Wednesday, August 06, 2008

Burn the Witch vs. Soak the Rich
Probably like most people in my field, I get the Crain's New York Business Daily every afternoon around 4. Most days, there isn't anything particularly bearing on what I do (whatever that is), but they're relevant or interesting often enough that it's a worthwhile skim. Today is one of those days, with Crain's offering the news that New Yorkers evidently are concerned enough about the state's budget problems--which do not constitute a "fiscal crisis"; more on that in a bit--and sufficiently disgruntled with the current level of public services, that they're receptive to a so-called "millionaire's tax":

Even as personal budgets feel the pinch, the city and state finances are also reeling from rising costs and budget shortfalls. Gov. David Paterson estimated last week that the state budget deficit for fiscal year 2009 stands at $6.4 billion, after having swelled by 30% in less than four months.

To help offset the shortfall, voters surveyed by the Quinnipiac University Polling Institute overwhelmingly approve of taxing the state’s richest residents with a “millionaire’s tax.” Nearly 80% of those surveyed, including a majority of Democrats, Republicans and Independents, were in favor of raising the state income taxes of residents who make more than $1 million a year.

The millionaire’s tax vote disappointed at least one business leader, who called the proposal gimmicky.

“The fiscal policy of the state needs to be balanced through discipline,” said Ken Adams, chief executive of the Business Council of New York State. “I know the economy is tough and people are worried, but we believe the solution is to cut spending, not look for new revenues.”

I know Ken Adams slightly; he's a longtime friend of the Center, was an outstanding member of the city Workforce Investment Board when he served as president of the Brooklyn Chamber of Commerce, and has been a source (always on the record, I think) for various things I've written. Probably because I've always thought highly of him, I'm less inclined to dismiss his words here as the typical, if not necessary and inevitable, protestation of a business leader on behalf of his constituents. But I think the most pertinent question is which solution to the budget problems of the state does more harm: increasing taxes on the best-off (which could spur relocation out of the state, thus shrinking the revenue pool), or cutting services through shrunken public budgets (which would exacerbate current deficiencies in education, social services, public facilities--libraries and parks--and so on)?

The Working Families Party, which for years has been calling for a rollback of the upper-income tax cuts passed during the Pataki Administration, doesn't find this a very tough call. They too cite the Quinnipiac poll, and posit the same choice between less spending and more revenues. But in their Budget Battle Bulletin blog post from yesterday, WFP calls upon a Nobel Laureate economist to make their case, while taking a whack at a conservative columnist:

Bill Hammond at the Daily News, however, isn't buying any calls for ration and calm:

“It would be easy for Gov. Paterson to play down the gravity of New York State's fiscal quagmire. It would be easy to ignore the steep slide in tax receipts, to pretend that Wall Street will bounce back in a couple of months…”

He goes on to bash calls for raising taxes on the wealthy as part of the solution to the budget gap:
“[Paterson] could just go along with the easiest of easy fixes - hiking taxes on the wealthy, further pummeling the state's battered economy.”

That’s an interesting argument, considering that the last time New York asked its most fortunate citizens to contribute a little more to keeping society running (2003 – 2005), the economy kept right on growing. In fact, although Governor Pataki had predicted a negative impact on the economy and on the number of high income earners in New York during the last budget battle, tax filers with incomes above $200,000 continued to grow steadily.

But Hammond raises the right question - what would be better for the state's economy, raising taxes on the wealthy or cutting spending?

Lucky for us, Joseph Stiglitz, Nobel Prize winning economist, has weighed in on exactly that topic, telling Albany leaders in a March 17th letter:

“New York, like most states, is now facing an unenviable choice: either taxes have to be raised, or expenditures cut…When faced with such an unpleasant choice, economic theory and evidence gives a clear and unambiguous answer: it is economically preferable to raise taxes on those with high incomes than to cut state expenditures.”

“The reasoning is straightforward: in a recession you want to raise (or not decrease) the total level of spending – by households, business, and government – in the economy.”

Bill, you may want to slash New York’s healthcare and education spending for ideological reasons, but most New Yorkers don’t want to use the economic downturn as an excuse for more Bush-enomics.

Reading Hammond's original column, though, I see something that might be important: a quote from Governor Paterson about the addictive nature of taxes.

"I really don't want to discuss the issue of taxes, because as soon as you do, it perpetuates the addiction," he told the Daily News Editorial Board on Friday. "It was taxes, in many ways, that got us here. There's always somebody who will bail you out."

And here we get to the essential difficulty in debates like this one: the loudest voices belong to the ideologues, the likes of Hammond who (I assume, not knowing much of anything about the guy) view every tax increase as anathema and the WFP who, since they've been calling for higher taxes on the rich at every opportunity for years, through good times and bad, have little credibility to draw upon in advocating that solution for this particular problem.

So to me, that brings us back to the question I asked earlier: which direction yields less long-term pain? Another opinion piece published today, by a Queens Assemblyman named Rory Lancman, suggests that if we all calm the hell down a little, we actually can figure this out.

Lancman also explains why the state's current predicament is really not comparable to the full-blown fiscal crisis New York City faced the mid-1970s: back then, nobody would buy the city's bonds, and it looked like bankruptcy would be the near-certain consequence. Now, we merely face a series of budget shortfalls:$600 million this year, in the context of a $121.6 billion budget (less than half of one percent) and projected deficits of $6.4 billion, $7.7 billion, and $10.5 billion over the next three years. That's an unpleasant prospect, certainly, but one within the state's power to solve through taxing and spending decisions--as opposed to the city's fiscal crisis, which required outside assistance to solve. That said, it's a relevant precedent in that the city's fiscal crisis was so scary that public officials at both the local and state level have been loathe to decree tax increases or undertake big new spending initiatives ever since. The fiscal crisis made austerity a political winner.

[W]hy is it so important that we acknowledge that there is no crisis, but merely a serious challenge?

Because crises produce bad policies, while serious challenges produce serious, thoughtful responses.

Witness the rush to judgment of our state's editorialists and political commentators, crying out for cuts, cuts and more cuts to education, health care and our work force; and no new taxes, even for those earning over a million dollars a year. Have the fiscal and social consequences been thought out of our consigning another generation of New York City schools kids to an inadequate education after we finally got them their fair share of state education money; of denying access to health care for the working poor or elderly; of ignoring the gross inequities in our tax policies that leave middle class families paying a far higher share of their resources in state taxes than our wealthiest citizens?

The late summer, one-day special legislative session three weeks before the September primary elections called by the governor is a perfect recipe for the bad policies bred of overstated crises, and should give those who care about good government serious pause for concern. New York has a detailed and elaborate budget-making process, essentially running from January through March, culminating in an approved budget by April 1 (a target date the state has more or less hit with consistency the last few years after two decades of absurdly late budgets).

The process is filled with good government stuff we should be loathe to throw overboard for a one-day special session at the first whiff of stormy seas: budget hearings covering every subject area and state agency; detailed budget analyses and economic forecasts provided by each legislative chamber's majority and minority parties; public budget conference committee meetings and reports; and a state comptroller with the power and pulpit to arbitrate revenue disputes. Perhaps most importantly, the budget process is filled with context — the context of an overall budget that strives to meet the many varied and competing interests and needs of New York's extraordinarily diverse population — urban and rural; upstate and downstate; young and old.

Now, obviously Lancman has a pretty clear point of view here; he's with the WFP. (And in fact he's cited in today's WFP budget blog.) But his process description is the key point: we can run the numbers and make an informed decision. If those crying that a "millionaire's tax" will do more harm than good can prove their case with budget projections, then by all means let's emphasize spending cuts. If, on the other hand, his argument about the damage such cuts would do to the work of schools, hospitals and other publicly funded services is proven valid, then that's the proper direction for policymakers. It should be data, not ideology--anyone's ideology--that determines the course of action.


Feral said...

First of all, the answer, just like everything else, is probably to increase taxes a little while cutting spending a little. Now that practicality is out of the way, on to the ideology!

I don’t entirely agree with your last point. Data should be one of the main decisive factors, but we can’t discard ideology entirely. If it can be statistically proven that an anti-abortion law would be beneficial to the economy, or vice versa, does this mean that a decision should be made based on that? Granted, taxes are not on the same personal level as right-to-choose, but I do get uneasy when the crowds start getting restless and point to a certain group, saying “They have money! Let’s make them pay more so we can all benefit!”. If we want to increase taxes, we can put a bit more thought into it than just saying “everybody over $1 mil.”. How about sector specific increases? How about going after the Hedge Fund guys a little more; I don’t think anybody’s gonna have a big problem with a tax increase on billionaires currently paying 15%. Sure, it will lead to some migration of business, but if you’re gentle with it, what you’ll lose will be marginal compared to what you gain. How about taxing real estate over a certain amount, like Ohio billionaires buying a $40 million 2-bedroom pied-a-tiers that they’ll never use. At least there’s no chance of migration of business in real estate! And while we’re on it, why not tax foreigners a higher level on real estate purchases (over a certain dollar amount) in New York? If a Saudi Prince wants to buy a mansion, let him pay a princely amount of tax (for a change). Let's tax high-end entertainment; they're actually benefiting from New York being an urban hub of excess. Clubs, restaurants, advertisement, etc. (all with profits above a certain level, as usual). Not a "rich tax", but a "luxury tax" for people who have the luxury of taking advantage of the City.

I don’t want to sound all Ayn Rand-y here (heh…randy), but taxing the rich just because they’re rich and we need money has a certain “from each according to his ability,…” feel to it. And that’s just not the American way. These colors don’t run. I’m told. Not actually from around here. Seems nice, though.

David said...

That was sort of what I was getting at with "Burn the witch." Taxing the prosperous, while it might not actually comprise "punishing the successful for their success," might be part of the solution but it doesn't necessarily get at the root causes of the problems.

And I agree that ideology shouldn't be thrown out altogether--though on some never-gonna-happen level, I'd prefer if the ideology were debated honestly, with people saying (as the Libertarians do) that it's immoral to punish the successful for their success...

In terms of some of the more targeted measures, I think the questions would be, one, whether you could really raise a decent chunk of the needed revenue through those means (and, since we're at the state level here, whether NYC would stand for essentially having "our" zillionaires responsible for bailing out the schmucks upstate), and two, whether the interest-group politics make such a measure at all feasible. IIRC, the tax on the hedge fund guys at the federal level went nowhere because Schumer stopped it. Gotta figure they have juice in Albany too.

Which reminds me of something I was going to add to this post last night, but didn't: the spending-cuts route is highly unlikely because the wafer-thin Republican majority in the state Senate is propped up by the public unions. Skelos, the new leader in the upper chamber, said only that education cuts were the one thing off the table. So we got that goin' for us. Or agin us.

Anonymous said...

I think that, in many ways, tax policy is beside the point. On a federal level, we could rake in gazillions more than we currently do without changing the tax code at all - we'd just need to really enforce the code that we've got. The reason we don't is the same reason that taxing the rich at a state level doesn't work - the rich use their money to get access to, and influence with, the elected officials who set tax policy.

I'm not sure what the answer is. I sometimes think that we're growing to expect more from our democracy that it can realistically deliver.


The Navigator said...

STop me, oh-huh-ho stop me, stop if you think that you've heard this one before, but New York is really in a position to do things other cities can't do. The argument about driving the wealthy to leave the relevant jurisdiction always has some force, but let's face it - people just want to live in New York. It's New York. You can tax those millionaires, or, as Feral suggests, just those billionaires, quite a bit more than you could in many other cities, because it's New York.

It's true that local- and state-level tax policy makers are often faced with this very real dilemna - people, and even more so businesses, can and do play municipalities and states off against each other. It's one reason why many things are better done at the federal level, so cities and states aren't faced with this sword of Damocles: chase taxpayers across the state line or slash services.

But NYC is fortunate to be an exception. Similar to San Francisco. So many people want to live there that you can impose substantial levies before it affects the local economy at all. At some point, obviously, that may change - NYC might become uncool, or taxes might rise so high that you kill the golden goose and the billionaires all move to Bridgeport or Trenton. But I think it's pretty clear that we're well short of that point - as evidenced by the fact that Feral is chortling right now at the thought of wealthy New Yorkers agreeing to leave Manhattan for Bridgeport or Trenton.

Feral said...