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:
- BUSINESS TAXES: In 1994, rank-and-file lawmakers pushed through a measure that eliminated a 15 percent surcharge on corporate taxes, and made other tax reductions aimed at helping manufacturers and other key sectors. This year's budget includes, at the initiative of Senate Majority Leader Joseph L. Bruno, a more dramatic cut in business taxes. Our corporate tax rate of 9 percent, now 8th-highest among all the states, will drop to the 50-state midpoint of 7.5 percent as of the year 2002. Several other important business tax reductions were enacted in 1998, as well. Besides the intrinsic value of those reforms, they are tremendously important symbolically. They show that the new generation of leadership in Albany is concerned about stimulating business growth—enough so that this election-year tax package focused on businesses, which do not vote, rather than on individuals.
- PERSONAL TAXES: As a result of Governor Pataki's insistence during his first year in office, New Yorkers are saving an estimated $4 billion on their state tax returns every year. Our top rate has fallen to 6.85 percent, its lowest level since the early 1950s, and less than half the 15.375 percent level where it peaked in the mid-1970s. The result is not only more dollars in the pockets of working New Yorkers—but a powerful sign to investment decision-makers nationwide that the Empire State is a good place to live and do business.
- INHERITANCE TAX: Long the most burdensome in the nation, our estate tax will be cut to the lowest level of any state as of the year 2000. Initiated by the Governor, that reform will spare middle-class families a costly tax that was originally targeted only at rich people. And it makes it much easier for family-owned and closely held businesses to succeed in New York over the long term. Cutting this tax, in particular, was an important sign that this state wants wealth to stay within our borders.
- UTILITY TAXES: Our utility costs are among the highest in the nation, and high taxes are one reason. But the 3.5 percent gross receipts tax is scheduled to drop 1 percentage point as of the year 2000, saving ratepayers some $440 million. Again, this is more than dollar savings. Utility taxes are hidden taxes. They were easy for politicians who wanted more tax revenue to impose in the first place, and reducing them carries relatively little political gain—all the more reason it's an encouraging sign about the change taking place in New York.
- SALES TAX: At the insistence of Assembly Speaker Sheldon Silver, sales of clothing under $110 will be exempt from the state's 4 percent sales tax, and from local sales taxes in most counties. The combined savings to New Yorkers will likely be more than $700 million a year—and retailers, especially in border areas, will see sales rise as a result.
- RESIDENTIAL PROPERTY TAXES: Under Governor Pataki's STAR program, New Yorkers' state tax dollarsfrom Albany's personal income tax, sales and other taxes—will be used to relieve homeowners of some of the burden of school property taxes.
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.
|State-only Taxes Per Capita, By State|
|Rank, Change in
State Taxes Per
|State||Change in State
Taxes Per Capita,
|Rank, State Taxes
|State Taxes Per
|37||North Dakota||+ 11.2%||19||$1,660|
|34||Rhode Island||+ 10.9%||18||$1,666|
|30||South Carolina||+ 10.2%||41||$1,431|
|25||South Dakota||+ 9.5%||49||$1,041|
|19||North Carolina||+ 7.3%||16||$1,701|
|16||West Virginia||+ 6.9%||25||$1,600|
|13||New Mexico||+ 6.5%||13||$1,793|
|8||New Jersey||+ 4.6%||14||$1,790|
|4||NEW YORK||+ 2.0%||10||$1,922|
|2||New Hampshire||- 2.3%||50||$780|
|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?
- One place to start is to eliminate disparities in our business tax rates. For instance, banks and insurance companies were not included in this year's corporate tax reduction, and taxes on those key industries will remain uncompetitively high unless further reforms are enacted.
- Our utility taxes remain out of line overall, and utilities are now starting to compete with companies that do not pay gross receipts taxes. The GRT should be phased out as soon as possible, and reforms enacted to ensure that utility customers do not start paying taxes not intended for the modern, unregulated energy marketplace.
- And our local taxes, especially, are far too high. (See Table 5.) Property taxes in New York, at $1,256 per person in 1995, were 62 percent above average.
|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|
|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 capitaincluding 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.
|Major Cost Disparities, New York State vs. the Nation|
|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|
|Total Property Taxes Per Capita
In Selected Counties and Key Competitor States, 1996
|New Jersey||$1,540||St. Lawrence||$783|
|Erie||$1,057||Average for N.Y.S.
counties listed here
|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:
- WORKERS' COMPENSATION/UNEMPLOYMENT INSURANCE: The latest authoritative statistics on how our workers' comp costs compare
to those in other states show premiums in New York are about 20 percent
higher than the national average. That's a huge improvement from 57
percent above average just three years ago, according to a study by
Actuarial & Technical Solutions Inc. of Ronkonkoma. But we're still not
The savings stem partly from major reforms Governor Pataki and the Legislature enacted in 1996. Those included repealing the Dole v. Dow standard, which made New York one of the few states to allow third-party lawsuits against employers in workers' comp cases. The repeal of Dole was important because it will help cut comp costsand because it showed that state leaders are willing to stand up to the influential trial lawyers' lobby.
Employers point to the need for further reforms, such as use of standardized medical guidelines and time limits on awards for permanent partial disability.
Unemployment insurance premiums are going down sharply, as well. In late 1997, The Business Council led a drive by employers around the state to pre-pay 1998 UI premiums. The effect was to pump up the UI trust fund to a level where automatic premium reductions took effect, saving most private-sector employers $60 per worker.
This year, the Legislature went a major step further. The 1998 reform legislation creates new, more balanced UI tax tables that will cut costs for employers with good experience ratings; makes disqualification procedures more fair to employers; and enacts other changes.
- HEALTH-CARE COSTS: In 1996, Governor Pataki and the Legislature
enacted major reforms to our health-care system, to reduce costs and
encourage hospitals to operate more efficiently. Temporary surcharges of
$1.38 billion were imposed on insurance premiums to generate transitional
funding for hospitals entering a deregulated system of negotiated rates.
Those taxes are no longer necessary, or justifiable. Their scheduled expiration on December 31, 1999 should go forward.
Otherwise, employers, individual purchasers of health insurance and taxpayers (who pay for the Medicaid program) will continue to pay the equivalent of a major tax increase when the state is working to cut taxes. If they were ranked with other states taxes, in fact, the health-care taxes would be our third-largest business tax, and second-largest consumer tax. New York City employers pay annual health-care taxes of $385—roughly the equivalent of a month's insurance premium—for every employee's family health insurance policy to subsidize teaching hospitals for graduate medical education.
- ENERGY COSTS: The state's electric utility companies are preparing to
create a true marketplace in the sale and delivery of electricity for the first
time in history. As part of rate restructuring arrangements negotiated with
the Public Service Commission, electrical rates will decline across the
board during the next several years and purchasers will choose their
In most areas, particularly large reductions are going to large manufacturers. That's appropriate, given those customers' importance as large employers and the big role they play in helping to offset utilities' fixed costs. But all purchasers of electricity need further savings. Further action on the GRT will help; so will reduction in local property taxes, which impose another heavy burden on utility bills.
The Public Policy Institute of New York State, Inc.
111 Washington Avenue, Suite 400 | Albany, New York 12210-2289 | 518-465-7511