Gov. David A. Paterson has recently proposed to tax iPod song downloads, in an attempt to close a $15.4 billion budget gap. The download tax would make New York the 21st state (including Washington, D.C.) to tax music downloads.

Just how many songs will we need to download to fix the budget? And what is a $15.4 billion gap going to mean to life in Northern New York?

The budget crisis and the related global economic crisis illustrate an interesting and somewhat painful relationship between Northern New York and Wall Street.

We are often dismayed at the excesses of “the Street” and blame traders in the financial markets for the global economic crisis that has ravaged our retirement accounts and cost some of us our jobs.

At the same time, the huge hole in our state budget, with the corresponding need for more taxes and less public spending, is directly related to the loss of Wall Street revenues. We might claim to despise those fat cats, but we sure miss them when they are gone.

When struggling trading house Bear Stearns declined to pay $178 million in bonuses, some of us may have cheered at what seemed a dose of justice for overpaid securities traders. Our governor, however, noted that the loss of those bonuses would cost us millions of dollars in tax revenue.

According to state budget officials, Wall Street bonuses in 2007 were more than $50 billion. Projections for 2008 were at $27 billion — and dropping. In fact, taxes on Wall Street earnings and transactions made up about 20 percent of our total state budget last year.

You can hate those greedy fat cats if you like, but they are the ones who pay most of our state tax bills. Because Wall Street is a global financial center, much of the tax dollars it pays come from people and business around the world — bringing in wealth to New York that helps build our bridges and operate our schools.

According to at least one analyst at the Empire Center for Public Policy, rising Wall Street revenues are the only things that have allowed us to expand state spending while avoiding higher taxes. We have been spending that money as fast as it came in and borrowing even more against the expectation of future revenues.

If Wall Street has been greedy, so have we — or at least our elected state representatives.

Many analysts are predicting that Wall Street bonuses and heavily-taxed profits won’t return for five years or more. That means we are looking at several more years of budget gaps and efforts to raise taxes and reduce spending.

Our income tax rates are already among the highest in the nation, and our property tax rates the highest in the nation as a percentage of housing value, according to U.S. Census Bureau figures.

Economic developers and businesses in the state have been telling us for years that we need to reduce taxes if we are to attract new businesses or retain the ones we have.

Might the iPod tax drive away a whole generation of hip young technologists who could launch the next Microsoft or Starbucks Coffee here in Northern New York? Please save us, Wall Street.

According to the state Labor Department, there were 544,076 workers in the state’s financial sector, and they earned an average annual salary of $208,174 in 2007. That is twice the average of the nearest industry and dwarfs the average annual 2007 wage in the north country of $33,770.

Working in the financial sector is clearly lucrative, and those high salaries mean high state income taxes as well — an estimated $7.8 billion in 2007 at the state’s nominal top bracket. The preliminary figures for 2008 look much worse, however, with total earnings in the sector cut almost in half.

Locally, the financial sector is a smaller component of our economy. It makes up 3.4 percent of the jobs in Jefferson County and 2.4 percent and 2.7 percent in Lewis and St. Lawrence counties, respectively, according to Census Bureau estimates.

Average annual salaries in the financial sector are still higher than the average resident of the north country takes home, but nothing like the huge figures from the rest of the state.

The source of high profits in finance is always tied to high risk. The recent collapse of financial markets is an example of what risk looks like when it comes home to visit. Our slower, sleepier local financial sector has certainly been hurt by global financial events, but we have yet to see collapsing banks or imploding brokerage firms.

Local banks typically maintain a relatively low-risk portfolio, and brokerage firms tend to focus on the needs of middle class savers looking to invest their 401(k)s for the long haul.

Some local banks like Watertown Savings Bank don’t even resell their mortgages, so they have a clear incentive to make responsible loans that are not likely to come back and haunt them.

If you have money in a local bank or brokerage, it is probably safe where it is. It is certainly safer than at many of the high-flying Wall Street firms that have gotten so much press coverage in the last few months.

While Bernie Madoff didn’t have a Watertown office, we do occasionally have some financial scandals of our own.

Anyone who got financing from the Jefferson National Bank in the 1990s or bought stock in other ill-fated regional attempts to raise money on over-the-counter (OTC) public offerings will understand what it feels like. We are not immune from criminality or just bad judgment and bad luck in the business world.

In his 2006 report on local governments, the state comptroller noted that counties and cities outside New York City face increasing financial pressure, with property and sales tax rates approaching legal maximums and debt on the rise — and that was before the current financial crisis.

Raising taxes can fuel a decline in tax revenues as businesses and individuals leave the area or decide not to invest in new business growth. If you want a theoretical picture of this relationship, just Google something called the Laffer Curve or “deadweight loss.”

The much-maligned “greedy” traders of Wall Street have been the state’s largest growth engine and have paid for many a new school building or state prison in Northern New York. We have three state university campuses, five state prisons and a regional state work force of thousands of people in the tri-county area. Those state tax dollars are a huge element of our region’s economy.

We absolutely depend on our financial industry to fuel the workings of a modern economy — on Wall Street or on Public Square.

The financial crisis has hit people all over the world, but it will bring some special pain for taxpayers in Northern New York. Local bankers and brokers are facing significant losses in their businesses as well and some level of guilt by association.

Give them a break. We need them and their Wall Street counterparts.

Greg Gardner is an associate professor of business at SUNY Potsdam. His column on business issues in the north country is published monthly in Money Matters.

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