New York State and New York city are the perfect examples of how not to run a state or a city (or a nation, for that matter.) Both are facing huge budget deficits. Both have out of control spending, and both have been feeding at the Wall Street trough which has now run dry. The Wall Street Journal calls it the dirty little secret of highly progressive tax rates. The state becomes dependent on very few taxpayers. Once the income source of those few dries up, the states’ revenues dry up.
The financial industry doubled its percentage of the national economy in the 1980s, and did so again between 1990 and 2006. As Wall Street wages have grown, so has New York’s dependence on revenue from the personal income tax. In 1977 personal income taxes represented less than 45% of all state taxes. In 2007 they represented about 60%. And for the past 30 years, inflation-adjusted state spending has tracked closely with booms and busts on Wall Street. According to John Cape, a former state budget director, about 45,000 New York taxpayers provide the state “with anywhere from 20% to 30% of total income tax receipts.”
New York City has also done little to decrease its addiction to revenue from a single industry. Mayor Michael Bloomberg missed the chance to use 9/11 as an opportunity for reform, and he’s declined to challenge public unions over pay and benefits. Bigger and bigger budgets have been submitted and approved as though record Wall Street profits would never end. The financial industry is 14% of gross city product. In 2006, New York City received 50% of its personal income tax revenue from the top 1% of earners, many of whom work in finance.
During previous downturns Albany has resisted structural reforms. Instead of lessening the state’s dependence on this narrow slice of the tax base, lawmakers have been content to wait for Wall Street to come roaring back. To cover the rising costs of debt payments, school aid, Medicaid, pensions and other budget drivers, they’ve raised taxes, sometimes temporarily but often permanently.
It would be a tragic mistake to view the current downturn as merely another cyclical blip. It may take Wall Street years to come back, and once it does it certainly won’t look the same. Fewer big global banks are likely to emerge from the ashes; and while they will be better capitalized, they will also be more highly regulated. More reasonable leverage ratios mean less risk-taking and less profit even in good times. Bonus pools are likely to be anemic for some time.
New York’s revenue coffers are set to take a hit. The only question is how big. The state budget deficit is already projected to be $1.5 billion in the current fiscal year, and Governor David Paterson estimates it could grow to $14 billion over the next two years if nothing is done. Read full article.
The best financial advice I’ve ever heard is to live below your means. It’s time our local, state and federal governments learn that lesson.
