Economically efficient taxation includes a low tax rate spread over a wide tax base. In New York State, on the other hand, politically efficient taxation includes high tax rates spread over a tax base narrowed by exemptions, privileges, deductions, and tolerated tax evasion. Preferential treatment, tax and otherwise, was clearly on the minds of New York State leaders at a more enlightened point in our state’s history. Consider Article 3, Section 17 of the New York State Constitution, which prohibits "granting to any person, association, firm or corporation an exemption of real or personal property." It also forbids "granting any person, association or individual any exclusive privilege, immunity, or franchise whatever." Then there is Article 16, Section 4 which states "there shall be no discrimination in the rates and method of taxation between such corporations and other corporations exercising substantially similar functions and engaged in substantially similar businesses within the state." But it doesn’t matter. Whenever the economy is good, more special tax deals are enacted as added revenues come in. And whenever the economy is bad, rates are raised. Sometimes they are rolled back, and sometimes not.
As described in the prior essay, in order to align the share of total state and local tax revenue collected at the state level more closely with the national average, to align the level of government making spending decisions with the level of government required to raise the related revenues, and to cease the existing pattern of deferring costs to the future, state tax collections would have to rise by 34%. How should this be done?
According to Federal Tax Administrators, New York State’s 2006 income tax rates vary from 4.0% to 6.85%. The lower rate is among the highest bottom rates assessed by any state, and it applies beginning after just $8,000 for individuals and $16,000 for married couples. And there is no personal exemption for adults, just for children, unlike in most states. For an income tax, this one hits those at the lower end pretty hard. Should the rates be raised again, to 5.36% up to 9.2%? The state sales tax rate was 4.0%, but counties, localities and transit agencies impose substantial taxes as well, with a top rate of up to 9.5% in 2005 in Oneida County (the New York City rate was 8.375%). The top rates of the surrounding states are no more than 7.0%. Should the state sales tax rate be increased to 5.35%, pushing up the total state and local rate farther?
There is another option – roll back all the income, sales, and property tax exemptions that have been allowed to accumulate over the years. Apply the current tax rates to “Total Income” on federal form 1040, and the existing sales tax rate to all purchases made by consumers, save for housing which is already covered by property taxes, and my guess (I do not know this for a fact) is that total state tax revenues would rise by far more than the 34% required. And that is what I would do – propose the elimination of every single break in the tax code, whether I agreed with it or not, beginning six months in the future for sales taxes and at the start of the next calendar year for income taxes.
Would I really want to impose a sales tax on rice and beans purchased by poor families, or eliminate the meager $1,000 income tax exemption for children? No. But far less justifiable exemptions, deductions and other breaks are present throughout the tax code. And the way the legislature works makes it impossible to remove the breaks one at a time. Significant legislation cannot be passed without the agreement of the Governor, the Speaker of the New York State Assembly, the Majority Leader of the New York State Senate, the majority of the Democrats in the State Assembly, and the majority of the Republicans in the State Senate. Each of these is kept in office by powerful, politically active interests who are primarily concerned with maintaining their own benefits and prerogatives. Legislators dare not agree to any legislation in which any of their backers would, rightly or wrongly, lose out. So they hold out for an agreement in which the other side’s backers are sacrificed, before agreeing to keep things as they are. The easiest solution, often the only solution, is a non-decision to do nothing.
And the existing system is shrewd, in that everyone is getting one or more special deals, even though those who are getting fewer special deals that average and are worse off than they would have been without them. Just as everyone thinks their property taxes are lower because all properties are assessed at a fraction of actual property values – even though the total property tax burden is high. The whole system relies on deception, and with that deception, the winners can rally the losers to the defense of their winnings. Thus, no change to anything is possible as long as narrow interests that benefit from existing arrangements have this unbeatable home field advantage. A comprehensive repeal, in contrast, would put everyone back to square one.
The legislature would then be able to add some of the exemptions, deductions and other privileges back, a far more pleasant prospect. I would encourage it to look at things this way. In exchange for not using their money to create electoral competition, and giving it to incumbents for use however they choose, lobbyists for powerful interests expect more and more benefits each and every year. Not just the maintenance of existing privilege, which self perpetuates, but more and more favors in exchange for yet another year of contributions. The lobbyists get their special deals forever, the legislators must beg every year. Every additional deal makes everyone else worse off, and the future worse off, and as these accumulate and the future arrives, the legislators are hated more and more by just about everyone. But are the lobbyists grateful and satisfied? No.
Now push through a comprehensive repeal, effective at a date in the future, suddenly and without warning, and everything changes. The lobbyists would quickly get over the legislators’ “betrayal,” and come bearing gifts and begging just for some of their old privileges back. Begging, knowing that instead of requiring universal approval to take their privileges away, the state now requires universal approval to get them back.
If it were up to me, the only tax exemptions and deductions would be those that assured the basic needs of the less well off, and those that eliminated a disincentive for people to do something that was in the community interest as much as or more than the personal interest. So I would want to exempt income below the poverty line from state income taxes, and rice and beans and vaccines from sales taxes. Even an absence of exemptions and deductions, however, would be fairer than what we have now. And I’d rather have the beneficiaries of special tax deal determined in an auction, with whoever gave more money to Silver, Bruno etc. the winner, than raise tax rates further.
Widening the income and sales tax base would also increase local sales and (in the cast of New York City) income tax collections. Fine. The state could, at the same time, cut the maximum rates localities and New York City are permitted to charge. Perhaps with a broader tax base, the City wouldn’t feel the need to tax the self-employed twice. Although there is no revenue need, if it were up to me most of the local property tax preferences would be repealed as well, effective at some point in the future, and have to be justified all over again. While I’m furious about the extent to which New York City has been ripped off on state school aid, for example, the rest of the state has reason to ask why New York City has no additional local money for schools having first narrowed its tax base for $400 checks to homeowners and tax breaks for luxury condos in exchange for below market housing for the fortunate few.
A state with the highest overall tax burden in the country has no business handing out lots of little tax deals, just as a state that cannot maintain and improve its infrastructure and provide a sound basic education to 37% of its children has no business providing grants so senior citizen’s clubs can travel to Atlantic City. Yet this is what New York State does. Project it forward on a straight line, and one day our income, our purchases and our property will all be taxed at 100% of their value, no one will receive any services, and none of the basic needs of the needy will be met. But there will be all kinds of exemptions, grants and deals (along with a black market, where participation is tolerated as long as you don’t step out of line) to allow most of us to somehow live, and some of us to live far better than they would otherwise. Everyone’s life will be determined by the latest political deal. Do you think that sometime before we reach that point, our politicians will have gone too far?
Now that you accept the possibility that they could at some point go to far, consider this: for me, they already have.