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Why New York Cut Taxes — and what that's done for our business climate

By Governor George E. Pataki

Cutting taxes has been key to New York's economic recovery. But cutting taxes is more than just an issue of economics. For us, cutting taxes is a matter of fulfilling government's fundamental obligation to the people.

It all comes down to one simple question: whose money is it anyway? The people's hard-fought earnings belong to the PEOPLE and not the government.

I'm proud to be able to tell you that in no state has this basic fact of life been declared more clearly and more emphatically than in New York.

I know that may come as a shock to you, given New York's history. But it's true. In the four years since I took office, New York has cut taxes more than any other state. We've cut taxes 36 times, returning $19 billion to the taxpayers so far. When all the tax cuts on the books take full effect, that number will grow to over $52 billion.

Our tax cutting has sparked a new direction in New York. We were once a state in crisis. Now, our largest business organization calls New York "The Comeback State."

I mean, New York has gotten so much better that even the First Lady is thinking of moving here!

But perhaps there is no greater evidence of the profound turnaround in New York than the fact that the Governor of the place that once led the nation in raising taxes is now testifying before Congress about how to cut taxes. As they used to say in Brooklyn, who woulda thunk it!

Before I talk more specifically about what we've done with taxes in New York, I want to address the broader issue of freedom, because I don't believe you can separate the two.

If ever there were two things that had an inverse relationship, it's taxes and freedom. The more you have of one, it is necessarily so that you must have less of the other.

The more money a person has seized from them by their government, the less freedom that person has to do what he or she wants with that money.

It could not be any simpler.

Now, many Americans have come to accept taxation as a "a necessary evil." They accept the fact that they have to surrender some of their earnings - and consequently, a degree of their financial freedom - to sustain their government.

The point I'd like to make today is that excessive taxation does more than infringe on people's financial freedom. It drives up spending, and creates a bigger, more intrusive government that inevitably infringes on other freedoms as well.

High taxes drive big spending, big government, less freedom

By nature, government has an insatiable appetite - an inherent desire to grow. When politicians raise taxes beyond what is necessary to fulfill government's legitimate function, they feed that growth and produce, not just a bigger government, but a costlier government that becomes a destructive force in people's lives.

It created a destructive cycle of high taxes, perpetuating more bureaucracy and more spending - which in turn perpetuated more taxes and less economic freedom for the people who pay those taxes.

But the cycle didn't end there. Excess bureaucracy created by over-taxation produced - not just more spending and further encroachments on people's economic freedom, but new encroachments on other freedoms.

Because bureaucrats without a legitimate function have to justify their existence by creating an ostensible function.

In New York, bureaucrats justified their existence by generating scores of rules and regulations - and government would use those regulations to assert itself over the people in every aspect of their daily lives.

Most of the regulations, however, were aimed at businesses, putting the men and women who create jobs under the close supervision of a government that sought to dictate their every move.

So what you had in New York was an endless cycle of high taxes leading to big bureaucracies and more regulations, which led to higher taxes and bigger bureaucracies and even more regulations.

This went on for more than a decade, and the results were devastating.

The bleak picture of New York in 1994

Let me just give you a picture of New York in 1994 - and bear with me because, as dismal as it seems, this story does have a happy ending.

When I took office in January of 1995, New York was in crisis. The state government was too big, too bossy, and too expensive. It faced a budget deficit that totaled a record $5billion - a deficit larger than the total budgets of 31 other states. The promise of tax relief had turned into a cruel hoax. Our welfare rolls were bursting, and jobs were on the run.

The biggest taxes - income taxes, property taxes and school taxes - were all rising every year at an alarming rate. But there were other taxes as well: The sales tax. The estate tax. Hidden taxes on goods and services. And scores of taxes that were imposed on businesses and paid by consumers.

All of these taxes served one purpose and one purpose only: To drive up spending and feed a government that was out of touch and out of control.

And that destructive cycle - of taxes, more bureaucracy, more spending, more taxes and less freedom - was in full throttle.

As government got more, families got less.

As bureaucracies thrived, businesses suffered.

Taxes were literally destroying the greatest state in America.

What we've done to cut taxes and restore freedom

Together with New York's Legislature, we confronted that crisis. From our first day, we held to a fundamental covenant that says: at all times and without exception, respect the people and let them lead the way toward real progress.

And in a state where the guiding principle is respect for the people, big government and big government taxation simply does not compute. That's why in New York we have embarked on the most ambitious campaign of tax cutting in the state's history.

It's working. In fact, our philosophy is working so well that it has created a new challenge for us. In that first year, 1995, we had to manage crisis. In 1999, our challenge in New York is to manage prosperity.

Today, taxes aren't going up every year, as they had been; they're going down, by record amounts. Private-sector jobs aren't going down, as they had been; they are going up, and jobs are now at their highest level ever.

That economic revitalization has been the key to solving one of New York's most serious problems. When I took office, one out of every 11 New Yorkers was on welfare; in New York City, the figure was one in seven.

But today, welfare rolls are shrinking every day, as people are finding the freedom that comes with work. Welfare rolls are down by nearly 653,000, and have fallen below the 1million mark for the first time since December of 1967.

Families are buying new homes and refinancing their old ones, which says they're planning to stay in New York and build their future here.

It's hard to think of a tax we haven't cut.

We began by cutting income taxes. Today the vast majority of New Yorkers pay 25 percent less in income taxes today than they did in 1994.

We're cutting income taxes, business taxes and school property taxes. Taxes are being cut for small business people, family farmers, and senior citizens, working families and retired couples.

We're cutting taxes on entrepreneurs trying to start businesses, businesses trying to grow jobs and people trying to find work.

We're cutting taxes for families who are both buying clothes for their children and saving for their college education.

Across the board, and in every conceivable category, taxes are falling - in ways some thought were impossible.

When we first proposed cutting income taxes 25 percent, there were some who swore we could never actually do it. But we did, and it's saving New Yorkers $5 billion every year and helping to revitalize our economy.

There was once a time when New York was one of the only states that imposed its own tax on estates. But this year, New York's tax on death finally dies, along with the gift tax.

Once upon a time, we not only had one of the highest corporate income tax rates in the nation, but we had a 15 percent surcharge on top of that. We got rid of the surcharge, and this year the corporate income tax rate starts coming down too. When all is said and done, New York's corporate tax rate will be at its lowest level since 1970.

There's more. We've cut the Corporation Franchise Tax... the Gross Receipts Tax... the Real Property Transfer Tax... the tax on motor fuel... the Container Tax... and the tax on beer.

We've cut bank taxes, insurance taxes and the Petroleum Business Tax.

And we cut the tax that had the dubious honor of being named after my predecessor: The "Cuomo tax." It was a transfer tax of 10 percent on all real estate transactions over $1 million - a true job killer that was wreaking havoc on New York's real estate investment industry.

And in 1997, we did something unprecedented. We signed a law - called the STAR Program - that cuts school property taxes for every homeowner in New York for the first in New York State history.

This truly is remarkable because in New York, the state doesn't even levy school taxes. The localities do.

And so, essentially the state is cutting taxes that we don't even impose - then reimbursing local governments for the lost revenue. And the reason we can afford to do that is because we've reduced the size and cost of government so dramatically.

STAR is cutting school taxes by 27 percent on average. Seniors will see a 45 percent cut. And in 11 of New York's 62 counties, the average senior citizen will pay no school taxes at all.

In 1996, we not only led the nation in cutting taxes, we cut taxes by more than the other 49 states combined.

And in 1997 we cut taxes more than Texas, California and Illinois combined.

New York's Public Policy Institute, a pro-growth think tank, calculated all our tax cuts and then considered what they would mean on a federal level. They said that if equivalent tax cuts were done nationally, Americans would save well over $300 billion.

We have had great progress in New York, but there is more work to do. This year, I've proposed another $1 billion in tax cuts, including a $600 million income tax cut that will raise the threshold at which the maximum state tax rate applies, and it doubles the deduction for dependent children. Another 5 million taxpayers, including tens of thousands of small businesses, will see major savings.

Bad tax policy goes beyond bad taxes. There is the bureaucratic mindset perpetuated by these taxes. This year, I have sent the Legislature a bill that will remove one of the great absurdities from the state's tax code.

For years, hundreds of thousands of New Yorkers have had to file state income tax returns every year even though both they and the state know they will owe no income tax. It takes two minutes to figure it out.

But state law makes them file anyway. That's a waste of taxpayer's time, and a waste of taxpayers' money, because guess whose dollars go to pay for the processing of those useless tax returns?

If there was ever a tribute to twisted bureaucratic logic, this is it. By raising the taxable income needed to file a state return to match the state's standard deduction, we can wipe this dumb rule off the books for good. And we'll help 500,000 New Yorkers, mostly seniors, by relieving them of paperwork they never should have had to deal with in the first place.

We have proven that cutting taxes works. But putting tax cuts on the books is only one part of the winning formula. New York was once run by those who were quick to approve tax cuts, and then delay them, and then totally forget about them and finally turn around and RAISE taxes.

The tax-cut movement cannot be allowed to become a blip on the screen of our state's or our nation's history. The act of raising taxes is a destructive act and should therefore be a difficult act.

Last week, I joined with Congressman Joe Barton of Texas in calling for constitutional amendments that would require super-majority approval for any tax increases. At the state and federal levels, requiring a two-thirds vote for any tax increase would protect millions of hardworking taxpayers from unnecessary and counterproductive tax hikes.

I'm working in my state to get this protection passed, and I would respectfully urge the members of this committee to do the same here in Washington.

We didn't just cut taxes. We cut government, and more.

Our mission in New York four years ago wasn't to lead the nation in cutting taxes. Our mission was to restore freedom.

To truly fulfill that mission, we knew that - in addition to cutting taxes - we had to eliminate the layers of unnecessary bureaucracy that those taxes created in the first place.

We knew we had to significantly reduce the size of the big, overbearing government bureaucracy that was intruding into the daily lives of our people.

After all, that big government didn't just disappear when I took office. It was still there, turning out rules and regulations like never before.

To date, we've reduced the size of government by approximately 20,000 positions - and we've done virtually all of that through creative measures like early retirement and transfers, and without huge layoffs.

We've streamlined or abolished unnecessary and ineffective programs. In fact, in 1995 we abolished an entire government agency - the Energy Office - which was created during the 1970s to deal with the energy crisis.

And in doing so, we proudly broke the old rule of government: that once a program or agency is created it can never be abolished.

In addition to that, we've sent a strong message to every bureaucrat in every agency of government that the days of harassing employers for leisure are over.

We've eliminated thousands of regulations imposed by the previous administration - saving our people and businesses billions of dollars.

We've reduced workers compensation costs by 38 percent.

We've privatized state-owned properties that government had no business owning in the first place - things like bakeries, golf courses, and hotels. We're in the process of making Stewart Airport in the Hudson Valley the first commercial airport in the nation to be privatized.

As for that $5 billion deficit I mentioned before - the one I inherited. By returning economic power to the people through tax cuts and fiscal restraint, we've created a strong economy that has allowed us to eliminate that deficit and replace it with four straight budget surpluses. The latest surplus totaled $1.8billion.

And I'm urging our Legislature to preserve that surplus, and the ability to cut taxes in the future, by keeping our budget growth this coming year to the inflation rate.

There's one other important point to make about New York State's tax cutting. We have done all this without inhibiting the ability of one single state agency to provide an important public service. We are operating more efficiently and effectively than ever before.

It's also important to note that as we have limited New York's State government, we have not shifted the burden of services or taxation to localities.

It's not just that we have ended big government in New York. We've replaced it with smarter government.

A word of encouragement

Let me end with what I hope is a word of encouragement. There's been a wave of newspaper articles recently citing polls which suggest Americans don't want a tax cut.

It has been said that the hunger for a tax cut doesn't exist because our economy is healthy and people are doing well for themselves financially. But it has also been said that freedom is fragile and must be protected. To sacrifice it, even as a temporary measure, is to betray it.

We must never submit to the notion that the preservation of freedom is a part-time endeavor that can be pursued and abandoned based on the last Gallup poll.

Ronald Reagan was right when he said that the federal government has taken too much tax money from the people, too much authority from the states and too much liberty with the Constitution. And we are right to stand by our principles of smaller government, lower taxes and more freedom.

We are right to insist on policies that reward hard work and empower the individual spirit that fuels our national greatness and keeps our economy strong.

We must stand by our convictions and do what's right for America, for Americans, and for the preservation of freedom. We must pledge allegiance to our principles.

This is what we have done in New York.

To paraphrase Frank Sinatra - if you can cut taxes in New York, and cut them more than any other state, you can cut taxes anywhere.

Even Washington.