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For Release — August 16, 2004

STUDY: UPSTATE TAXPAYERS PAY UP TO $6 BILLION A YEAR EXTRA IN TAXES, MAINLY TO FUND HIGH SPENDING ON LOCAL GOVERNMENTS AND MEDICAID

ALBANY—Upstate New York taxpayers paid as much as $6 billion more in state and local taxes than they would in an average state, mostly because of the state's far-above-average levels of spending on Medicaid and local government payrolls, a new report from The Public Policy Institute of New York State shows.

Only aggressive actions to trim local government payrolls and reduce—not merely shift—the state's burden of Medicaid spending will ease this burden and reduce its drag on the Upstate economy, according to the report, "How High is the Upstate Tax Burden-and Why?" The report, which was released August 16 by The Institute, is posted at www.ppinys.org/reports/2004/upstate_taxes04.pdf.

"Upstate's businesses and taxpayers are paying state and local taxes that are about $5 billion to $6 billion a year higher than they would be if they were living in, say, Ohio," the report said. "And that's more than enough to impose a significant drag on the region's economy-one reason Upstate's job growth has lagged behind competing states' for so long."

State income taxes per capita Upstate are about 22 percent above average, which means Upstaters pay about $800 million a year above the norm. But the disparity in local taxes is even higher: about 55 percent above the national average. This costs Upstate taxpayers about $4.2 billion a year more than they would pay if they paid local taxes at the national average per capita, the report said.

This difference includes higher property taxes (more than $3 billion extra a year) and higher local sales taxes (more than $1.3 billion extra a year), the report noted:

Upstate's taxes are so far above average because spending is higher, especially in two key spending areas: government payroll and Medicaid.

Cutting high local spending and taxes will require action both in Albany and locally, the report noted. Locally, "serious and difficult initiatives" such as consolidation of governments or government services will be required. And "Albany, meanwhile, must reform its 'mandates'-the state rules that help drive up so many costs at the local level-from Medicaid to collective bargaining to the restraints on governmental consolidation, downsizing and/or privatization," the report said.

The report highlighted an irony in the debate about managing the state's burden of Medicaid spending: the fact that a state takeover of Medicaid spending would actually cost Upstaters money.

"The most oft-recommended 'cure' for the Medicaid burden on Upstate taxpayers is for the state government to take over the local share of the cost, thus easing the burden on the property tax," the report said. "Ironically, however, this would backfire on Upstate taxpayers as a whole. Unless the program were drastically reformed first, Upstate taxpayers would end up paying at least $250 million more in state taxes than they would gain in local tax relief."

A state takeover of the local share would tend to shift money to New York City and, based on 2001 spending and tax patterns, increase upstate taxpayers' state taxes by about $1.08 billion while decreasing their local taxes about $815 million-for a net loss of over $250 million, the report added.

"Solving Upstate's high tax problem requires two key things: downsizing local governments; and cutting, rather than just shifting, the cost of Medicaid," the report concluded. "Neither step will be easy. But both are essential."

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