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February 9, 2005

Federal Reserve study: New York's high spending, taxes aren't based on need

A new study by the Federal Reserve Bank of Boston confirms that New York's taxes are by far the highest in the country -- and finds that social needs don't seem to explain the heavy tax burden.

The "tax effort" required of New York's workers and businesses is 43 percent higher than the national average, according to the study. That level is far above any other state; even the state with the second-highest tax effort, Connecticut, was only 19 percent above average.

Tax effort measures how much state and local governments in each state collect in taxes, compared to the revenue-generating capacity of the state's economy.

Federal Reserve economists also calculated "fiscal need" in each state. That index includes measures such as the poverty rate, the proportion of residents who are school-aged, and number of vehicle-miles traveled.

New York State's fiscal need was only 1 percent above the national average, the study found. After adjusting for need, state and local government spending in New York is at least 35 percent above average in such major areas as education, public welfare, health/hospitals, highways, and police/corrections, the Federal Reserve study concluded.

The study also found New York's tax effort is especially high in these areas:

Most of the differences in taxes and spending among states appear to be based on political and policy decisions, rather than differences in wealth and ability to generate revenue, economists Robert Tannenwald and Nicholas Turner concluded.

"States with low levels of public expenditures tend to spend less because they want to, not because they are constrained by a lack of revenue," they wrote. "States have unique preferences for public services."

The Federal Reserve report, based on data from fiscal 1999, is available at http://www.bos.frb.org/economic/ppdp/2004/ppdp0409.pdf.