Reasoning with the Taxman

To meet the projected deficit, New York is cutting spending to make up 20 percent of the gap; the other 80 percent will be filled via 137 new or increased taxes, fees and charges. Most of this will come from increases on personal state income taxes for those earning more than $200,000 (a 12.7 percent increase) and those earning more than $500,000 (a 23.6 percent increase).

Our $131.8 billion budget was increased by 10.1 percent, or $12.1 billion, over last year. Politicians claim that the increase was due to the spending of stimulus money received from the federal government. Unfortunately, this is not accurate: Minus any stimulus money, the budget still increased by 4.7 percent, or $5.9 billion. This is much higher than the rate of inflation and much higher than the increases in an overwhelming majority of individual and business budgets.

For years and years, we have seen spending in our state accelerate and taxes increase. A familiar definition of insanity is to keep doing the same thing over and over and expecting a different result.

For as long as I can remember, real estate leaders in New York City have been concerned about the high level of taxes in the city out of fear that businesses and individuals would leave for a more tax-friendly location. After all, our real estate markets need people and businesses to want to live and to locate here. Many elected officials pooh-poohed this position, because, after all, “Where else would people want to live? Besides, businesses have to be in New York City.” Never underestimate the mobility of human beings.

 

TWO WEEKS AGO, THIS fear was made tangible, as a study was released by the Empire Center for New York State Policy that shows middle-class people are leaving the city in meaningful numbers. Given the extraordinarily heavy state and local tax structure, these results are not surprising.

The report shows that between 2000 and 2008, New York had a net domestic outflow of more than 1.5 million, which was the largest exodus from any state. Unfortunately, most of those who left resided in New York City. These departures have significant budget consequences, as they tend to include residents who are much better off than those who are arriving. In 2006 alone, the blow to the state budget was $4.3 billion in taxpayer revenue due to these trends. The impact from 2000 to 2008 resulted in lost revenue estimated at approximately $30 billion.

The Empire Center study does not drill down to the reasons for this migration, but the assumption is that the notorious state and local tax burden faced by New Yorkers was the main reason. Going back to 1977, New York State has ranked first or second in the country for its state-local tax burden compared with all other locales in the U.S. An illustration of the effect of high taxes on migration is found in 2004. This was the year in which the tax burden for New Yorkers peaked; the following year saw a peak in departures, at more than 250,000. This year we are faced with an even higher peak in the tax burden. It will be interesting to see what happens to our population next year.

Proving that behavior is altered based upon such incentives, a recent tax case was won by a hedge fund titan who avoided $27 million in city taxes after proving to New York’s tax court that he spent more than half of his nights outside of the Big Apple. In the upside-down world of tax law, where citizens are guilty until they can prove their whereabouts, it’s a rare taxpayer victory. The victory was won due to a meticulous assistant who kept a computer calendar so precisely that she even counted as a day in New York one evening when her boss crossed the George Washington Bridge at 11:45 p.m. and entered the city.

That a man who has so much would be willing to subject himself to such a trial, and put himself under such surveillance by his office staff, tells us something about the tax burdens that have become a fact of life in so much of America. New York City and surrounding locales would be served well if they tried harder to encourage people and businesses to locate here and devoted fewer resources punishing those who do.