The 2005 public finance data from the U.S. Census Bureau is out, along with personal income data from the Bureau of Economic Analysis. Since this is not a census of governments year, the Bureau’s data is based on a limited survey, and state and local finance estimates are provided at the state level only. Downloading individual unit data for the City of New York and the Port Authority of NY and NJ, the only units of local government in New York City, however, I have compiled data for both New York City and (by subtraction) the rest of New York State. A spreadsheet with tax data can be found here and here; data on other revenues and expenditures will follow. For reasons I explained here http://www.r8ny.com/blog/larry_littlefield/bureau_of_economic_analysis_data_pay_per_worker_and_its_public_policy_implications.html, in general revenues and expenditures are most comparable when expressed as a share of personal income. This post is about state and local taxes; future posts will discuss where the tax dollars go. But if you can’t wait, just read what I wrote last year; the same patterns have repeated as long as I have compiled this data.
Comparing fiscal 2005 tax data from the U.S. Census Bureau with 2005 personal income data from the Bureau of Economic Analysis, one finds that New York State taxes absorbed 6.5% of the income of state residents, just above the 6.3% national average and 29th in the country. Local taxes, on the other hand, absorbed 9.2% of the income of New York City residents, and 6.8% of the income of residents of the rest of the state, far above the 4.4% national average. Only the District of Columbia, which has no state taxes, has higher local taxes.
Putting these two together, and assuming that the burden of state taxes is distributed around the state in proportion to personal income (it isn’t — MTA taxes are only collected downstate), one finds that state and local taxes absorbed 15.7% of the personal income of New York City residents in FY 2005, which would have been highest in the nation by far if the city had been a separate state, and 13.3% of the income of the rest of New York State, which would have ranked third. New York City’s state and local taxes were 46.4% above the national average, compared with 24.4% above average for the Rest of New York State and 4.0% for New Jersey. As we will discuss in future posts, however, New Jersey has been deferring taxes on a larger-than-average scale for years through debts and deferred pension contributions, and is now locked in a downward spiral of rising taxes and falling (current) spending relative to income, something anyone should consider before moving across the river.
If one looks at the state and local tax burden combined, and adjusts for personal income levels, it is remarkable how similar most states are. States such as New Jersey, Massachusetts and Connecticut are near the top in per capita taxes, but also in per capita income, the cost of living, and thus the cost of providing labor-intensive public services of equal equality. Measure taxes as a share of personal income, and these states drop back into the pack, despite their reputations. Egalitarian Minnesota and California have relatively high state taxes, but these are balanced by low local taxes. High inequality New Hampshire and New Jersey have high local taxes, but below average state taxes.
The national average for state and local taxes combined was 10.7% of income in FY 2005. Going out 1.2 percentage points out from the mean in each direction (from 9.5% to 11.9%) one captures 37 of the 51 states plus the District of Columbia. Moreover, the eight high tax states include two low population states, Wyoming and Alaska, where oil production taxes, not local residents or businesses, are carrying a large share of the bill, and one state, Louisiana, whose taxes soared as a share of collapsing income in the wake of Hurricane Katrina. There were, in reality, only five high tax states and five low tax states in FY 2005, with Colorado subsequently forced to raise taxes to provide decent schools. New York leads among the high tax states, with the burden concentrated in New York City.
The 9.2% of personal income absorbed by NYC local taxes is not a record according to the data available to me, but it is close. NYC taxes absorbed 8.2% of the income of NYC residents in FY 1972, as the Lindsay Administration ran up debts and handed out pension benefits while deferring the costs (see attachment for chart). In 1977, with those bills coming due and the economy in recession, NYC taxes soared to 9.6% of personal income even as services collapsed; the national average was 4.5% of income that year. Also in 1977, New York’s state taxes absorbed 7.4% of personal income, compared with a national average of 6.2%. The state and local total in 1977 for the United States, therefore, was 10.7% in FY 1977 compared with 10.7% in FY 2005. For New York City (with the assumption about state taxes described above) the total was 17.0% of personal income in 1997, compared with 15.7% in FY 2005.
While better than in the worst years, however, NYC’s local taxes are higher than they had been more recently. Even in the depths of the early 1990s recession NYC tax revenues peaked at just 8.7% of income. In the late 1990s, the Giuliani Administration got taxes as low as 7.4% of income in FY 2002, its last year, in part by running up debts and deferring pension contributions while enriching pensions. So if you think the NYC tax increase from (say) FY 2000 to FY 2005 is due to increased education spending as a share of income, think again. As will be discussed in future posts, the city’s public school spending was somewhat below the national average in both years, and only slightly higher in the second than in the first, as a share of personal income. Adding up state and local taxes, NYC’s total burden rose from 13.9% of personal income in FY 2000 to 15.7% in FY 2005; the rest of the state rose more moderately from 12.4% to 13.3% as state aid (as I showed last year) was shifted away from the city. New York City’s local government employment also fell substantially in these years, as that in the rest of New York State rose.
It may also be said, moreover, that while taxes were higher in the 1970s, real estate was cheaper. Today, city residents face high rents (if they do not benefit from rent stabilization and similar deals), high housing purchase prices (if they do not already own), AND high taxes. Of course, income is higher as well, but housing prices have bubbled up out of proportion with income. It is at least possible that for someone moving to the city today, or for a city resident leaving school (generally without an education) and seeking to go out of their own, the bite of the landlord plus the bite of the tax collector was greater in 2005 than in the 1970s. In each case, many of the beneficiaries had cashed in and moved out.
It is, on the other hand, entirely possible that NYC’s state and local taxes are lower today as a share of personal income, than they were in FY 2005. Incomes have recovered from the early 2000s recession and World Trade Center disaster, temporary income and sales tax increases have been at least partially rescinded, some people have gotten some property tax refunds, and some people have had property tax increases that have lagged behind inflation. Moreover, the federal tax cuts that went into effect earlier in the decade offset state and local tax increases caused by recession-induced fiscal crises, leaving the total tax bill no greater than before. Unfortunately, when the economy recovered the federal government elected to keep the tax cuts and continue to run big deficits even in an economic expansion, with presumably bigger ones to follow in the next recession. But I guess if my choice is a bankrupt country or a bankrupt community, I’m better off with the former if I choose to stay put.
For me, however, post-recession tax cuts are not necessarily a cause for celebration. History shows that New York City and State borrow money, hand out pension enhancements, and cut taxes when times are good, people are flush, and replacements for retiring public employees are hard to find. They subsequently are forced to raise taxes, cut capital spending, and cut services when the economy goes south, when tax increases really hurt, when construction costs less, and when people could use government jobs. Irresponsibility repeats itself over and over. Will we never learn?
If it were up to me, there wouldn’t by any New York City tax cuts this year, except for those that increase equity (such as eliminating the double taxation of self employment income up to $200,000 or $300,000 per year). I would even get ride of that $400 political check for homeowners. And God knows, the last people who deserve another special tax break are senior citizens, as I explained here http://www.r8ny.com/blog/larry_littlefield/taxes_generational_equity_part_one.html. If our current leaders, including not only the Mayor but also the City Council, want to impress me as true leaders, they will use the ENTIRE FY 2007 surplus, all $6 billion or so, to reduce debt, avoid issuing any new debt, and pre-pay pension and retiree health care obligations. Then, when a recession hits, perhaps this time taxes could be cut instead of raised to the moon.
Long term, however, the relative tax burden in New York City and state has to affect one’s political calculations. Were I in a low tax state such as Tennessee I’d be far to the left of the Working Families party, and would blame every unmet public need on the relatively low tax bill. Not so here. Taxes are high, and were recently higher than at any time since the 1970s, so our unmet needs have another cause.