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In 1998 the Business Incentives Reform Clearinghouse, a project of the Corporation for Enterprise Development, prepared a Tax and Fiscal Systems Index that ranked the states on tax system soundness. According to the explanation accompanying the Index, the premise was that “the overemphasis on tax competitiveness and tax rates… obscures the fact that there are other, equally important goals of a tax system.” The Clearinghouse added, “this does not mean that a state’s tax and fiscal environment does not affect its economic climate… but that it is the overall soundness of a state’s tax and fiscal system that affects development.”
New York ranked only 33rd in the Index. The lesson for New York is that as taxes are raised to close deficits, tax and fiscal systems must also be reformed. Michael Wasylenko recommends “systematic fiscal reform,” particularly in jurisdictions “with structural deficits, high marginal tax rates, and inefficient service delivery” such as New York.
The Index encompassed three aspects of a state’s tax and fiscal system: a) fiscal stability and balanced revenue, b) tax fairness, and c) fiscal equalization.
a) Fiscal stability and balanced revenue. To ensure the predictable tax environment that business seeks and to maintain the government services on which business depends, the tax system must be capable of raising sufficient revenues to maintain quality government services even during recessions. Government budget-making that consistently underestimates future expenditures, is overly optimistic about assistance from Washington and the state capital, and relies heavily on nonrecurring revenues to close structural deficits does not promote fiscal stability. Not surprisingly, since these deficiencies characterize New York State, the Tax and Fiscal Systems Index ranked New York State only 31st in this category.
In a similar vein, annual budget report cards for New York State and New York City issued by the Citizens Budget Commission assign grades for “promoting trust,” “budgeting responsibly,” “budgeting effectively,” and for “tax policy.” For FY 2003, New York State received an F in each category except for a C in tax policy. For FY 2003 the City received D’s in “budgeting responsibly” and “budgeting effectively” and a B in tax policy.
New York City and State need to ensure their long-term fiscal capacity to cover expenses. Reforming the tax system so that it keeps pace with changes in the economy and corporate structures, in technology, and demographic trends is an important part of this. Robert Tannenwald, Assistant Vice-President and Economist at the Federal Reserve Bank of Boston, believes that state and local revenue systems are “out of sync with the economy’s changing structure.” New York State also needs to send a strong message that its fiscal house is in order by enacting the State budget on time and ending the use of budgetary gap-closing measures such as drawing down reserve funds and relying heavily on non-recurring revenues.
b) Tax fairness. Citizens and businesses “must be convinced that taxes are fair, with no individual or company benefiting at the expense of others,” according to the Incentives Clearinghouse. New York’s tax system would become fairer by ending loopholes and special provisions that, with no real benefit to the economy, give advantage to only some of the payers of a particular tax. For example, State corporate tax laws, rates and rules increasingly benefit large, multi-state and multinational firms at the expense of smaller firms that are unable to take advantage of loopholes and favorable income apportionment formulas. Tens of thousands of low-income households pay New York City taxes but not federal or State taxes.
The New York City property tax system is in particular need of reform. In 1993, the final report of the New York City Real Property Tax Reform Commission concluded that the property tax system “not only appears unfair, it is unfair.” Among shortcomings identified by the Commission that still plague the system are:
• “Owners of coops and condos, and owners of rental buildings, often pay far higher taxes than owners of one, two or three family homes with identical market value.”
• “Homes of similar market value in different neighborhoods, or even on the same block, can bear very different effective tax burdens.”
• “The property tax consumes a far greater percentage of the income of the less well off than of the more affluent, and current relief programs are inadequate.”
Among the issues that the 1993 Commission urged the City to address were revision of the class system to eliminate artificial distinctions among residential properties, simplification of the tax structure, replacement of the system of class shares – such as varied caps and phase-ins – and “provision of appropriate tax relief to the burden placed on persons of low-income and the elderly with fixed income.”
Given the severity of the current fiscal situation, an immediate property tax increase is unavoidable. At the same time, though, the City Real Property Tax Reform Commission that should be reconstituted to update its previous work and recommend a comprehensive restructuring of the system. A reconstituted Real Property Tax Reform Commission should include in its work a review of special property tax exemptions, in particular:
• The Sec. 421-a program that subsidizes new luxury multi-family with a relatively small affordable housing component. The 421-a program has been criticized as an inefficient way to produce affordable housing.
• The portion of the Industrial and Commercial Incentive Program that provides exemptions for retail uses outside of the designated special needs zones, inasmuch as retailing is not a primary job generator and retailers do not have an option of relocating away from the populations they serve;
• Exemptions that are negotiated by the City and approved on a project-by-project basis;
• The continuing $8.8 million property tax forgiveness given to Madison in 1982 when there was a concern that the New York Knicks and Rangers would move to the suburbs.
A fair tax system is also an appropriately progressive one. The City should seek to exempt from taxes thousands of low-income New York City residents who pay no State or federal taxes and to end regressive taxes such as the utility gross receipts tax. As a long-term goal, both the City and State should reduce the sales tax, which is not federally deductible as are the property and personal income taxes.
The Tax and Fiscal Systems Index ranked New York State ranked 19th in the nation in tax fairness largely because of New York’s heavier reliance on the personal income tax, which is more progressive than the sales and other taxes relied on by other states.
c) Fiscal equalization. Not all communities in a state can afford an adequate level of public services. State governments can “level the playing field” by assuming a substantial portion of the cost of local government services such as education. The New York State Tax and Finance Department reports that in 1998, the most recent year for which data is available, 54% of taxes in New York State were generated by local governments and 46% by the State compared to a national average of 61% generated by the state and only 39% by localities. Only in New Hampshire do local governments generate a smaller share of total tax revenue than New York. Not surprisingly, New York ranked 44th on fiscal equalization.
New York’s heavy reliance on local taxes has left localities increasingly struggling to pay their one-quarter share of the cost of Medicaid, as well as for schools and other basic services primarily through sales taxes and escalating property taxes. With Medicaid and other many other expenses rising quickly, the fiscal stress on New York localities is intensifying. According to an analysis by the Fiscal Policy Institute in January 2002, 64% of State’s school districts with 81% of all pupils received less operating aid per pupil during the 2001-02 school year than they did the year before. Aid was essentially frozen for 2002-03.
New York State provides substantial school district property tax relief through the STAR (School Tax Relief) program local enacted in 1997. STAR provides the highest levels of tax relief, measured on a per-pupil basis, in the New York City suburban districts, with a lower level of relief in New York City, the major Upstate cities, and rural areas. The STAR program perpetuates and accentuates State education funding inequities.
Improving the State’s fiscal capacity needs to be a priority, not only to eliminate the State’s structural deficit but ultimately to give the State the capacity to pick up the local cost of Medicaid and to cover a greater portion education costs.
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