In an era of steeply progressive taxation, New York state’s formulas for aid to local governments inevitably have a Robin Hood effect – redistributing income from the relatively wealthy New York City metropolitan area to relatively poorer regions north of the Bear Mountain Bridge. But the Legislature’s 2003-04 budget deal pushes this trend to an extreme, significantly adding to the transfer of income from Downstate to Upstate.

When added state taxes are stacked up against restored state aid, the New York City metropolitan area is clearly on the losing side of the new state budget deal (although the city alone may end up roughly breaking even, depending on how different forms of aid are counted).

Economically, there is no doubt that the entire Downstate region will disproportionately suffer the harmful consequences associated with raising taxes by well over $1 billion when many key business sectors have yet to emerge from the recession.

THE largest single item on the Legislature’s revenue-raising agenda is an increase in New York state’s top personal-income tax rate. Effective in 2003, the rate will rise from 6.85 percent to 7.5 percent for married couples earning taxable incomes of $150,000 to $500,000, and to 7.7 percent for couples earning taxable incomes above $500,000. The tax hike is expected to produce $1.64 billion in the 2003-04 fiscal year and $3 billion over the next three years.

As illustrated in the pie chart, households in New York City and Nassau, Suffolk, Westchester and Rockland counties will pay at least 89 percent of new income taxes collected from all state residents – a total of about $1.2 billion in added income taxes during the 2003-04 fiscal year, compared to just $144 million for all households in the rest of the state. Most of the city’s share will originate in one borough – Manhattan.

(The remainder of the state income tax hike – some $338 million in all – will come from residents of other states who work in New York.)

Just 4 percent of all state tax filers fall into the high-income brackets affected by the new higher rates. But these households are disproportionately concentrated in just a few downstate counties. (In Westchester, for example, nearly one-quarter of all married couples will be affected.) This helps explain why the region’s share of the tax increase greatly exceeds both its 63 percent share of the state’s total population and its 70 percent share of total personal income.

THE Legislature’s budget also adds a quarter-percentage point to the existing 4 percent statewide sales tax and removes two of the statewide sales tax “holidays” for clothing purchases that the governor had recommended. This is expected to raise $567 million in new revenue during fiscal 2003-04. State tax data indicate that $367 million, or 65 percent of the total, will be generated in New York City, Long Island and Westchester and Rockland Counties.

Many state legislators defended their support for the income- and sales-tax increases as a way to hold down property taxes, principally school taxes. Yet, the total school aid restoration for these counties doesn’t come close to offsetting the state tax increase.

As the nearby chart shows, the net state tax increases in Long Island, Westchester and Rockland will exceed school-aid restorations by $457 million.

The Legislature also restored nearly $1 billion in spending for Medicaid and health-care programs that Gov. Pataki had cut. According to some published reports, when this funding is added to the school aid total, New York City may reap over $1 billion in new cash from Albany, slightly more than the additional state taxes it will generate. However, a final figure will not be available until the city updates its financial plan for the fiscal year beginning July 1.

Suburban counties, however, clearly lose when increased state taxes are compared to direct aid. Legislative analysts said the adopted budget included state-aid restorations sufficient to “provide property-tax relief for homeowners of $1.3 billion.” After deducting restored school funding, that would leave a total of about $300 million. Even in the unlikely event that this aid is distributed among counties in equal proportion to increased taxes, tax hikes will exceed property-tax relief by at least $337 million in Long Island, Westchester and Rockland.

PREVIOUS studies of the flow of state funds within New York have documented that, on a per-capita basis, the New York City metropolitan area provides a large net subsidy to the rest of the state.

A larger question, however, is what the new state budget will do the economy of the New York City metropolitan area. Based on previous correlations between taxes and employment, the governor’s office has estimated that 100,000 jobs will be lost as a result of the legislative tax increase. If so, most of those jobs will be concentrated downstate – where New York City and Long Island, in particular, have continued to experience private-sector employment declines over the past year.

State tax hikes will be compounded by a separately approved rise in New York City’s own income tax, which will boost the combined state-local top rate in the city from 10.5 percent to 12.15 percent.

LEGISLATORS and local elected officials in Upstate New York, where private-sector employment is growing at a slightly faster pace than the national average, may be tempted to assume the distribution of the fiscal costs under the new state budget is an unalloyed benefit to their region.

But with the decline in the relative importance of key Upstate industries, New York’s economy as a whole – and, to an even greater extent, its income tax-dependent state treasury – is more heavily dependent than ever on growth in the New York City region. Thus, the final cost of the budget is likely to be heavier than Upstate officials now appreciate.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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