High state and local taxes are widely recognized as a significant obstacle to stronger economic growth, especially for Upstate communities whose natural competitors are lower-cost regions of the Midwest and Southeast.
As of 2004, New York’s state and local taxes were the highest in the country — fully 29 percent above the national average, relative to personal income, according to the Tax Foundation. These taxes directly reflect the cost of supporting an exceptionally large and well-compensated public-sector work force compounded by expensive state mandates on local governments.
The solution can be summed up in three words: Slow government growth.
Obviously, this is easier said than done. Public employee unions and other special interest groups raise millions of dollars in campaign contributions to reinforce their influence in Albany. Lawmakers end up virtually paralyzed by fear of the political consequences of curbing spending. Small wonder the state budget is chronically late.
The only sure way to get around this problem is for New York to join the 28 states that have put in place some form of constitutional spending and tax limits. The best, most comprehensive model for such an approach is the Taxpayer Bill of Rights (TABOR) adopted by Colorado voters in 1992.
Colorado’s TABOR limits the amount of state tax revenue that legislators can spend to the prior year total multiplied by the rate of inflation plus annual population growth. Surpluses must be returned to taxpayers in the form of tax reductions. Any increase in state or local debt or tax rates needs voter approval.
A New York version of TABOR would need to recognize some unique factors driving spending here, particularly state- mandated programs. An exception could be made for spending shifted from local to the state level — allowing for a gradual takeover of local Medicaid costs. Any savings generated by additional state relief would be passed on to local taxpayers.
Because New York suffers from excessive debt, our TABOR could let legislators use surplus revenues to pay off bonds or to finance capital improvements on a pay-as-you-go basis. As a hedge against boom and bust cycles exacerbated by our dependence on Wall Street, some surpluses could be deposited in rainy-day reserve funds.
New York’s state tax receipts grew by 42 percent over 10 years. If the budget had been subject to the TABOR limits described above, spending growth financed by these taxes would have been capped at 27 percent.
The cumulative savings from fiscal 1995 through 2005 would have been nearly $23 billion. This would have freed enough funds annually to finance a state takeover of most local Medicaid costs, with significant property and sales tax reductions.
Until recently, the very notion of capping state and local taxes in New York might have seemed sheer fantasy. But now pressure is growing for real reform.
For the first time in recent memory, there is bipartisan support in the Legislature for a constitutional convention — which could open the door to the kind of fundamental reform that tax and spending limitations would represent. New Yorkers should seize on the TABOR example for all it’s worth.