In the written version of his congressional testimony yesterday, Governor David Paterson made this pointed reference to what the late Sen. Daniel Patrick Moynihan used to call the “balance of payments deficit” between New York State and the federal government:

While all states are hurting and deserve support from the federal government, I think it is
incumbent on me to note that New York faces unique circumstances with respect to this crisis.
First, we are at the epicenter of the crisis on Wall Street, and the failure of financial institutions
impacts our revenues and unemployment situation more than any other state … Second, New York has been shortchanged for years when it comes to aid from Washington. In 2007 alone, New York sent $86.9 billion more to the federal government in taxes than it received in return – again, more than any other state.New York has been shortchanged for years when it comes to aid from Washington. In 2007 alone, New York sent $86.9 billion more to the federal government in taxes than it received in return – again, more than any other state.  [Emphasis added.]

But as Moynihan ultimately recognized, that imbalance is less a matter of how aid is distributed than of how federal taxes are imposed. High-income states like New York always send more to Washington than they get back.  So when Congress gets through paying for the stimulus package Paterson and other governors are seeking–on top of paying the bill for the bank bailout, the auto industry bailout and the distressed homebuyer bailout–New York will end up paying a disproportionately large share of the bill.

Then there’s Barack Obama’s redistributive approach to the federal tax code, under which the Empire State would be a large net loser, according to “High Stakes Taxing,” the Empire Center’s recent analysis of the Obama and McCain tax plans.  Obama’s proposal to raise rates in the top two brackets also would inevitably lead to shrinkage of the taxable income base to which the state personal income tax is applied.  This would blow an added hole of at least $800 million in Paterson’s already plummeting revenue estimates over the next two years, based on a U.S. Treasury Department estimate of the “elasticity of response” by taxpayers to changes in marginal rates.

More on the New York-Washington flow of funds from the Empire Center report:

“A near quarter century of data analysis has pretty well established that New York.s balance of payments deficits is structural,” Moynihan observed … “It is not the result of one administration, one party, one business cycle, whatever. In good times it only gets worse, owing to our high tax brackets which in measure reflect our high cost of living.”

The imbalance of payments deficit hasn’t been reduced by the billions in tax cuts flowing to New Yorkers since 2001; in fact, the gap is now as large as it’s ever been. That’s because total federal spending has continued going up even while tax rates were going down. In the long run, as Moynihan pointed out, “Anything that grows the size of the Federal government will grow the deficit of New York and other such [high-income] states.”
[Emphasis emphatically added.]

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

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