Given the repeal of the STAR rebate,
it is more urgent than ever to protect property owners from
the tax shift that might otherwise result from necessary
reductions in state school aid.
Thank you.
