New York State tax revenues will fall $2.3 billion short of budget projections, Gov. Andrew Cuomo announced at a news conference.
Cuomo rejected calls to raise taxes on the rich as a way to fill the gap.
“We have the second highest millionaire’s tax in the United States of America,” Cuomo said on North Country Public Radio and was quoted in multiple news reports. “And you have some people saying we should be number one—raise taxes even more.
“This is the flip side: tax the rich, tax the rich, tax the rich, the rich leave,” Cuomo said. “And now what do you do?”
The outbound migration of residents noted by Cuomo in his February 4 statement and subsequent comments highlights a nationwide trend of people and businesses moving from high-tax states such as New York and Illinois to low-tax places such as Florida and Texas.
‘Federal Subsidy’ Reduced
Cuomo blamed the current budget woes on the new $10,000 limit on the deductibility of state and local taxes (SALT) on federal tax returns in the Tax Cuts and Jobs Act of 2017. The cap on “SALT was an economic civil war,” said Cuomo, The Wall Street Journal reports.
The SALT cap rightly requires taxpayers in high-tax states to bear more of the burden of state taxes, says Adam Michel, a senior policy analyst at The Heritage Foundation.
“The cap on state and local tax deductions reduced the federal subsidy for high state tax rates, so now residents of states with uncompetitive, high tax burdens will actually have to pay those rates, rather than passing the cost along to federal taxpayers,” said Michel.
The SALT cap is increasing people’s awareness of their state tax burdens, says Robert Klein, a regional director of Inertia Advisor Services Group and a policy advisor to The Heartland Institute, which publishes Budget & Tax News.
“The SALT reduction pulled the sheet off of the proverbial corpse,” said Klein. “You cannot hide behind high taxes by saying, ‘but you can deduct it.’ Smart money will leave, and those that stay will keep voting for this insanity.”
Officials ‘Failed to Anticipate’
Contrary to the governor’s “tax the rich” lament, he certainly isn’t opposed to high tax rates on the wealthy, says E.J. McMahon, a senior fellow at the Empire Center of New York.
“The same budget includes a five-year extension of the state’s millionaire’s tax,” said McMahon. “The highest 1 percent [of taxpayers] pay 40 percent of our total income tax.”
The SALT limit didn’t cause the budget shortfall, says McMahon.
“They simply failed to anticipate the fall in capital gains tax revenue due to the 15 percent fall in the stock market,” McMahon said.
Tax Cuts ‘a Game-Changer’
Many states experienced a surge in revenues after enactment of the 2017 federal tax reform, says Jonathan Williams, chief economist and vice president of the Center for State Fiscal Reform at the American Legislative Exchange Council.
“The untold story of federal tax reform’s success is the opportunity the new law has provided policymakers across America’s 50 ‘laboratories of democracy,’ where unexpected tax receipts that are directly linked to changes [in] the federal tax code have been a game-changer in many state capitols this past year,” said Williams.
Some states seized the opportunity provided by the 2017 federal tax reforms to improve their competitive standing, says Williams. Taking advantage of the revenue windfall the new tax law unleashed, lawmakers in Georgia, Idaho, Iowa, Missouri, and Vermont lowered tax rates in 2018.
“These state tax reforms continue to build on a trend, as states look for ways to become more competitive,” Williams said.
Committed to High Taxes
The migration of people and money to low-tax, low-regulation locales “highlights the robust relationship between tax policy and economic health of a state,” a new study coauthored by Williams reports.
“While many states stand by their commitment to free markets and limited government, others continue their preoccupation with high taxes and bloated government,” reports the 11th annual edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, by Arthur B. Laffer, Stephen Moore, and Jonathan Williams, released by ALEC on January 31.
New York ranked dead last in the ALEC competitiveness index, whereas Utah ranks first.
It isn’t surprising that Utah finished first, says Derek Monson, vice president for policy at the Sutherland Institute in Utah.
“Utah is an exceptional state for many reasons,” said Monson. “First and foremost, it’s our policymakers’ recognition that it’s the private sector, not the government, that produces jobs, income, and growth. This recognition prevents overregulation. Our state’s fiscal conservatism leads to well-managed budgets and a reasonable tax burden.”
‘A Terrible Place’ for Business
There are a host of state policies that encourage out-migration, says Seth Barron, associate editor of City Journal, published by the Manhattan Institute.
“New York State is simply a terrible place to do business,” said Barron.
“The governor’s anti-growth energy policy, including a ban on fracking in some of the resource-richest areas of the country, hasn’t helped,” Barron said. “Hyper-regulation, powerful unions, and a high minimum wage do nothing to incentivize economic growth upstate.”
Bonner R. Cohen, Ph.D. ([email protected] nationalcenter.org) is a senior fellow at the National Center for Public Policy Research.
Arthur B. Laffer, Stephen Moore, and Jonathan Williams, Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, 11th edition, American Legislative Exchange Council, January 31, 2019: https://heartland.org/publicationsresources/publications/rich-statespoor-states-alec-laffer-stateeconomic-competitiveness-index
Karen DeWitt, “Cuomo Warns of $2.3 billion deficit,” North Country Public Radio, February 5, 2019: https://www.northcountrypublicradio.org/news/story/37969/20190205/cuomowarns-of-2-3-billion-deficit