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The Comeback Trail:1998

Section 3

Major progress in cutting taxes, other business costs

The most obvious change that's taken place in New York State in the last four years is in our taxes:

Every major state tax has been cut sharply.

Anyone familiar with our political climate who left the Empire State just a few years ago, and returned now, would find that change hard to believe. Before the sea change that started in 1994, with repeal of a corporate tax surcharge, it wasn't easy to predict that significant reductions would be made to even one major tax. But it's happened:

All told, these state tax cuts will save individuals and businesses some $8.7 billion a year, not counting the local tax relief under the STAR program. The state projects revenues of some $40 billion in the year 2001-2002. Thus the tax cuts enacted from 1994 through this year represent reductions of more than $1 in every $6 Albany would have collected, in the absence of any such action.

With the reductions that took effect up through the state's 1996-97 fiscal year, total state tax collections per capita rose only 2 percent from three years earlier. Only three states had a better record of protecting taxpayers' interests during that period, as shown in Table 4. The political debate in Albany has now changed completely. Every one of the four leaders in the Legislature proposed cutting taxes this year. And, for the second straight statewide election year, the major reductions enacted this year directly benefit businesses.

Table 4
State-only Taxes Per Capita, By State
Rank, Change in
State Taxes Per
Capita, 1995-97
State Change in State
Taxes Per Capita,
1995-97
Rank, State Taxes
Per Capita,1997
State Taxes Per
Capita, 1997
50 Louisiana + 20.3% 45 $1,297
49 Minnesota + 18.5% 4 $2,395
48 Missouri + 14.0% 38 $1,447
47 Massachusetts + 13.8% 6 $2,175
46 Nebraska + 13.6% 28 $1,538
45 California + 13.2% 11 $1,911
44 Oklahoma + 13.1% 30 $1,526
43 Colorado + 12.4% 44 $1,359
42 Oregon + 12.0% 31 $1,525
41 Michigan + 11.9% 7 $2,080
40 Indiana + 11.8% 27 $1,552
39 Wisconsin + 11.7% 9 $1,970
38 Vermont + 11.5% 29 $1,527
37 North Dakota + 11.2% 19 $1,660
36 Maine + 11.1% 22 $1,626
35 Kansas + 11.0% 21 $1,630
34 Rhode Island + 10.9% 18 $1,666
33 Illinois + 10.8% 26 $1,559
32 Georgia + 10.6% 37 $1,456
31 Mississippi + 10.2% 34 $1,471
30 South Carolina + 10.2% 41 $1,431
29 Florida + 9.8% 39 $1,439
28 Texas + 9.7% 48 $1,184
27 Arkansas + 9.7% 33 $1,497
26 Tennessee + 9.5% 47 $1,233
25 South Dakota + 9.5% 49 $1,041
24 Idaho + 9.0% 23 $1,620
23 Connecticut + 9.0% 3 $2,491
22 Virginia + 7.7% 42 $1,430
21 Ohio + 7.6% 35 $1,468
20 Delaware + 7.4% 5 $2,381
19 North Carolina + 7.3% 16 $1,701
18 Kentucky + 7.1% 15 $1,745
17 Utah + 7.0% 36 $1,462
16 West Virginia + 6.9% 25 $1,600
15 Washington + 6.7% 8 $1,997
14 Hawaii + 6.7% 2 $2,601
13 New Mexico + 6.5% 13 $1,793
12 Pennsylvania + 6.5% 24 $1,612
11 Alabama + 6.3% 46 $1,270
10 Iowa + 6.1% 20 $1,643
9 Maryland + 5.6% 17 $1,689
8 New Jersey + 4.6% 14 $1,790
7 Arizona + 3.8% 32 $1,500
6 Nevada + 2.8% 12 $1,809
5 Montana + 2.7% 40 $1,433
4 NEW YORK + 2.0% 10 $1,922
3 Wyoming - 0.9% 43 $1,380
2 New Hampshire - 2.3% 50 $780
1 Alaska - 16.6% 1 $2,659
  U.S. + 9.1%   $1,660
Source for data on 1997 state and local taxes: Tax Foundation.
Source for other data: U.S. Census Bureau, calculations by The Public Policy Institute.

We need to cut costs further

And yet, despite all that progress, we need to do more, to bring the cost of doing business in New York down to the level of our competitors.

The tax burden on New Yorkers has been so far out of line, for so long, that even the impressive record of the past four years leaves us with overall government costs much heavier than those in other states. And other business costs remain too high despite progress in reducing electrical rates, cutting workers' compensation premiums and reforming health care (more on those issues below).

There's also the sobering reality that, because of the nature of our state tax system and because other states are still growing faster than New York, some tax cuts are needed just to stay even, on a competitive basis. The Pataki personal income tax cuts that took full effect in 1997, for instance, were partly intended to eliminate major, automatic tax increases that millions of New Yorkers suffered in earlier years, as their income rose to keep pace with inflation and they moved into higher tax brackets. In addition, new businesses and new jobs mean a broader base to pay taxes, and more tax revenue even with no change in tax rates.

Where, specifically, should further tax cuts be directed?

Table 5
1995 Taxes Per Capita, by Category: States Ranked by Property Taxes
Rank, State & Local Taxes Per Capita State Property Taxes Per Capita All State/Local Taxes Per Capita State-only Taxes Per Capita (1997) Sales Taxes Per Capita Utility Sales Taxes Per Capita Individual Income Taxes Per Capita Corporate Income Taxes Per Capita
4 New Jersey $1,540 $3,285 $1,790 $520 $153 $575 $130
29 New $1,453 $2,267 $780 $0 $44 $33 $145
3 Connecticut $1,389 $3,687 $2,491 $723 $45 $756 $213
2 NEW YORK $1,256 $3,933 $1,922 $707 $111 $1,171 $275
12 Rhode Island $1,149 $2,660 $1,666 $461 $67 $536 $83
1 Alaska $1,121 $4,460 $2,659 $177 $13 $0 $874
17 Vermont $1,103 $2,469 $1,527 $297 $18 $428 $83
7 Massachusett $1,040 $2,980 $2,175 $409 $0 $984 $198
8 Wisconsin $1,031 $2,831 $1,970 $530 $56 $768 $131
19 Maine $1,022 $2,466 $1,626 $524 $1 $516 $51
13 Illinois $1,003 $2,619 $1,559 $511 $112 $450 $125
24 Wyoming $948 $2,358 $1,380 $571 $15 $0 $0
6 Minnesota $931 $2,996 $2,395 $598 $10 $795 $144
22 Nebraska $903 $2,398 $1,538 $560 $17 $453 $76
41 Montana $879 $2,038 $1,433 $0 $15 $428 $87
18 Iowa $863 $2,466 $1,643 $536 $3 $577 $78
30 Florida $808 $2,252 $1,439 $776 $118 $0 $67
10 Washington $805 $2,728 $1,997 $1,299 $81 $0 $0
26 Oregon $789 $2,309 $1,525 $0 $32 $891 $99
45 South Dakota $774 $1,914 $1,041 $642 $4 $0 $55
38 Texas $758 $2,066 $1,184 $668 $44 $0 $0
23 Kansas $754 $2,369 $1,630 $641 $36 $481 $102
9 Maryland $741 $2,758 $1,689 $387 $59 $1,018 $73
33 Indiana $730 $2,201 $1,552 $467 $1 $631 $151
25 Colorado $728 $2,333 $1,359 $652 $19 $561 $51
14 California $714 $2,570 $1,911 $689 $54 $581 $182
27 Virginia $705 $2,307 $1,430 $377 $71 $652 $56
16 Pennsylvania $703 $2,477 $1,612 $467 $64 $576 $148
21 Ohio $693 $2,405 $1,468 $503 $66 $732 $64
20 Michigan $687 $2,454 $2,080 $614 $5 $617 $223
28 Arizona $672 $2,292 $1,500 $819 $40 $352 $99
31 Georgia $624 $2,215 $1,456 $673 $16 $533 $91
34 North Dakota $618 $2,183 $1,660 $488 $48 $223 $109
44 South $562 $1,922 $1,431 $503 $23 $451 $68
35 Missouri $550 $2,148 $1,447 $618 $53 $522 $69
39 Idaho $545 $2,062 $1,620 $495 $6 $516 $111
15 Nevada $530 $2,567 $1,809 $989 $32 $0 $0
5 Hawaii $516 $3,058 $2,601 $1,148 $105 $780 $40
40 Utah $513 $2,059 $1,462 $663 $25 $525 $76
32 North Carolina $483 $2,210 $1,701 $508 $39 $653 $126
48 Mississippi $416 $1,776 $1,471 $628 $11 $253 $75
47 Tennessee $408 $1,790 $1,233 $825 $6 $19 $94
11 Delaware $394 $2,704 $2,381 $0 $35 $828 $270
42 West Virginia $379 $1,955 $1,600 $434 $126 $388 $120
37 Kentucky $340 $2,101 $1,745 $435 $30 $626 $88
43 Oklahoma $321 $1,935 $1,526 $582 $25 $432 $51
46 Louisiana $305 $1,839 $1,297 $745 $28 $244 $65
49 Arkansas $262 $1,765 $1,497 $626 $28 $422 $77
36 New Mexico $256 $2,147 $1,793 $898 $20 $351 $89
50 Alabama $216 $1,713 $1,270 $530 $93 $364 $56
U.S. $774 $2,514 $1,660 $610 $57 $525 $120
U.S. Census Bureau; calculations by The Public Policy Institute.

Local taxes: Our biggest cost problem

Our local taxes, overall, impose $25 billion in extra costs on New Yorkers, compared to what we would pay if our per-capita local taxes were the same as the national average. That cost disparity is greater than our higher-than-average costs for health care, electrical rates, and lawsuit liability, all combined. And the greatest single element in our high local taxes is property taxes. (See Table 6.)

Property taxes are a problem for New Yorkers as individuals, of course. Governor Pataki's STAR program will alleviate some of the high cost on homeowners, although the huge property tax burden our school districts and municipalities have built up over many years will still hit New York homeowners harder than those in most other states. And, because the Governor's proposal to impose a legal cap on school tax rates was not included in the final STAR legislation, there's no guarantee that homeowners will reap all the savings promised by STAR.

In any event, our property taxes are a big problem for another reason—the damage they inflict on our competitiveness.

The anti-competitive nature of our property taxes is clear from Table 7. Total property taxes per capita—including those levied by school districts, counties, and municipal entities—are far higher in every area of New York than in most of our key competitor states.

Table 6
Major Cost Disparities, New York State vs. the Nation
Item New York
State Per-
Capita Cost
U.S. Per-
Capita Cost
Extra Per-
Capita Cost
in N.Y.S.
Potential Savings,
If N.Y.S.
matched U.S.
State taxes, 1997 $1,922 $1,660 $262 $4,751,108,000
Local taxes, 1995 3,933 $2,514 $1,419 $25,759,107,000
Property taxes, 1995 1,256 $738 $518 $9,403,254,000
Health-care costs, 1994 4,488 $3,852 $636 $11,545,308,000
Electrical rates, 1996 11.13* 6.86* 4.27* $5,615,690,500
Liability costs, 1996 787 $616 $171 $3,100,914,000
* In cents per kilowatt-hour (not a per-capita calculation).
Sources: All tax data, U.S. Census Bureau; health-care costs, Tax Foundation; electrical rates, Edison Electric Institute; liability costs, The Public Policy Institute

 

Table 7
Total Property Taxes Per Capita
In Selected Counties and Key Competitor States, 1996
County/state Total property
taxes per
capita
County/state Total property
taxes per
capita
Nassau $2,501 Broome $1,045
Westchester $2,329 Massachusetts $1,040
Rockland $2,174 Chautauqua $1,013
Suffolk $1,963 Illinois $1,003
Oswego $1,570 Rensselaer $965
Ulster $1,540 Oneida $859
New Jersey $1,540 St. Lawrence $783
Orange $1,377 Jefferson $781
Connecticut $1,389 Indiana $730
Dutchess $1,371 California $714
Monroe $1,229 Virginia $705
Onondaga $1,205 Pennsylvania $703
Albany $1,198 Ohio $693
Schenectady $1,185 Michigan $687
Saratoga $1,133 Georgia $624
Niagara $1,097 North Carolina $483
Erie $1,057 Average for N.Y.S.
counties listed here
$1,631
Avg. for all states $774
Property tax per capita figure includes all property taxes within the county or state
(school, county, municipal)
Sources: Office of the State Comptroller, U.S. Census Bureau

Why do these numbers matter? Take, for instance, a business that seeks to locate in the New York City metropolitan area. The owners will, most likely, first decide whether they need to be in the city, or can site the operation in the suburbs. If the latter, choices will include Nassau, Suffolk, Westchester and Rockland counties, or perhaps a site in New Jersey or Connecticut. Property taxes are likely to encourage a location outside the Empire State.

Upstate counties often compete with regional neighbors such as Pennsylvania, Ohio, Illinois and Michigan. Property taxes per capita in every one of those states are dramatically lower than in Monroe, Onondaga, Erie, Broome and other counties in New York. Some important competitor states, such as Georgia and North Carolina, have even lower property taxes—and their economic development offices make sure businesses in New York know it.

The average for all the counties shown (all the counties in New York State, outside New York City, with populations above 100,000) is more than twice the average for all the 50 states. Obviously, a major competitive problem.

What to do? The Buffalo News, commenting on continuing slow economic growth upstate, has suggested extending STAR to business property and eliminating the two-tier property tax system that discriminates against employers in some 20 communities around the state. Many business owners would agree with both suggestions. Ultimately, though, the only real solution is simply to reduce the cost of local governments and schools, so property taxes can be reduced across the board.

State aid won't fix it

Speaking of local taxes, what's happened as Albany has cut state-level taxes in recent years? Many of those who opposed the state tax cuts claimed they would result in sharp cutbacks in local assistance, and thus boost municipal and school taxes.

In fact, though, state government has increased aid to localities. In 1996, the latest year for which complete data are available from the Office of the State Comptroller, overall state aid to localities and school districts was up 0.6 percent. And the 1998-99 state budget includes a record jump in aid to school districts, more than $800 million, along with a similar amount of direct aid to municipalities.

The Office of the State Comptroller also reports that total local tax collections rose 4.6 percent in 1996. That increase was sharply lower than those of just a few years earlier. In 1989, for instance, local taxes jumped 9.5 percent even as state aid was increasing 7.3 percent.

The reality is that more state aid does not guarantee lower local taxes, and less state aid need not produce local tax increases.

Municipal and school officials will base their spending decisions primarily on how much money is available. And, in recent years, those officials have started reacting to the taxpayers' long cries for relief.

Fully 115 school districts statewide actually reduced per-student tax collections in 1996, a Public Policy Institute study earlier this year showed. At the same time, more than 300 districts increased per-student taxes by more than the inflation rate that year. The logical conclusion: Local and school officials have wide latitude in determining how much they will spend, and how much they will tax. It's up to them to make the decision to control spending and reduce taxes, and it's up to taxpayers to keep a close eye on those decisions.

The cost of creating a job

As with taxes, New York State's new generation of leadership has achieved a great deal to reduce the cost of keeping and creating jobs here.

We've seen truly significant progress in building a better business climate in New York. Yet, in every one of those areas, we need to do still more:

         

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