If you have been paying attention, you have read that I recommend changes to New York State’s Medicaid program to create incentives to reduce spending. I propose similar changes in incentives to reduce spending in the state’s public schools outside New York City, partially balanced by increased spending in districts where spending is low, particularly New York City – but a smaller increase than proposed by the plaintiffs in the Campaign for Fiscal Equity case. The tax surcharge-based disclosure of the cost of retiree health benefits, pensions, and debts I have suggested are intended to limit, in the long term, the hidden growth of employee compensation and the interest burden of excess debt. One might conclude that my proposals would lead to lower taxes. And in the long run, when state and local taxes are combined, that could be the case. But not in the short run for state taxes alone.
The school aid and Medicaid proposals involve shifts in fiscal burdens from the local level to the state level. Even if local property taxes would be lower, state taxes would have to be higher. Moreover, all of my proposals have short run fiscal costs and long run benefits. And it is entirely possible there will be a recession next year. So in the short run state taxes – and dedicated transportation and similar fee and fare revenues – would have to go up faster than local taxes come down. I’m proposing lower spending – in some cases enough to drive certain local governments and other organizations dependent on public money into bankruptcy — and higher taxes. And since I’m not running for public office, I don’t mind saying so. Hopefully the next Governor will level with us soon after the election, as New Jersey Governor Corzine did (“Gee – the state is broke! Who knew?”)
Is it reasonable to shift costs to the state level?
According to the Census Bureau and assuming the burden of state taxes was distributed across the state in proportion to personal income, state and local taxes absorbed 14.9% of the income of New York City residents and 12.8% of the income or residents elsewhere in the state, compared with a national average of 10.4%, in Fiscal 2004. Actually, the burden in New York City is somewhat higher, and the burden elsewhere lower, because MTA taxes are only collected downstate but are nonetheless counted as state taxes by the Census Bureau. New York’s state taxes were only slightly higher than average – at 6.2% of income compared with 6.1%. But while local taxes only absorbed 4.3% of the income of U.S. residents, they absorbed 8.7% of the income of New York City residents – double — and 6.6% of the income of residents elsewhere in the state.
In that sense it is reasonable to shift the tax burden from the local level to the state level, not because overall taxes are lower, but because the state – which has been responsible for a good share of the excess spending – has avoided taking responsibility for raising the revenues.
So how high would state taxes have to rise? I don’t have the information on current spending levels to say in absolute dollars. But I could look back at Census Bureau data from fiscal 2004, and guesstimate how much higher those taxes would have been that year if my suggestions had been implemented.
In that year, New York State’s local taxes totaled about $56 billion, and its state taxes totaled about $46 billion. The state and MTA went $2.2 billion further into debt that year, and its local governments went $6.5 billion further into debt. Assume half of that local government debt was the result of state policy (given the number of public authorities classified as local but operating as state or something in between), and you have a $5.5 billion in additional taxes just for the state to break even.
New York State aid for elementary and secondary education totaled about $17.7 billion that year, the FY 2004 Census Bureau report on school finance reports. If New York State had funded the entire cost of public education, excluding federal money, for every child in the state, with some adjustment for the disadvantaged and disabled, then it would have provided $24.8 billion in state school aid. That is $7.1 billion more. Of course even adjusted for inflation state school aid has increased substantially since FY 2004, with much of the increase going to the wealthiest, higher-spending districts via STAR and son-of-STAR (ie. Bruno’s check).
New York State spent $35.3 billion on federal Medicaid in FY 2004. How much of the total Medicaid bill was funded by which branch of government is now a closely held secret, but we can at least make some assumptions based on federal data. The federal government would have picked up 50% of that total, or $17.8 billion. Local governments paid $5.65 billion to the state for Medicaid that year, leaving the state with $11.85 billion in costs (somewhat more in reality, due to Medicaid spending that the federal government doesn’t contribute to).
How my proposals would change this is hard to say. But based on spending per beneficiary, the suggestion that the state pay for all of Medicaid at the contribution provided by surrounding states Upstate, and 20% more based on a cost of living Downstate, would have cut the cost of federally participating Medicaid spending by $5 billion in 2004 — if no local government chose to increase its reimbursement rate above the state-funded level with its own money. I know that total spending per beneficiary depends on usage and the mix of services as well as price, but this is a quick and dirty and I have to work with what I have. The state would have picked up half of the remaining $30.3 billion, or $15.2 billion. That is another $3.3 billion in state taxes that would have been required.
My proposals for shifting the type and cost of the care of the elderly and disabled would have provided a similar decrease in total cost and increase in state cost, but to a diminished extent for the latter (since the state already covers 90% of the non-federal cost of custodial care for the elderly and disabled). So that might be a wash for the state, at worst, even given an offsetting increase in services for those cared for primarily by friends and relatives which – in my proposal – would be entirely state funded. The increased local cost of care for seniors who did not require institutionalization but did not have friends and relatives willing to look after them would fall primarily on New York City, where at-home services are concentrated. But so, because the city accounts for about 2/3 of all state Medicaid spending, would savings due to the state picking up a higher share of other costs.
Adding it up, state taxes would have had to rise by nearly $16 billion in FY 2004, simply to provide a more fair and (eventually) less expensive public school and Medicaid system, and to stop selling out the future. That would have been a little over a 34% rise. And, it would have increased the state taxes to 8.3% of the income of state residents, or 37% more than the national average. As it happens, the New York’s state and local tax burden combined was 32% more than the national average in FY2004, so if local tax declines offset the state tax increase, the state would be back where it started – but with a proportionate share of its excess tax burden collected at the state level, rather than having the entire excess collected at the local level.
But would local taxes fall? Or would local governments pocket the increased state aid and use it to hire more friends, relatives and supporters, increase salaries, and enrich pensions? That is a legitimate fear – based on what school districts outside New York City did with money from the STAR program. And that is why any proposal to increase state support, particularly for schools, must be accompanied by a “maximum” that provides an incentive to bring spending down where it excessively high. Under my proposals local governments could decide to spend more, but they would sacrifice state aid to do so, bringing state taxes down as fast as local taxes go up. Those proposals, if you don’t recall, would have taken away one dollar of state aid for each dollar spent in excess of 25 percent more than the national average, with the cap adjusted for the cost of living Downstate. With that, I would expect that in the long run local taxes would fall by more than state taxes rise, as local governments (and, for Medicaid, the state government) pay more attention to value for the dollar once (on the margin) it is their own dollar, collected from their own voters, that they are spending.
What I am hearing, unfortunately, is not what I would propose. Political proposals are sketchy, but the latest from future Governor Spitzer would require New York City residents to pay for more than two-thirds of the cost of any additional spending provided by the Campaign for Fiscal Equity case – 40 percent of the state contribution in state taxes, and all of a minimum 25% local contribution in local taxes and local service cuts. Meanwhile, Spitzer has proposed increased aid to school districts elsewhere in the state – through an even greater STAR program – which New York City residents would pay additional state taxes to cover 40% of as well, getting little back. That program would have no limit on spending, allowing those other school districts to increase spending and preserve the huge difference between their resources and those of New York City’s children, and keeping their ability to outbid the city for qualified teachers using the city’s own state tax dollars money. The city’s share of state education funding would once again fall – but not by as much as candidate John Faso proposes.
Under the circumstances – the deck chairs get arranged, but the city always ends up with a stool – then the city might be better off if New York State’s state and local tax shares became more like New Hampshire instead of more like the rest of the country. The state income tax would be eliminated, state sales taxes would be slashed, and local income and sales taxes imposed or increased. The state would fund virtually no assistance, benefits, or funding Downstate, leaving each portion of it on its own. New York City would be left to break even, a better deal than it has today. State taxes collected in the Downstate Suburbs would be redistributed Upstate as part of a “dependent communities welfare grant” or other appropriately named program. It wouldn’t be as equitable, and wouldn’t be as simple and comprehensive, so it’s not what I would propose. But remember my school aid bottom line: at the state level, all that matters is the share! If the city was not helped by the rest of the state, net based on all funds collected and distributed, in the horrific early 1990s recession or in the aftermath of 9/11, it never will be. And Christian and liberal generosity (and combinations thereof) are hard to sustain in the face of contempt and the victimization of children.
Let’s say, however, that the state were to implement my proposals, and had to raise taxes by 34%. Which taxes should be raised, and how? That will be the subject of my next two posts.