January 17, 2007
New York ranks #1 in taxes, despite average spending needs, new study finds
State and local taxes in New York remain the highest in the country when measured against the state's economic ability to generate revenue, a new study by the Federal Reserve Bank of Boston finds.
The study, conducted in conjunction with the nonprofit Urban Institute, measures "tax effort" -- each state's actual tax collections, compared to what would have been raised if taxable economic activity and tax rates equaled the average for all states -- in fiscal 2002. As of that year, New York's tax effort was 34 percent higher than the national average. Second-place Maine was 18 percent above average, while competing states such as Massachusetts, Michigan, Ohio and Pennsylvania all had significantly lower taxes than New York's.
"New York has consistently topped the tax effort rankings," the study says. While still ranking first in taxes, New York has moved closer to the national average. New York's tax effort was 55 percent above average in 1994, and 43 percent above average in 1999. The 2002 figures may have been influenced by the September 11, 2001, terrorist attacks, which sharply reduced employment and tax revenues in New York.
Using a broader measure of revenues that includes user charges, fees and gambling revenue, the Boston Fed study ranked New York second in the nation for "revenue effort," the ratio of actual revenues to expected revenue capacity. Alaska, which collects significant nontax revenue from its oil and gas industry, led all states in revenue effort. New York's overall revenues were 22 percent higher than the national average, the study found.
New York's "expenditure need" is almost exactly the same as a typical state's, at 101 on an index where 100 is average, according to the study.
"States with high expenditure needs are generally those with a combination of high poverty rates, a large primary and secondary school–age cohort (age 5 through 17), and high crime rates," the report said. Specific factors used to estimate spending needs include elements such as the share of older residents living in poverty, the state's share of nationwide college enrollment, number of low-income families, and total highway lane miles.
While ranking 19th among the states on expenditure needs, New York was second -- and 39 percent above the national average -- for "expenditure effort." Only Alaska ranked higher on that index, which measures actual government spending compared to the need for such expenditures. New York's spending was especially high, relative to other states, in elementary/secondary education and public welfare.
The new report, Measuring Fiscal Disparities Across the U.S. States, is available at www.bos.frb.org/economic/neppc/wp/2006/neppcwp0602.htm.