Statement on Budget Cuts and Tax Reform

March 23, 2010
In January the governor proposed about $7.2 billion in cuts to education, hospitals, nursing homes, and home care, libraries, our road and bridge program, the arts, social services, state parks and other environmental programs – the list goes on. With the budget gap now at $9 billion, more cuts will be contemplated. I am, of course, fighting hard to restore or mitigate cuts to these critical public goods, but, with the budget gap continuing to grow, I have to put out a clear warning to everyone who cares about these issues: This is not a normal year. We have to think outside the box if we are to have any hope of substantial restoration. In my view, the only plausible and proper way out of this nearly continuous downward spiral for the entire public sector that we have been in for many years is state income tax reform. The only question is: Is it possible? Will New Yorkers demand tax reform from their legislators and Governor? I hope so, because if they don’t, it won’t happen, and the downhill slide will continue and worsen.

Conservative think tanks and many newspaper editorials say that we shouldn’t raise taxes, that our taxes are already too high in New York. Most people’s taxes are too high, but it’s not their income taxes that are killing them; it’s the property tax that’s killing people! Our income taxes rank 25th out of the 50 states, largely because the wealthiest New Yorkers went from a 15% tax bracket to under 7% during the late ‘80’s and early 90’s. The top 4% of New Yorkers, those making $250,000 per year and up, had their tax rates cut by more than 50%. Most other New Yorkers had perhaps a one percent drop, from say, 5% to 4%, but have more than paid for those cuts by property tax hikes that resulted from the shift from state support to local support for schools and other critical services.

We are now losing $22 billion every year to the state treasury because of the overly-optimistic cuts from 1988 to 1996 that promised to revive the state’s economy and create good jobs, which, you may have noticed, didn’t happen. What has happened is that New York now mirrors the country as a whole in suffering from the greatest income inequality since the 1920’s. The top 1% of Americans (and New Yorkers) has more wealth than the bottom 90% and more income than the bottom 40% combined.

As you can see from the enclosure, when federal, state and local taxes are all combined, the wealthiest New Yorkers (top 1%) have the lowest tax burden, at 7.2%, while those in the middle, making $33,000-$56,000, pay the highest percentage of their income on taxes, at 11.6%. No wonder there’s an outcry from the public about taxes being too high! It amazes me that whenever we talk about asking the very wealthy to pay their fair share, the corporate media and conservative think tanks label it “job-killing taxes” and accuse us of “soaking the rich”. The fact is, our tax policies have been slowly killing the middle class for many years.

That’s the background – and then in 2008, true disaster struck. Our nation and most states, including New York, plunged into a deep recession, caused by the financial sector’s greedy and irresponsible actions. We have been pulled back from the brink of a Depression through the enactment by President Obama and Congress of billions in federal stimulus that, it is estimated, has saved upwards of 100,000 jobs in New York and softened the blow of poverty for millions more. Most economists are actually calling for more stimulus, as the private sector is still stalled and failing to create enough new jobs needed by Americans and New Yorkers. I am very worried that President Obama is listening to the voices from the right who say the federal government is spending too much (see online, Harper’s, July 2009, “Barack Hoover Obama”).

How does this larger, national picture affect our current legislative session and budget? As I hear calls for cuts of billions in state spending, I am worried that too many people are calling for less government spending, rather than remembering FDR, who understood that government must act to protect people and revive the private sector through steady government support. That is the lesson of the recovery from the Depression, and we forget it at our peril. It’s important to understand that if we get $8 billion in federal money and then cut $8 billion in state funding from our budget, there is no stimulus or recovery effect. It will have the inevitable result of slowing our recovery from this painful recession. It’s the great irony of our current situation that most individuals “tighten their belts,” as they must and should, but governments, in fact, should spend -- to prime the pump -- and to move our society to greener, sustainable energy sources. The crisis of global warming makes that a moral imperative; government is the only entity that can lead that effort in moving us as quickly as possible away from the brink of global warming disaster. The private sector has not led that charge, nor will they, it is clear. The energy industry has spent millions on lobbyists who have secured $73 billion in federal subsidies for the fossil fuel industry from 2002 to 2008, while solar has garnered $1 billion in federal subsidy in that same time period. It is a bleak assessment, but true, apparently, that we taxpayers are funding our own destruction. But I digress.

Some claim that our state’s problems are caused, not by overly-aggressive tax cuts for the wealthy, but instead, by “reckless spending” by state government. The facts say otherwise. The enclosed graph illustrates that over the past 25 years, state operating funds have been essentially flat-lined between 6.5% and 7.5 % of our state’s GDP (Gross Domestic Product, or the total wealth of the state), which is the only valid way to measure spending. After all, we don’t want to spend the same as Mississippi on education, libraries or health care, do we? I certainly hope not. While it’s not entirely valid, we often hear of comparisons of government budgets with family budgets; if a wealthy family spent only 7% of its annual income, we’d think they were very frugal, don’t you agree?

It’s also important to remember that the governor and the legislature are under a court order by our state’s highest court to spend $7 billion more on Pre-K through 12 education, because the state cut billions in funding to our schools as the tax cuts were enacted, leaving schools unable to provide the “sound, basic education” called for in our state constitution.

Some have claimed that state government hasn’t worked on making cuts. That simply isn’t true. We have actually gone through three rounds of cuts in 18 months and also cut $6 billion in recurring annual spending due to reforms to Medicaid, the Empire Zone program and Rockefeller Drug Laws over the past two years. We have recently enacted Information Technology (IT) reform that will save the state $50 million per year or more.

Since about 70% of the state budget goes to education and health care, at this point, it’s impossible to make big cuts without devastating these sectors. I fear we will make severe cuts in those areas, which will mean the loss of critical services and perhaps 50,000 teachers, nurses and other critical middle-class jobs, unless there is a massive public outcry.

These high-end tax-cutting policies, on top of globalization, have set up a destructive race to the bottom. If we want to put some brakes on this race to the bottom and the slow bleed of our public sector, we should finally do a partial, but permanent reversal, of those high-end tax cuts.

The wealthy elite of this country and state, who led the drive for the “free-market, de-regulation –“Leave business alone – they’ll-do-the-right-thing” policies that led to the mess we are in, and who benefited handsomely (I would say, obscenely) from those policies, now need to pay more taxes to help clean up the mess they have made. I think it’s wrong for Wall Street to be handing out billions of dollars in bonuses, money they wouldn’t have without billions of our federal tax dollars, while Americans are being foreclosed on their homes at the rate of one every 7.5 seconds. As our Congress works on legislation to regulate them, or hold anyone other than Bernie Madoff accountable, we, at least, need to tax them, so we have the resources to fund our children’s schools, keep our libraries open and staffed, support our hospitals and nursing homes, fix our roads and bridges, and try to assist those victimized by the Ponzi schemes of Wall Street.

President Obama and the new Congress plan to roll back some of the similarly lopsided Bush-era federal tax cuts for, again, the very wealthiest Americans, so they can begin setting the fiscal house right in Washington. In New York, we need to roll back some of the extreme tax-cutting done here, as well. But, as I said, it won’t happen without a massive public outcry.

It is pretty clear that we are in a “jobless recovery” with only a small upsurge of revenues for the state in 2010, and so, unless we fix our state’s unfair tax structure, we will see yet more destructive cuts. I share your great frustration and unhappiness about that, and hope we can all join together in this budget process to find a better way forward, which must, in my view, include income tax reform.