Politics, Not Need, Drive New York’s Tax-and-Spend Policies

Published April 1, 2005

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

The study provides researchers in every state with a rich source of information on spending and taxes compared to those elsewhere. Analysis of the Federal Reserve Bank’s findings relative to New York, conducted by the Public Policy Institute of New York State, was covered in the New York Post and other media outlets.

“Tax Effort” Exorbitant

The “tax effort” required of New York’s workers and businesses is 43 percent higher than the national average, according to the Federal Reserve Bank’s study. That level is far above that of any other state. 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 with the revenue-generating capacity of the state’s economy.

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

  • personal income taxes, where New York is number 1 among the states, 71 percent above average;
  • corporate income taxes, 83 percent above average; and
  • property taxes, 48 percent above average.

High Spending Not Necessary

Federal Reserve economists Robert Tannenwald and Nicholas Turner 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 the number of vehicle-miles traveled.

New York State’s fiscal need was only 1 percent above the national average, Tannenwald and Turner found. After adjusting for need, state and local government spending in New York was 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.

“New York State’s high tax effort reflects in part its policy preferences, not just its fiscal need,” Tannenwald said. He added that it’s possible the study underestimates fiscal need in New York State because of special circumstances in New York City, but he said he doubts the difference would be enough to materially affect the outcome of the study.

Politics Drive Decisions

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, Tannenwald and 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.”

Tannenwald said the report does not show major changes in long-term trends in relative spending and relative tax effort among the states. For example, he noted, between 1994 and 1999 there was little change in the difference between the tax effort of the states at the top and the bottom of the tax-effort list.

Robert Ward ([email protected]) is director of research for the Public Policy Institute of New York State, the research affiliate of The Business Council of New York State. A version of this article was published on the council’s Web site, http://www.bcnys.org.

For more information …

The report by Federal Reserve Bank economists Robert Tannenwald and Nicholas Turner is available online at http://www.bos.frb.org/economic/ppdp/2004/ppdp0409.pdf.