Volatility, thy name is “income tax”

by E.J. McMahon |  | NY Torch

States are finding it more difficult to accurately predict their revenues–and “the biggest culprit” is an increasing reliance on personal income taxes, according to a new report from the Pew Center on the States and the Nelson A. Rockefeller Institute in Albany.

“In New York, for example, officials had to revise their fiscal year 2011 estimate five times in 2009,” the report notes.  Not by coincidence, New York is also much more reliant on the income tax than most states. The Pew-Rockefeller Institute report explains the problem:

Traditionally, personal income taxes are a more volatile income stream than the sales tax. That is in large part because many states rely heavily on non-wage income such as dividends from investments, which can rise and fall with the performance of the stock market.

As if on cue, on the same day that the Pew-Rockefeller report was released, Assembly Speaker Sheldon Silver said his 99-member Democratic majority will push for a budget bill that makes New York more dependent on the income tax, by renewing the scheduled Dec. 31, 2011 sunset of a temporary tax increases on high-income earners. Gov. Cuomo and the Senate Republican Majority oppose extending the tax.

It’s not as if Silver was never warned about the volatility problem before.  His own Ways and Means Committee staff has noted that New York’s revenue base is “inherently unstable,” “volatile”and “unsustainable.” So the Assembly’s position is also a conscious push to make the tax base more unstable, volatile and unsustainable.

Of course, quite aside from those pesky macroeconomic tides affecting investment income, the taxpayers themselves also have a way of changing their behavior when hit with higher rates.  Some choose to shelter their income in tax-free investments.  Others spend less time in the state (high-income households, by definition, being more likely to have multiple homes to choose from).  Still others leave altogether.  Which is why so many economists agree that higher marginal income tax rates drive away capital and suppress growth.

Then again, while a heavy reliance on income taxes clearly does not serve the best long-term interests of the state, it is in the short-term interests of New York’s public employee unions, who will otherwise be pressured to make concessions they have so far avoided.  The coalition organized by the unions to support higher taxes staged its own demonstration Albany yesterday.



- E.J. McMahon is the Research Director at the Empire Center for Public Policy.