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Unforgivable Policies of The State of New York
The City and State of New York are a public policy un-miracle. Despite the highest local taxes, as a share of personal income, in the country, the city’s schools, parks, libraries and other services are funded, on the same basis, at well below the national average. Where does the money go?
For many years the welfare-dependent poor were a politically convenient scapegoat, with politicians and pundits using the concentration of welfare recipients in New York City as the explanation for the city’s and state’s high taxes and, in some cases, poor services. Democrats and liberals assailed the shift of this burden to New York, saying those in better off communities and other parts of the country should be paying more to help. Republicans and conservatives claimed that New York City’s own public policies were creating a culture of dependency. Yet they both agreed on where all the money was going and this, at least, was a tolerable explanation. New Yorkers had to balance the non-governmental advantages of New York City and State as a place to live and do business against the high taxes they had to pay and, in some cases, the poor services they received, because (rightly or wrongly) their tax dollars were presumably going to those worse off than themselves.
There is only one problem. It wasn’t really true then, and certainly isn’t true today. The decline in the welfare rolls has exposed something. Our tax dollars, it seems, are going not to high quality services for ourselves, which those who live in many parts of the state, beginning in New York City, don’t get. They are not even going to the poor, at least not anymore. They are going elsewhere, to those who have (let’s say) very good deals, and feel fully entitled to them. Some of these are in New York City, and are represented primarily by Democrats. Some are in other parts of the state, and are represented primarily by Republicans.
The real question is where has the crime been committed? And the answer is at the state capital in Albany. Under our federal system, the federal government collects most of the money, and local governments do most of the work, but it is the state governments that actually make most of the decisions on the margin. The federal government pays most of its revenue right back out for debt service, Medicare, Social Security, and aid to states, and actually does very little other than national defense and the post office. Local governments provide services under rules set by, and using funds provided in part by, the states. It is the state government in Albany that makes the laws and sets the priorities we live under. And while the City of New York may not be perfect, and the federal government may be getting worse all the time, it is the State of New York that is the worst run and least democratically accountable of the three, one of the worst state governments in the country.
Many of the inequitable and short-sighted policies that have damaged our state go back many years, kept in place by perpetual incumbents in the legislature, who are in turn kept in office by their beneficiaries. But during the 1997 to 2002 period, the Governor and State Legislature made a bad situation worse on state school aid, Medicaid, public employee wages and pensions, debt and infrastructure, and taxes. They handed out more benefits to their organized supporters, who already benefit disproportionately from state policy. In 2002, they hid the cost of these decisions until after they were safely re-elected. Part of that cost was passed on to the "losers" last year, in the form of higher taxes and service cuts. Now in 2004, another election year for the State Legislature, they are again deferring the cost of their past favors until after the election, rather than repealing them. This essay will tell you what some of those favors are, and how they affect the future of your community.
State School Aid, and the STAR Program New York State’s school aid system is uniquely unjust. Everywhere else in the United States, the school finance debate has been about the extent to which school districts with concentrations of poor children should receive additional state funding to offset greater needs and inadequate local resources. Only in New York has the state actively redistributed educational resources away from poor children, acting as a reverse Robin Hood.
Most people know that New York City’s share of state school aid has been lower than its share of public school students for years - perhaps forever. What most do not know is that New York City’s share of state school aid has also been below its residents’ share of New York State income tax payments. In 1992-93, for example, when New York City accounted for 36.9 percent of the state’s public school students yet received just 33.3 percent of state school aid, its residents paid 37.8 percent of state’s income taxes. That’s just including taxes paid by state residents; residents of other states also pay extensive New York State income taxes, and most of them work in New York City.
Overall, during the administration of Democratic Governor Mario Cuomo, the city’s children would have been better off by an average of $500 million (in $2003) per year if state school aid did not exist. And during the first five years of the administration of Republican Governor George Pataki, the city’s children would have been better off by an average of $565 million per year if state school aid did not exist, due in large part to $954 million redistributed away from the them in Fiscal 1995-96. That year, according to data from the state Department of Education, state school aid to New York City was cut, even as it was increased for higher spending districts elsewhere.
It is this redistribution of funds away from poor children in New York City that makes New York State’s school finance history unique. Better off, college-educated New York City residents are seeing their state taxes redirected not to the poor children of their own city, but to children elsewhere in the state who receive a quality education that their own children are denied. No wonder so many parents reluctantly leave the city when their children reach school age. No wonder so many choose to send their children to private and parochial schools, unfairly receiving nothing in exchange for all the state and local taxes they pay for education. No wonder so many are forced to agonize about getting their children into the small number of "special" programs and functioning schools, and are made to feel lucky or even a little guilty if their children are fortunate enough to receive a decent education that other city children do not, an education they had in fact paid for many times over.
This longstanding inequity, however, was not enough for the State of New York. During the late 1990s, it implemented the STAR school aid program. Whereas the state sends traditional school aid to school districts that then spend it, STAR aid is sent to school districts as reimbursement for the money they had spent. The state used this nonsensical difference to claim that STAR, of which the City of New York and its taxpayers and children receive relatively little, is not school aid. In reality there is no difference between STAR and other school aid - except that STAR provides more aid to those who have and spend the most, encouraging them to spend even more.
During the late 1990s and into 2001, suburban and upstate school districts were able to use rising STAR funding to outbid New York City for qualified teachers. And this happened a critical time, as public school enrollment peaked and - in a booming economy -- a teacher shortage was at its worst. Thanks to STAR, according to data from the New York State Department of Education, by Fiscal 2002 state aid per student averaged $4,085 in the affluent Downstate Suburban counties, only modestly less than the $4,591 received by New York City. And teacher turnover was much higher in the city than in the rest of the state. Even now, after a ruling in the city’s favor in the Campaign for Fiscal Equity lawsuit, no one is expecting fiscal equity, as the following quotations demonstrate.
"We really came to the decision that if we could get a functioning lab in every school, decent class sizes, gym facilities, an adequate education in every school - to get there is such a huge battle," said the executive director of the Campaign for Fiscal Equity, Michael Rebell. "Maybe in 20 years, if we ever get that, somebody else can say that they want to go for equity. But that's not our battle."
"There's a political reality, but there's also an educational reality," said Steven Sanders, a Manhattan Democrat who is chairman of the Assembly's Education Committee. "Even districts not defined as high-need still have needs."
For 20 years, we’ve been hearing that New York City’s problem is that its schools waste money outside the classroom. Yet in March 2002, according to the U.S. Census Bureau, the City of New York had just 419 non-instructional public school employees per 100,000 residents, well below the national average. The Downstate Suburbs averaged 808, and the rest of the state over 900, after big increases from 1997 to 2002, paid for by STAR, funded by the state taxes city residents pay. In most years if New York City were a separate state its public school spending, as a share of its residents’ personal income, would be among the lowest of all states, while the rest of the state would be among the highest. Despite the Appellate Court ruling, all parties in the Campaign for Equity Lawsuit agree that the sky-high level of spending in the rest of the state must not only continue, but must increase.
As for New York City’s schools, as Assemblyman James Brennan said in his newsletter "It is recognized that the State has financial problems and that it will take several years to implement an improved funding plan." Oh well. During those several years, and perhaps afterward as well, the state will continue to use the state taxes paid by New York City’s better off residents to redistribute educational resources away from New York City’s poor children, and their own children. And if the city’s children are to get anything, it may be because the state raises city residents’ local taxes, already double the national average as a share of personal income, to pay for it.
Medicaid, and the 2002 Health Care "Reform" Act New York State’s Medicaid program is the most richly funded in the country, and because (unlike in other states) local governments are forced to pay for much of it, New York City taxpayers are charged nearly an additional one percent of their income in local taxes just for Medicaid. Some of these higher expenditures are an understandable but costly response to the ongoing collapse of the employer-provided health insurance system, and the rising share of state residents who are uninsured. In 2000, New York State had just 6.7 percent of the nation’s population, but it had 7.9 percent of the nation’s poor people, so it is understandable that it also had 8.0 percent of the nation’s Medicaid recipients. But most of New York’s excessive burden is due to very high payments to selected parts of the health care industry, as a result of their political power.
New York State’s Medicaid expenditure per recipient was $7,647 in 2000, far higher than in any other state and double the average for nearby New Jersey, Massachusetts, and Pennsylvania ($3,500). Despite this high spending overall, New York actually spent less than the national average per recipient on many kinds of services, including visits to doctors’ offices (36 percent below average) and nursing home services for the non-elderly disabled (8 percent below average). It is no surprise that many physicians will not take Medicaid patients, and that an investigation by the New York Times revealed terrible conditions for mentally ill adults in New York’s nursing homes.
According to New York’s Temporary State Commission on Lobbying, the top ten organizations in lobbying expenditures in 2001 included Local 1199 (a health care union), the Greater New York Hospital Association, the Medical Society of New York, and the Empire State Association of Assisted Living Facilities. It is the hospital, assisted living, and elderly nursing home industries that get paid the most, relatively, in New York. One wonders what they do with the money. In 2002, New York’s Medicaid hospital expenditures per recipient was more than double the level of nearby states. Do New York’s nurses earn double? Are there twice as many of them? For nursing homes, New York’s expenditures per recipient were 20 percent above the average of nearby states (far more for the elderly, less for the disabled); for intermediate care facilities for the elderly, and at home personal care services for the elderly, they were more than double.
In early 2002, at a time when many states were cutting reimbursement rates to balance their budgets, Governor Pataki and the State Legislature cut a deal to increase Medicaid payments to the hospital and elderly nursing home industries even further, even as taxes were being raised and funding for other services was being cut in the wake of 9/11. Passed by the legislature after no debate and with virtually no votes against, like all such bills in Albany, the state cost of the deal was funded by a special payment by Blue Cross Blue Shield, in exchange for allowing it to convert from a non-profit charity to a for-profit business. All the donations and tax exemptions Blue Cross had accumulated over decades were converted, in an instant, to a cash payment to two politically powerful industries and their unions, over the objections of health care advocates, who wanted the money used for the uninsured. The share of the cost shifted to local governments was paid for in property tax increases and lower spending on services such as parks, libraries, and sanitation.
That isn’t the only cost. For 30 years members of the State Legislature from New York City have voted in favor of budgets that shortchanged the city on school aid. The evidence suggests that school aid, a top priority of legislators from Upstate and the suburbs, has been traded away to get other things, especially higher Medicaid spending for the politically powerful hospital and nursing home industries, and the social services organizations that provide other Medicaid-funded services to the elderly. Much of this spending takes place in New York City, and it is a significant burden on the rest of the state, though a significant share of the burden is borne by the City of New York itself through its local matching share. The clout of New York’s hospital industry is unending. In 2004 the State Legislature was close to a deal to end its string of late budgets. Under that plan, if a new budget wasn’t passed by the deadline, last year’s spending would continue in most categories, and would be allowed to increase in some categories like school aid. The health care industry objected to the deal, on the grounds that today Medicaid spending goes up automatically even if other spending must be cut to pay for it. Their 11th hour objection was enough to kill the legislation, until it was agreed that New York City’s state school aid would be cut as well.
Public Employee Wages Pensions, and the 2000 Pension Deal Many types of public employees are paid less than their private counterparts, but they also work fewer years in a career and fewer days in a year. This is particularly the case for police officers and firefighters, who can work for just 20 years and retire in their early 40s, drawing a pension for the rest of their lives. Other public employees generally retire in their mid-50s, and the state constitution forbids reductions in public employee pensions. Today most private sector workers, in contrast, no longer receive defined-benefit pensions at all, and many employers do not even contribute to their 401(k) plans, plans that in any event are not permitted to pay out until age 62. Those born after 1960 will not receive full social security benefits until age 67, if then, and half of those working in the private sector have no retirement other than social security.
Low pay and limited respect, combined with early retirement with guaranteed pensions, affects the type of worker the government can attract. Along with increasingly cynical and disappointed idealists that signed on out some idea of "public service," public agencies tend to attract only those who, from their first day of work, look forward to not working. Public employees bitterly resent the low pay, and public employee union leaders seldom mention the rich pensions when advocating raises. The ability to get paid to do nothing in the not-so-far-off future doesn’t pay the rent today, and therefore does not attract skilled and competent workers. In general, the only well off and happy public employee is a retired public employee. So despite high labor costs, and thus high taxes, New York cannot attract motivated and qualified teachers, police officers, and other skilled workers, and thus cannot provide good services. The money goes to those who are not working, and thanks to laws passed by the State Legislature, local governments cannot change this.
This would be bad enough if all public employees were treated equally. What is worse is the State Legislature’s practice of granting richer pension benefits to those with seniority, those about to retire, and those already retired in economic booms. Local governments are then forced to offset soaring pension costs with reduced services and lower wages and benefits for new public employees - those actually providing services over the next two decades -- in recessions. The first time this cycle occurred, it might have been an accident. After a few more cycles, it is clearly not a mistake.
The rich "Tier 1" public employee pensions handed out during the 1960s "nifty-fifty" stock bubble nearly bankrupted New York’s local governments. By 1972, according to the U.S. Census Bureau, New Yorkers had to pay almost an additional one percent of their incomes in taxes, not for services, but for contributions to rich pensions after early retirements for those who were cashing in and moving out. In 1982, the City of New York had to contribute 28.6 percent of its employees’ wages to its pension funds, compared with a national average of 11.3 percent. No wonder public services had virtually collapsed - all the money was going to those who had left.
Most employees hired since 1980 have had less valuable pensions and lower wages. New York City public employees hired before the late 1970s, along with police officers and firefighters, are not required to pay anything into their pension plans. Until the year 2000, in contrast, those hired between 1980 and 1995 were required to pay 3.0 percent of their paychecks into the pension funds. And after a mid-1990s deal that also allowed earlier retirement, those hired since 1995 have been forced to pay 5.85 percent of their pay into the pension funds. The national average pension contribution by public employees was 4.6 percent of their wages in fiscal 2000.
It isn’t just workers with seniority who weren’t putting enough in. During the 1990s, the State of New York and its local governments, as well, were putting a less-than-average amount into the pension funds themselves, diverting the money to politically popular spending and tax breaks, in reality engaging in off-the-books borrowing. During the past couple of decades, the national average for employer contributions into public employee pension funds has been about 10 percent of payroll. The City of New York put in less than that every year from 1994 to 2001; local governments in other parts of the state put in less than three percent. While putting a below average amount in, the City of New York, as a result of the generous pensions of the past, was also paying an above average amount out. In 2000 the average U.S. state and local pension fund paid out 4.3 percent of its assets in benefits; the City of New York’s pension funds paid out 6.8 percent of their assets.
This was the situation in 2000. At that very moment, at the peak of another stock market bubble, the State Legislature granted cost of living adjustments for long retired employees of up to 50 percent, provides guaranteed cost of living increases in the future, and eliminated employee pension contributions -- for those with 10 or more years of seniority. Meanwhile, as part of the deal, the City of New York was allowed to temporarily cut its own contributions to the pension funds in half - during former Mayor Giuliani’s aborted Senate run -- freeing up the money for other things. This deal, pushed by former Comptroller McCall, was passed by the State Legislature with no debate and without a single "no vote." After vetoing the legislation a few times, Governor Pataki signed it and took credit for it. It was a great deal for everyone who matters in Albany. "Everybody wins."
The consequences? Soaring mandatory pension contributions to make up for the shortfall, not falling tax revenues, has been the most important factor in New York City’s ongoing budget crisis. The city will be required to contribute $3.2 billion in local tax dollars to its pension funds in Fiscal 2005, while using only $9.8 million in local tax dollars ($16.7 million overall) for wages for today’s public employees. New York City’s pension payments are projected to rise even higher in future years. These increases are being offset by tax increases - no problem for the retirees since pension income is exempt from state and local (but not federal) income taxes by state law -- and by ongoing service cuts in agencies such as parks, libraries, and the Administration for Child Services.
In June 2004, as part of a new labor contract with its largest union, the City of New York agreed to pay new public employees 15 percent less than previous hires, using the savings for higher wages for current employees. Those new employees will, therefore, receive 15 percent less in pay while contributing 5.85 percent of their diminished wages into the pension plans, even as those with ten or more years of seniority make no contribution to the pension funds and get higher wages - wages on which their pensions will be based. Meanwhile, the cost of health insurance benefits of retired employees now exceeds the cost of health insurance for active employees in some parts of the state.
Not even this is enough. In early 2004 both houses of the State Legislature, with little debate or opposition, passed bills allowing New York City’s transit workers to retire at age 50, after working for just 20 years. That bill was has not been signed by the Governor, at least not yet. If it had been, it would have cost the transit system over $100 million per year, or one-third the total amount spent on all the people who maintain the subway stations and man the station booths. Many more bills were introduced providing richer pensions after shorter careers for different groups of public employees, or even individual public employees. And, as a result of laws passed by the State Legislature, neither the City of New York nor the state nor local governments elsewhere are contributing enough of their own funds to pull the pension plans out of the hole. They are deferring obligations, at eight percent interest, into an at-risk future of higher taxes and inferior public services. In fact one "savings" proposed by the Governor and State Legislature as part of this year’s budget is to defer covering the pension shortfall even longer.
"We get the benefit, somebody else gets the problem in the future," said (NYC Budget Director) Mr. Page (in a City Council hearing), growing animated. "On the other hand, here we sit, we've got the problem from all the guys behind us -- what do you do with this - I should stop."
Debt and Infrastructure, and Financing the 2000-04 MTA Capital Plan For twenty years, the same old faces supported by the same interests have held power in the State Legislature. They are representatives of the sort of people who have been moving away, and whatever their other differences, the one thing that none of them care about is the future of our state and our community. Their only goal is to get through the next budget and the next election with their deals, favors, and jobs intact, even if it might mean a lower standard of living and a lower quality of life down the road. And the best way to accomplish this, in addition to gaming the pension system, is to run up debts without expanding, or even maintaining, the state’s infrastructure.
New York’s state and local debts were already high in 1994 - nearly double the national average as a share of its residents’ personal income. Many of those who ran up these debts and benefited from the related spending have left New York City and State. In fiscal 1993, New York City residents were paying 0.8 percent of their incomes more than the national average, not for services, but to pay interest on state and local debts run up in the past. Divide your household income by 125. That’s the extra taxes you were paying in exchange for nothing, as a result of the decisions of the past.
Yet this was not enough for our state legislators. They could have taken advantage of the temporary increase in revenues during the 1990s boom to reduce state and local debts, the way the federal government did. Instead, New York’s state and local debts kept rising right through the 1990s boom, from $133 billion to in 1994 to $178 billion in 2000. By fiscal 2000 city residents were paying nearly an additional 1.2 percent of their incomes in taxes for interest on state and local debts, compared with the national average and New Jersey. If the New York Post claims "spending" is rising and yet your library is open for just a few hours per day a few days per week, now you know why. Actual spending today is going down, but we are paying now for spending, and pension obligations, from the past. In 2000, New York City residents could have become more than one percent better off just by moving to New Jersey. That would be more than three percent if you also include the additional pension contributions and the mandatory local share of Medicaid. No loss of "spending" or public services would be involved.
The worst was yet to come. The 2000-2004 MTA Capital Plan, proposed by the Pataki Administration and passed by the State Legislature, loaded the Downstate transit system with enormous debts by diverting other, current revenues elsewhere. Passed over the desperate objections of groups ranging from the business community (the NYC Partnership) to labor unions to transit rider advocates to fiscal monitors, this huge rise in debt will burden the transit system for years to come. In 2000, according to MTA budget documents, debt service equaled 10.5 percent of operating revenues. As a result of the state’s decision to keep down fares, divert tax dollars elsewhere, and borrow the difference, debt service is projected to rise to 31 percent of operating revenues by 2007 (according to a 1/27/04 presentation by MTA Executive Director Katherine Lapp). In addition, pension costs, which amounted to seven percent of operating revenues in 2003, are expected to grow to 14% by 2007. In 2007, therefore, nearly half of your transit fare will be going not to pay for the salaries of those operating and maintaining trains and buses today, but to pay for the debts and pensions of the past. The MTA faces huge operating budget gaps even after the recent fare increase, which will require drastic fare increases, service reductions, or substantial tax increases to close.
On top of this, no one has any idea how to pay for the 2005-2009 MTA Capital Plan. That plan will not be passed until after the 2004 elections, if it is ever passed at all. An improvement that would be particularly important to Brooklyn’s F, D and B train riders - connection between the station at Broadway-Lafayette and the uptown number 6 train at Bleecker Street - is one of the many that may be at risk. Today, F, D and B riders have to take three or four trains to get to the job rich East Side and Grand Central area. The ability to change to the uptown #6 would allow a two-train ride that is 10 to 15 minutes faster, saving perhaps an hour per week. Yet it is doubtful that Brooklyn’s state politicians even know about this improvement, just as they barely noticed the lousy commute caused by having half the tracks of the Manhattan Bridge out of service for 22 years. In the sub-culture of Brooklyn politicos, mass transit is for losers. Toll free bridges and free on-street parking privileges, granted by permit to the politically connected, are for insiders.
No wonder that Lapp, far from projecting a golden future that most expect for the region’s transit system, has gone on record warning of a possible 1970s-style decline. And to understand the consequence of this, consider the importance of the region’s transit system to the state’s economy. Manhattan accounts for about half of all the private sector earnings in New York State, if the publicly-funded health and social services industries are excluded. Not the city. Not the Downstate Region. The entire state! And that’s just directly. Add in the private sector activity created elsewhere, in places like Downtown Brooklyn, by firms linked to Manhattan, and by jobs in firms whose business customers are in Manhattan, and by jobs supported by spending by commuters who earn their living in Manhattan, and by spending by those whose jobs are paid for by taxes collected in Manhattan, and you have 75 percent or more of the state’s economy. And Manhattan is able to generate that kind of activity because of its unique asset - the mass transit system’s ability to bring more two million talented people together in a small, dynamic area each day. And the state government has put the ability to maintain and improve that asset in jeopardy.
All this borrowing, and postponement of paying pension obligations, took place during the boom, when the city and state were flush with money. The higher spending - on some well placed groups - and lower taxes - for other well placed groups - made the Governor, state legislators, and former Mayor and State Comptroller very popular. During the recession, to avoid a backlash, the State and City of New York have continued to borrow heavily. Even next year, the city is proposing to spend more than it takes in, drawing down $1.3 billion in cash reserves run up in fiscal 2004. And yet with all this debt, major transportation improvements such as the Second Avenue Subway remain un-built and the city’s schools remain inadequate and overcrowded. I, for one, will not want to hear that it is "unfortunate" or "inevitable" that long promised improvements cannot be built. It was not inevitable. Debt that could have paid for long-term improvements has, in New York, been used for other things. Unless things change, and fast, five, ten, twenty years from now, only the debts will remain.
Tax Deals, and the 2003-04 State and Local Tax Increases Economically efficient taxation includes a low tax rate spread over a wide tax base. In New York State, on the other hand, politically efficient taxation includes high tax rates spread over a tax base narrowed by exemptions, privileges, deductions, and tolerated tax evasion. Preferential treatment, tax and otherwise, was clearly on the minds of New York State leaders at a more enlightened point in our state’s history. Consider Article 3, Section 17 of the New York State Constitution, which prohibits "granting to any person, association, firm or corporation an exemption of real or personal property." It also forbids "granting any person, association or individual any exclusive privilege, immunity, or franchise whatever." Then there is Article 16, Section 4 which states "there shall be no discrimination in the rates and method of taxation between such corporations and other corporations exercising substantially similar functions and engaged in substantially similar businesses within the state." But it doesn’t matter. No constitution can make New York State’s politicians resist the temptation to reward their supporters, and tax then everyone else more to make up the difference.
In Fiscal 2000 (assuming the burden of state taxes is distributed in proportion to personal income) New York City’s state and local tax collections were 33 percent higher than the national average as a share of personal income. In the rest of the state, state and local tax collections were 20 percent higher than the national average. If all of New York’s families, and all of its businesses, were forced to pay 20 or 33 percent more than the national average in state and local taxes, and more than in any other state, that would be bad enough. For most of New York’s people and firms, however, the difference between what they pay here and what they would by elsewhere is even greater. That’s because New York not only has high taxes but also has more property tax, sales tax, and income tax deductions, exemptions, credits and deals than most other states. As a result, New York’s tax rates are much higher, relative to other places, than its actual tax collections.
Take income taxes for example. In a progressive income tax system, deductions and exemptions benefit the well off, not those with low and moderate incomes, so they not only distort economic activity but also reduce equity. Twenty years ago some elected officials, those with principles (of various sorts), understood this, and that is why Democratic Senator Bill Bradley championed and Republican President Ronald Reagan pushed through a federal income tax simplification. After the 1986 tax reform, there were a few, generally lower federal income tax rates, and most deductions were eliminated. In the years since, however, federal income tax rates have risen but dozens of deductions and credits have been added, resulting in (once the capital gains boom of the 1990s was over) falling revenues. The greatest beneficiaries have been the wealthy and those in the upper middle class. The greatest losers, given the rise in debt and the shift in public spending priorities occurring at the same time, have been the poor, the working poor, the young, and future generations.
The story has been the same in the State of New York, which not only carries forward deductions from the federal income tax code, but also adds a few little deals of its own, many enacted in recent years. Most people generally take the standard deduction, and some use the itemized deductions carried over from their federal return. In New York State, however, some may also take advantage of the exemption of income from New York’s state and local government pensions, or money contributed to college savings funds, or money paid for long-term care insurance. And for those who really know how to work the system, there are 31 different deductions from taxable income, with most listed under "other" on the main tax form, and 38 different tax credits on forms IT201-ATT and IT-203B. Every year brings more of these benefits, lobbied for by more and more grateful campaign contributors. As a result, according to the 1997 Census of Governments New York’s state income tax collections equaled 3.2 percent of the income of state residents. In Massachusetts, state income tax collections equaled 3.7 percent of income, a greater share overall, yet the Massachusetts income tax on wages is only 5.95 percent while even middle class New Yorkers paid 6.84 percent.
New York’s sales tax works the same way. It may be reasonable to exclude basic foodstuffs and the residential rent paid by poor families, but the State of New York exempts far more than that. Coin-operated car cleaning machines were exempted from the state's sales tax in 1997, but full-service car washes were not. The state's Car Wash Association has been pushing for a similar exemption ever since, giving lawmakers $84,750 over the past four years. The sales tax on beer was reduced, in part due to the clout of the big brewing companies, but not that on wine. Architects are exempt from sales taxes, but not interior designers. Periodicals are tax-exempt; books are taxed. The biggest sales tax story of recent years has been the off-and-on exemption of items of clothing costing under $110. But given that we live in an era when clothing is so inexpensive that perfectly good used clothing is shipped out the country, because not even the poor here will wear it, what is the public policy reason for subsidizing the purchase and rapid disposal of even more of it?
With many, many goods and services exempt from tax, New York State’s state sales and gross receipts taxes equaled just 2.2 percent of the income its residents, while in North Carolina these taxes equaled 3.0 percent of income. Yet New York’s state sales tax rate was 4.0 percent, just slightly lower than the 4.5 percent in North Carolina. New Yorkers also have to pay substantial local sales taxes.
Then there is the property tax, which all sorts of people and businesses don’t have to pay, legally or illegally. Take, for example, the Empire Zones, which provide the "right" business in the "right" locations with sales, income, and property tax breaks. Originally, these zones were located in declining, already built over areas where poverty and employment were high and infrastructure was already in place. After the Empire Zones Act of 2000, however, the breaks have been expanded, in some cases, to companies building on green-field sites in growing suburbs. And while the tax breaks are supposed to be granted in exchange for the creation of new jobs, recent hearings have revealed that no one is checking to make sure promises are honored, and in any event the entire program has generated only 50,000 new jobs in 17 years. The City of New York, however, doesn’t need an Empire Zone to allow a politically influential business to avoid paying taxes. During the Giuliani Administration dozens of large companies were exempted from tax, with some required to make lower "payments in lieu of tax," under "business retention" deals. Some firms received more than one tax break to retain the same jobs; few were audited to ensure jobs were actually retained.
And there is the Mitchell-Lama program. Thirty years ago, New York City developers were granted a property tax break and tax-exempt financing for new apartment buildings, in exchange for giving the apartments to eligible households off a government list, and entering the rent regulation program to provide cheaper rents until the bonds were paid back. Legend has it that politically-connected groups knew when and where the "first-come first-serve" tenant applications would be collected, and ended up taking most of the subsidized housing units. Many were college-educated professionals whose incomes were moderate only because they were in graduate school or just starting their careers, yet they have been paying lower rents than the rest of us, despite (in many cases) higher incomes, ever since - subsidized by a property tax break. In recent years, as their Mitchell-Lama deals have been about to expire, the City of New York has been agreeing to continue to exempt these buildings, many located in affluent areas of Manhattan, from property taxes, or to collect lower taxes than other buildings are made to pay. In exchange, the landlords have been agreeing to continue accept lower rents than tenants in the rest of the city have to pay. The State Legislature approves all of these deals - its members lobby for and negotiate many of them. Thus, a special deal from the past that was supposed to expire in the present continues into the future.
Shrewd politicians don’t steal a quarter out of your pocket. They steal two quarters, then give you back one quarter you don’t deserve, and make you feel a little guilty and obligated, in exchange. At this point just about everyone is getting a break of some kind. Take New York City’s homeowners. Under a 1982 state law, assessments on residential homes in Nassau County and New York City may not rise more than 6 percent in one year and 20 percent over five years. This may have been an understandable reaction to soaring prices in some neighborhoods, and thus higher assessments, causing existing residents to be taxed out of their homes. What is less understandable is the repeated acts of the New York State Legislature, often requested by the City of New York, to reduce the increase in assessments below the rate set by the 1982 law. Or other deals proposed more recently.
With all these tax deals, exemptions and privileges, the City of New York’s real estate tax collections were actually higher in Fiscal 1993, at the bottom of a deep recession, than they were in Fiscal 2000, at the peak of the one of the biggest economic booms in the city’s history. That’s without adjustment for inflation. Adjusted for inflation, the city’s real estate tax collections had fallen by 20 percent. It later emerged that New York City tax assessors had been taking bribes in exchange for providing buildings with lower property tax assessments. Perhaps they felt free to do so, given that elected officials were handing out the right to pay lower taxes on a far grander scale.
As for the unemployment tax, during the late 1990s boom, most states followed U.S. Department of Labor guidelines and built up a large balance in their unemployment insurance trust accounts. The State of New York, however, rewarded influential business and labor groups with higher benefits and lower unemployment insurance taxes. As a result, the state’s unemployment trust account went broke very early in the recession, and the state was forced to borrow hundreds of millions of dollars from the federal government just to pay benefits, money that will have to be paid back with interest.
The consequences? When the City and State faced a fiscal crisis in 2003, the State Legislature temporarily discontinued some corporate income and sales tax breaks. But just some and just temporarily; after all, their backers had paid for their breaks in campaign contributions and lobbying expenses fair and square. Instead, the City of New York raised its property tax rate by 18.5 percent, an increase that has been paid for by homeowners directly, and has been passed on to renters and businesses in the form of higher rents. The City and State raised their sales tax rate by half a percent. Both raised their income tax rate by a substantial amount as well. And in order to pay back the loan from the federal government, the state imposed a substantial automatic unemployment tax rate increase, a devastating tax increase on new jobs in a recession. Obviously, businesses that shut down or relocated jobs out of the New York State, which had benefited from the lower contributions in the boom, are not around to pay the higher taxes now. And the new businesses that employ today’s New Yorkers are paying the higher taxes now, but didn’t benefit from the break.
All of us pay more to offset all the tax breaks and deals over the years, but some of us pay more than others. Along with those who have special tax breaks, there are also those with special tax penalties. In recent decades, businesses in many industries have taken to hiring self-employed "freelancers" rather than employees, both to increase their flexibility and to avoid paying health benefits. The many young people flocking to New York City are especially likely to end up as "freelancers." But in New York City these workers are forced to pay two local income taxes on the same income - the New York City Personal Income Tax and the Unincorporated Business Tax, a surcharge of federal Schedule C. Just a handful of other places in the Untied States even have one local personal income tax, and a UBT deduction on the personal income tax only partially removes this double taxation. The local double taxation of self-employment income also hits entrepreneurs, owners of new, growing businesses - the ones providing tomorrow’s jobs. It is unique in the United States.
In the long run, handing out tax breaks to declining businesses that are moving out, while hitting new and small businesses with special additional taxes, is economic suicide. Businesses are always opening and closing, moving, growing and shrinking, due to conditions in particular industries, the relative success of individual firms, and technological and social change. According to a special tabulation of New York State Department of Labor data (produced at my request), about one-third of the people working in New York’s private-sector are employed by establishments that did not exist five years before. New York State needs 60,000 new businesses creating more than 450,000 new jobs every year just to break even. Not the 50,000 jobs in 17 years created by the Empire Zones.
But it doesn’t matter. The self-employed and businesses that don’t exist yet are not on anyone’s list of major campaign contributors, young people don’t vote, and after the deals are cut for others, someone has to pay. And while only New York City specifically targets freelancers and entrepreneurs with higher taxes, the overall structure of the state’s revenues hurts new businesses elsewhere as well. The state shifts fiscal burdens to local government, and thus to the property tax, and away from state government, and income and sales taxes. Entrepreneurs just starting out may earn and spend little, but they must pay the high property taxes - passed on to them in higher rents - regardless. The tax structure is indicative of a backward-looking state government.
Enron Budgets: How New Yorkers are Played for Suckers Year after year, decade after decade, the deals, favors, and privileges accumulate, getting ever more expensive. They are never cut back. In good years, when the economy is booming and the tax revenues are rolling in, the New York State Legislature holds everyone else harmless, or even throws them a bone. In bad years, they are sacrificed. But not in election years at the state level, and not by the state legislators who created the problem.
New York State’s legislators evade accountability by keeping challengers off the ballot, shifting the burden to local officials and forcing them to allocate the pain, and handing out small grants of money to the very groups of people who have been abused by their policies. After local government budget cuts and tax increases, your park may be poorly maintained, your library may be open only five hours per day, your school may be awful, your local taxes may be sky high, and your poor neighbors may be suffering. But there is your State Senator or Assemblyman, after having voted for the deal which sent most of your tax dollars elsewhere, with a small grant of books for the library, computers for the school, a lawn mower for the park, a trip to Atlantic City for the senior citizen’s club, or a tax deal for some interest, acting like the money was coming out of his own pocket as a personal gift. In exchange for the right to make a few little deals, they sell us out on the big ones.
The Governor and State Legislature also avoid accountability by shifting the cost of their decisions into the future, with help from their friends. Take fiscal 2002-2003 for example. You may recall that City of New York passed a budget that included borrowing $1.5 billion just to pay for that year’s spending, and then declared the budget balanced. The MTA - departing from past practice - refused to even publish budget documents or discuss a fare increase. All the while, the Republican Mayor of New York City praised the Republican Governor of New York State, while Democrats on the New York City Council praised Democrats in the State Legislature. The Governor and state legislators were duly re-elected in November 2002, the former having been endorsed by all the major newspapers in Downstate New York.
Then, right after the election, all kinds of huge budget gaps were suddenly admitted to, in small part due to the financial impact of the recession and terrorist attack, but in large part due to policies enacted by that very same State Legislature and Governor. The City of New York raised property taxes and slashed services while the MTA raised fares. The State Legislature raised state university tuition and state taxes some time later; property taxes in the rest of the state soared as well. The $1.5 billion the City borrowed did nothing more than postpone sacrifices by six months, until after the election. City residents will be paying perhaps $100 million per year in interest on that $1.5 billion, the biggest campaign contribution in history, into the far off future.
Now it’s 2004, and the New York State Legislature (though not the Governor) is once again up for election. And it is once again trying to cover up the fiscal consequences of its favors and deals over the years, along with its non-decision not to repeal them. This time the state may not even pass a budget until after the election. With a $5 billion dollar deficit projected, in spite of an excellent year on Wall Street and the failure, once again, to provide a fair share of state aid to New York City’s schools, one can only imagine what the state budget will bring.
And once again, New York City’s Mayor and City Council members, unlike some other local officials elsewhere, are silent about how bad our state government is. Indeed, both proposed and then adopted an "election year budget," with all kinds of special tax breaks and grants - generally temporary - for all kinds of local interests. This despite proposing to draw down a $1.3 billion cash reserve, once again planning to spend nearly $1.5 billion more than the city takes in. The partial restoration of services and partial reduction in taxes is sure to make New Yorkers less upset when they go to the polls in November.
But the election year for Mayor Bloomberg and the New York City Council is next year, not this year. The "election year budget" is at the right time for Sheldon Silver, Joe Bruno, and the rest of the New York State Legislature, but it is a year early for them. If New York City’s Mayor and City Council are not going to call for New York City’s representatives in the New York State Legislature to be voted out of office in 2004, then no one is going to want to hear about the "unavoidable" sacrifices they need to impose as a result of state policy in 2005.
Lawrence D. Littlefield, Brooklyn, NY, vampire-state@att.net
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