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Albany's Toxic Taxes

from the magazine

Albany's Toxic Taxes

Rich in every other advantage, New York State's economy withers under a thirty-year tax blight. It's time to reverse the tax-and-spend plague now. Autumn 1994

One morning next summer, a convoy of nine trailer trucks will pull up at a
factory on Sweet Hollow Road in Old Bethpage, New York. Movers will load up
the machinery, inventories, fixtures, office equipment, furniture, and files
and cart it all away to Charleston, South Carolina. Life Industries, a
manufacturer of marine cleaners, sealants, and adhesives since 1969, is
leaving New York. With it will go 22 jobs—and yet another piece of New York’s
industrial base.

The departure of Life Industries is both a symptom of what’s wrong with
New York State and a harbinger of the grim economic fate that awaits unless
there is a transformation of the state’s taxing and spending policies. To put
it bluntly, New York has become a lousy place to do business.

Within living memory, of course, the Empire State had as good a business
climate as any place in the United States—or in the world, for that matter.
But decades’ worth of Albany’s tax-and-spend arrogance, its tendencies toward
budgetary flimflam, and its disregard for the businesses that pay the taxes
and meet the payrolls have produced an environment that is driving existing
companies away and discouraging new ones from coming. Louise Schmidt, Life
Industry’s chief executive officer, is merely being matter-of-fact when she
says: “New York doesn’t want you here if you’re a manufacturer. They just
want you to keep paying the taxes.”

The service industries that make up the meat of New York State’s economy
have been feeling equally unwelcome. Bankers and stockbrokers have been
moving “back office” jobs—clerks, secretaries, systems analysts—either to
neighboring states, like New Jersey and Pennsylvania, or to more distant
states that have purposefully reconfigured their tax codes to attract the
business, such as Delaware and South Dakota. The list of departees is a who’s
who of banking and finance: Citicorp, Lehman Brothers, MasterCard, Met Life,
J.P. Morgan, Moody’s, NatWest, Salomon Brothers.

Some of the reasons for the decline of New York as a business center lie
beyond the purview of public policy. Northeasterners have migrated to the
sunbelt, drawn to its more clement climes. And the continuing revolution in
communications, along with improvements in transportation, has lessened the
need for businesses, their suppliers, and subsidiaries to cluster around the
older industrial hubs like New York City, Troy, Syracuse, Rochester, and
Buffalo. Related to that is the trend towards the globalization of industry,
with U.S. companies setting up subsidiaries and production facilities closer
to their customers and far from corporate headquarters.

But many of the reasons for New York’s eclipse are a direct consequence of
bad policy decisions made in Albany, the main one being the state’s fiscal
practices—the way it taxes and spends. The degeneration of fiscal policy
began as early as the 1950s. Then the most populous and richest state, New
York became lazy and complacent. Politicians embraced the seductive notion
that state and local government could be all things to all people, and they
assumed they could pay for the expanded services with a limitless supply of
tax revenue. As former Governors Malcolm Wilson and Hugh L. Carey put it in
the foreword to a recent book on New York’s economic predicament, The
Comeback State: “We didn’t know it at the time, but the post-World War II era
would be the beginning of a long, profound decline relative to our sister

Just stopping that decline and taking the first steps to reverse it will
require heroic efforts. The tax reforms of the last seven years were small
steps in the right direction. But the tiny tax cuts enacted last year and the
$1.5 billion in further cuts promised recently by the Cuomo administration are
too small by at least an order of magnitude. New York needs to cut tens of
billions of dollars from both state and local spending merely to restore
itself to rough parity with other states.

fundamental explanation for New York’s relative decline lies in the
statistical data comparing its tax burden with those of the other states.
That uncommonly high taxes are bad for business formation, job creation, and
economic growth is almost intuitively obvious, and eloquently persuasive
evidence for the idea can be found in a substantial body of recent economic
research. More practical proof can be found simply by talking to the New York
business owners and managers who are fleeing or have decided that future
expansion will take place in more business-friendly locales. The anecdotal
evidence is underscored by opinion surveys and data on migration and job

A convenient place to start is 1958. For one thing, the best series of
data comparing taxes among the fifty states begins in that year. More
important, anyone familiar with New York at the time will agree that the
quality of life in general, and of government services in particular, was far
better than it is today or has been at any time recently. The New York State
Thruway, the longest and most modern highway in the world, was largely
completed. The Saint Lawrence Seaway would open a year later. The state’s
educational system was the envy of the nation. From Buffalo to Brooklyn, the
streets were safe and clean. Children rode the subways of New York City
unafraid and unmolested.

As the chart above shows, New York was a high tax state even then, but
look closely at how the tax burden changed in the subsequent decades. The
data are adjusted for inflation, so all dollar amounts are expressed in 1991
dollars. They are also shown per capita rather than in total, to adjust for
the effect of changes in population. Combined state and local taxes are used,
since that is the measure of the tax burden that counts in economic terms.
Untangling local and state taxes is difficult for New York, since much local
spending—notably for Medicaid and education—is effectively mandated by the
State Legislature and by state regulatory authorities. Indeed, a recent study
by the New York Association of Counties estimated that 60 percent of the
average county’s spending is effectively directed by Albany. Local
governments, for example, are required to use separate contractors for
plumbing, heating, and electrical work, even when it is more expensive than
using a single contractor. School districts are compelled to pay bonuses to
teachers under the Excellence in Teaching program, even if the local school
board doesn’t think bonuses are merited and would prefer to spend the money
on something else, such as books. Local fire departments are required to give
trainees forty hours of instruction as peace officers. Other studies have
estimated that New York controls more local spending than any other state. In
addition to data on the national averages, the average of the ten most
populous states is given as well, since these urban states share more common
characteristics with New York.

Back in 1958, real total taxes per capita in New York were $1,140 in 1991
dollars, 37 percent higher than the national average, and 34 percent higher
than the average of the ten most populous states. New York taxes grew faster
than these averages throughout the 1960s—rocketing upward in the latter part
of the decade and in the early 1970s. By 1973, New York’s per capita taxes
were 55 percent higher than the nation’s, and 63 percent higher than the
average of the ten most populous states.

The 1970s saw the tax burden actually fall, reflecting both economic
distresses such as the recession of 1973-75 and the fiscal rectitude of the
Carey administration, which held the statehouse and the line on taxes from
1975 through 1982. But taxes again began growing much faster than the
national and big-state averages in the mid-1980s. Tax growth leveled off late
in the decade. Nevertheless, in 1991 (the most recent year for which these
uniform data are available) New York’s tax burden stood at $3,340 per capita,
58 percent higher than the nation as a whole and 66 percent higher than the
big-state average.

Proponents of high taxes sometimes argue that the simple measure of total
per capita taxes is misleading, because it fails to recognize that on average
people have become richer over time and thus more able—perhaps even more
willing—to pay higher taxes in return for more and better services. To answer
this objection, the chart above shows total state and local taxes per $1,000
of income, which effectively adjusts the data to reflect changes in wealth.
Again, the tax burden rose much faster in New York than elsewhere, especially
from the late 1960s into the mid-1970s. In 1958, New York’s taxes per $1,000
of income were 9.8 percent higher than the national average, and 14 percent
higher than the ten most populous states. The gap widened to 39 percent above
the national average in 1976 and has narrowed slightly since then. In 1991, New
York’s taxes per $1,000 of income were 34.5 percent higher than the national
average, and 41.5 percent higher than the average of the ten most populous

Albany has worked all the levers of tax policy to accomplish this increase
in the tax burden. The charts opposite, on page 13, break out per capita
income taxes, property taxes, and sales taxes for New York, the nation, and
the ten biggest states. According to a study by economist Alvin Rubushka, New
York’s real income taxes per capita—today more than double the
national average—grew most sharply relative to the other states from 1983 to
1987. In the other two major categories of taxes, property taxes and sales
taxes, New York has maintained a considerable lead—a quarter to a half again
as high as the rest of the nation.

These comprehensive measures of taxes all point to a single conclusion:
the state’s tax burden is significantly higher than the burden for the nation
as a whole or for other large states. The data cut through the fiscal fog
that emanates from Albany. Look at the tax reductions of 1987. The year
before, the Reagan administration’s federal tax reform simultaneously cut
federal tax rates and broadened the base of taxable income by doing away with
many tax loopholes and by limiting deductions. Since New York uses federal
taxable income as the base on which it imposes state and local taxes, the
effect of raising taxable income by reducing deductions would have been a
huge tax increase for New Yorkers, unless New York cut its own tax rates. Instead
of promptly lowering rates to offset the tax windfall, Albany announced a
five-year phase-in of lower rates, from a top marginal rate of 8.75 percent
to 7 percent, which was supposed to be in effect by 1991. But the governor
and legislature quickly moved to postpone the rate reductions, and the 7
percent top rate has still not taken effect (it is scheduled to go into
effect next year). Meanwhile, inflation has pushed taxpayers into higher
brackets, partly offsetting the rate reductions. The derailment of the 1987
tax cuts has cost New Yorkers at least $1.8 billion, according to an analysis
by the Republican staff of the Assembly Ways and Means Committee. For a
family of four with an income just over $45,000 per year, this translated
into additional state income taxes of $237 in 1991.

The most
basic idea of economics suggests that higher taxes would discourage business
activity: raise the price of something, and you’ll get less of it. In a free
country such as the United States, you would also expect businesses to
migrate to lower-tax locales. Nevertheless, up until fairly recently
economists generally thought that state and local taxes had little effect on
business location and development compared with the effect of access to
markets, suppliers, and labor. A considerable body of research done in the
1980s and 1990s has shifted the consensus dramatically. Timothy J. Bartik, a
senior economist at the W.E. Upjohn Institute for Employment Research, an
independent organization in Kalamazoo, Michigan, surveyed the field in 1992
and concluded: “This recent research suggests that state and local taxes have
much stronger effects on the economic development of states, metropolitan
areas, and small jurisdictions than was once believed.”

These studies vary widely in the kinds of data they use, the geographical
comparisons they make, and the time periods they cover. Allowing for the
differences and averaging the results, Bartik concluded that a 10 percent cut
in tax rates—from 5 to 4.5 percent, for example—will increase business
activity by 1 to 8.5 percent. One study estimated that a 10 percent increase
in a locality’s property tax rate—from, say, 5 to 5.5 percent—will decrease
the property tax base by 1.5 percent over time. Another found that small
changes in tax rates for certain kinds of businesses can lead to anywhere
from a 1 to a 10 percent decline in the number of start-ups in that industry.

The research shows that business location decisions are especially
sensitive to tax rate differences among jurisdictions within a metropolitan
area, such as when a company has decided to locate in the tristate area and
must choose between New York, New Jersey, and Connecticut. Bartik, for
instance, took the average result of seven studies and found that they
suggest that a given jurisdiction’s 10 percent cut in property taxes would
increase its level of business activity by 17.6 percent over twenty years.

State taxes also affect foreign direct investment (purchases of companies,
buildings, and land) in the United States, which provides an important source
of capital to fuel the economy. James R. Hines Jr., an economist at Harvard’s
Kennedy School of Government, recently compared investments by companies from
nations that give home-country tax credits for U.S. state taxes with those
from nations that do not. He found that a 1-point difference in state
corporate tax rates—going from 5 to 6 percent, for instance—meant that
foreign companies that could not write off taxes would invest between 7 and 9
percent less in that state, “suggesting that state taxes significantly
influence the pattern of foreign direct investment in the U.S.”

So much for
theory. Now look at the question of tax burdens from the point of view of
Louise Schmidt, chief executive of the boat care product manufacturer that is
weighing anchor for South Carolina. Real estate taxes on the firm’s
23,500-square-foot plant are currently $82,000 per year. Taxes for the new,
slightly larger plant in Charleston are $14,000. “That’s all bottom line,”
says Schmidt. “It’s really hard to justify a profit differential like that.”
Many other costs will fall as a consequence of the move. Life Industries uses
a lot of electricity. Costs per kilowatt-hour, Schmidt figures, will fall by
half. The main reason for New York’s high energy costs is that state and
local governments use energy companies as tax collectors. On average, state
and local taxes make up a fifth of energy utility bills in New York. For
electricity customers, the tax burden is twice the national average. The
broader measures of the tax burden confirm Schmidt’s wisdom in moving. The
basic corporate tax rate is 5 percent in South Carolina compared to 9 percent
in New York. By the broadest measure of tax burden, New York’s total tax
revenue per capita was $3,337 in 1991, more than twice South Carolina’s

New York’s legislature has created a hodgepodge of hidden taxes, add-ons,
and supposedly temporary tax hikes to raise revenue surreptitiously. Some are
almost comical, such as the ten-cent-per-quart “lubricating oil tax” that was
enacted in 1990 to pay the debt service on new environmental bonds. (The
bonds were never issued and the tax was finally repealed this year.) Others
are just as insidious. Take telephone taxes. A 1992 study by Wellesley
economist Karl E. Case found that state and local taxes added up to 17.9
percent of Bell company operating revenues in New York. That’s twice the 9.2
percent average for the ten largest states. The rate for California was only
4.8 percent. A “business tax surcharge,” enacted in 1990 and boosting taxes
on business income by 15 percent at the stroke of a pen, was supposed to
disappear in 1993. This year’s budget postponed the phaseout to 1997, adding
a total of $122 million to the state’s corporate tax bill.

In some cases, these shenanigans have serious unintended consequences for
New York’s competitiveness. In 1983, as part of a $1 billion revenue package,
the state imposed a new petroleum gross receipts tax, billed as a temporary
levy that would soon fall to lower levels and end by 1985. Instead, it was
made permanent and later transmogrified into the Petroleum Business Tax
(PBT), currently about 15 cents per gallon of gasoline. The tax rate was
linked to an index of oil prices. Since oil prices have plummeted in recent
years, tax revenues should have declined, but in the last three years, the
legislature voted to freeze the PBT index rather than permit the scheduled
drop (it would have fallen 20 percent in 1995).

Travel Ports of America is a Rochester-based corporation that runs truck
stops in New York and six other states. The company’s revenues last year were
$137 million. These aren’t your corner gas stations. They typically feature
repair shops, restaurants, convenience stores, and motels. It’s a competitive
business: long-distance trucks typically can go 2,100 miles without fueling,
so truckers can be choosy about where they tank up.

Travel Ports employs some six hundred New Yorkers. Were it not for the
state’s inhospitable business climate—especially the stiff fuel taxes, which
push the retail price of diesel oil to $1.29 per gallon in New York versus
$0.96 to $1.17 in nearby states—Travel Ports would be adding an additional
125 jobs next year. The company had signed a contract to purchase land for a
new truck stop in Batavia, near the New York State Thruway, but bailed out
when the legislature passed the 1991 fuel tax hike. Instead, Travel Ports
purchased a 72-acre site 110 miles further west on the same road, in Erie,
Pennsylvania, and the company is spending between $5 million and $6.5 million
building the new truck stop there. The facility will open for business next
summer. Says Travel Ports president John Holahan: “We’re looking to expand in
all the states we’re in except New York.”

The fuel tax has had wider detrimental effects on the trucking business in
New York. Twenty years ago, several of the largest trucking firms in the
nation were based in the state. Ten years ago, there was still one in the top
hundred. But now all have fled or have gone out of business, taking their
once familiar names—Penn Yan, Red Star—with them. Their places haven’t been
filled by newcomers, and today not a single one of the top three hundred
trucking firms is based in New York.

Another businessman who has ruled out further expansion in New York is
William F. Allyn, chief executive officer of Welch Allyn, a manufacturer of
medical diagnostic equipment based in Skaneateles. With sales of over $200
million per year, Welch Allyn employs 1,200 people in New York and another
600 in plants in North Carolina, New Hampshire, Ireland, and Germany. Allyn
has been encouraged by the recent tax reduction efforts from Albany. But the
state’s overall tax burden, especially the taxes levied on energy, still make
New York uncompetitive in Allyn’s view. “We’ve been here eighty years, and it
would take a lot to get us to leave, but we need to compete on an economic
basis. We wouldn’t look favorably on expansion in New York. It’s not a
threat; it’s a reality, and if someone could prove me wrong I’d be glad to

Surveys of New York business people turn up even more negative assessments
of the state’s business climate. In a recent poll of 122 companies in western
New York, conducted by the Greater Buffalo Development Foundation, 46 percent
said they would not undertake a major expansion project in New York—with
taxes the most frequently cited reason. A 1993 survey of more than eight
hundred executives by the Business Council of New York State found that
nearly three out of four consider the level of state and local taxation a
negative factor influencing their ability to grow in New York. Nearly 42
percent called the climate for doing business in New York much less favorable
than in other states; 38.7 percent said it was somewhat worse. When asked
where their companies would add jobs if they were able to, 16 percent of
applicable companies said they would locate new jobs outside the state
because of the poor business environment. The manufacturers, as distinct from
the service providers, were even more downbeat: one-fifth said they would
expand elsewhere. Indeed, polls of business sentiment by the Business Council
have been so negative that the organization has sometimes suppressed the
results for fear of further damaging the business climate. “We have to walk a
fine line between pointing out the problems and planting ideas in people’s
minds,” says Robert B. Ward, the association’s research director.

What’s bad for business, of course, is bad for jobs, and job growth in New
York has been far weaker than in the rest of the nation or in other big
states. As the chart on page 16 shows, since 1958, employment in the United
States has grown 115 percent. In the other big states, jobs have grown 122
percent on average. New York’s job growth is a feeble 28 percent. What is
especially alarming about these data is that since 1989 New York has been
losing jobs even while other states have recovered. Data from the Internal
Revenue Service, which tracks migration between states based on the number of
taxpayers and their dependents claimed on federal income tax returns, provide
a close-up picture of New York’s relative decline in recent years (see chart
on page 17). Some 140,000 more taxpayers and family members have been leaving
the state each year than have been moving in.

What does
New York need to do to make itself competitive again? To create an atmosphere
where businesses will at least consider starting up new operations or
expanding existing ones? Where manufacturing companies will feel welcome,
where the existing business base won’t be lured away by other states, and
where job growth can reaccelerate to the typical speed of other states?

By far the most important thing is for New York to make deep, wide cuts in
spending and taxes. The only effective way to do this is to decide on overall
targets and then work backward and downward from there, apportioning the
reductions among programs and policies. This is the standard corporate model
for cost cutting, applied by thousands of businesses over the past dozen
years as American companies have scrambled to regain their own
competitiveness. It is also the way the Federal Government has managed to
achieve the modest deficit reductions of the last five years.

How far must New York cut taxes? The only sensible goal is to reduce per
capita total state and local taxes to the average of the other large states.
This implies major surgery, amounting to tens of billions of dollars in tax
and spending cuts, not the kind of mild palliative prescribed this summer by
the Cuomo administration. Total state and local spending in New York was
$98.5 billion in 1991, so each 10 percent reduction in spending equals nearly
$10 billion. Reducing the tax burden to the average of other large states
would not give New York any big fiscal advantage over its competitors for new
and exiting businesses; it would merely take away the handicap New York has
been laboring under, which unnecessarily restrains the extraordinary creative
and entrepreneurial energies which the state has in abundance.

Perhaps the most ambitious and sensible of the many plans for cutting New
York’s tax burden is a draft report by the Private Sector Commission on Cost
Control, which was created by the governor and the legislature in 1990. A “confidential
discussion draft” was leaked in 1991, but the report was never approved by
the commission and was effectively buried as politically unacceptable. The
goal set forth in the confidential draft was to cut or contain the growth of
costs enough to bring state and local government spending down to within 10
percent of the average of the other ten largest states within five years.
Then, as now, this would mean a 30 percent reduction in combined state and
local budgets.

That’s an ambitious but not outlandish goal. When New Jersey governor
Christine Todd Whitman pledged during her 1993 campaign to reduce state
income taxes in New Jersey by 30 percent, she was met with derision by
political opponents and by most of the media. But by July of this year she
had pushed through the first two cuts, 5 percent and 10 percent respectively,
and she vows to enact another two rounds to reach the 30 percent goal by
1997. Although Whitman’s tax-cutting plan is the boldest recent initiative,
several other states are also cutting taxes with gusto. Michigan, for
instance, is replacing property taxes with sales taxes as its method of
school funding, and in the process creating an overall tax reduction of
several hundred million dollars. Arizona has cut taxes in each of the last
three years. Other states with planned tax reductions include Massachusetts,
South Carolina, Mississippi, and Virginia.

Massive tax cuts could only happen in New York in the presence of
powerful, single-minded political leadership. New York has farther to go than
New Jersey or any of the other states that have launched tax-cutting
programs, given its outsized tax burden. Since nearly half of the taxes on
New Yorkers are levied at the local level, a true tax revolution must include
large cuts in property taxes as well as in income and sales taxes.
Coordination of the tax cuts would be necessary to ensure that state taxes were
not merely shunted down to the local level.

The austerity implied by a 30 percent tax reduction would force New York
State and its cities, counties, and villages to rethink the way they spend
money. There are no secrets about where the major spending cuts would have to
come from. The top three are medical spending and welfare costs, primary and
secondary education, and general government overhead. Former New York City
mayor Edward I. Koch is characteristically pithy on the subject of New York’s
spending: “We’ve got to reduce the quantum differentials in the services
provided by the City and State of New York compared with other states. We
provide Cadillacs and they provide Fords. I say, let’s have Fords.”

Take Medicaid. New York’s total spending on Medicaid in 1991 was nearly
nine times the national average. To put it another way, with 7 percent of the
nation’s population and less than 10 percent of all Medicaid recipients, New
York spent nearly 20 percent of all Medicaid dollars. New York is one of the
few states that provides nearly all the optional Medicaid benefits that the
federal government permits—loading up the Cadillac, to extend the metaphor,
with leather seats, extra chrome trim, and the deluxe CD player. New York
also has unusually generous eligibility rules that, among other things,
permit well-to-do and middle-class individuals to get subsidized nursing home
care. New York Medicaid patients spend more time in the hospital than
patients in other states, and the fees paid for nursing and hospital services
are considerably higher than in many other states.

The federal comparative data used in the chart on page 18 show Medicaid
costs as part of two categories—health and hospitals and public welfare—and
the chart reveals how far out of line New York’s costs have risen. Medicaid
grew faster than any other single spending program in the 1980s.

Per capita welfare spending, just over half of it for Medicaid, is twice
as high as the top-ten average; health and hospital spending is 80 percent
higher. Savings of $13 billion—about 13 percent of total state and local
spending—would result if both these spending categories could be reduced to
the U.S. average.

The solutions to the Medicaid cost explosion are also well understood. New
York needs to tighten eligibility requirements and reduce the number of
optional services. The biggest reforms the state could undertake would be to
encourage more competition among Medicaid service providers and to accelerate
efforts already under way to move Medicaid recipients into managed-care
programs. Other states have successfully reined in Medicaid spending, notably
Massachusetts and California. (The turnaround in California is recounted by
Edwin S. Rubenstein in “Emergency Surgery for Medicaid,” City Journal,
Spring 1991.)

The state’s inefficient and costly system of primary and secondary
education is another area where large savings are needed. New York spent
$1,211 per capita on primary and secondary education in 1991, 40 percent more
than the national and big-state average. Spending has continued to increase,
even as school enrollment has fallen and test scores have worsened. Cutting
spending on elementary and secondary education to the U.S. per capita average
would produce $6.3 billion in savings—a 6 percent reduction of total state
and local spending.

One major reform could help deliver the needed savings: cut back and
eliminate state educational mandates. A 1991 report by the education
department estimated that 71 percent of local school district budgets are
controlled by state mandates. This prevents parents, teachers, and local
school officials from finding efficient ways to deliver services at lower
cost. The most direct way to cut school spending is to eliminate overhead.
Over the past twenty years, enrollment has dropped by nearly a million, and
the number of teachers has decreased by 3 percent. But the number of
administrators and other nonteaching professionals has increased by 13
percent. Albert Shanker, president of the American Federation of Teachers,
has said there are more school administrators in New York State than in all
of Western Europe, and more in New York City that in France.

The problem of overstaffing is, in fact, rife throughout New York state
and local governments. Overall, New York had 1.1 million full time workers on
state and local payrolls in 1991, or 622 per ten thousand population in 1991,
compared to an average of 523 nationwide. Their average annual earnings were
$35,568, versus a national average of $29,748. Reducing the number of
employees to the national average would mean a 16 percent reduction of
headcount—well within the range that many companies have been forced to
impose over the last decade—and would save about $6.4 billion per year.
Cutting the pay of the remaining employees to the national average would save
a further $5.4 billion. It’s hard not to believe that major streamlining is
possible, especially given the duplication and overlap of services that have
grown up over the years. The Private Sector Commission on Cost Control
identified many of these: for example, in the field of mental health, the
Office of Mental Health, the Health Department, and the Office of Mental
Retardation and Developmental Disabilities are all overseen by the Commission
on Quality Care for the Mentally Disabled.

Even allowing for some double counting of cuts from personnel reductions,
the spending cutbacks in just the few large categories enumerated here add up
to well over 20 percent of total state and local spending. Critics of state
spending, such as the Empire Foundation, Citizens for a Sound Economy, and
the Business Council, have identified billions of dollars worth of other
potential savings in programs such as the prison system (spending per
prisoner is 40 percent higher in New York than in other large states) and the
public universities (which offer subsidized tuition to the wealthy as well as
to the needy). Cutting state and local spending by 30 percent over five years
may be hard. It is far from impossible.

Fundamental fiscal reform on this scale will require what psychiatrists
call an attitudinal change in Albany, where the legislature over the years
has often looked more like a bipartisan pig trough than a deliberative body.
Liberals don’t come down too hard on Republicans who want higher spending for
suburban schools, so long as the conservatives don’t raise a ruckus about
welfare outlays, and so on ad infinitum. The quintessence of the Albany
attitude is the annual rite known as members’ items. These are home district
goodies doled out as patronage by party leaders in the final moments of the
budget negotiations. This year, the legislature approved $48 million in such
spending, split 50-50 between each house. This year’s list, released
literally in the dead of night, included such items as a $2,500 grant to
repair the fence around a roller rink on Long Island and $5,000 to pay for
advertising for a glider museum near Elmira.

There is always a constituency for this kind of spending, as well as for
the bigger, more serious spending categories such as Medicaid, welfare, and
education. As George Bernard Shaw put it, “The government that robs Peter to
pay Paul can always depend on the support of Paul.” But in New York’s case,
the Peters—the businesses and individuals that pay the taxes—increasingly
have had enough and are voting with their feet. If New York persists on its
present path, the business base will continue to erode, job growth will
stagnate, and the tax base will eventually shrink. The per capita burden will
then have to rise even more, simply to support the same level of spending
that already exists.


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