ALBANYProjected shortfalls in state tax revenues produced by New York's recession are already producing calls for higher taxes to boost state revenues. But that strategy will backfire, and New York's experience in its last major recession proves it, according to a new report from The Public Policy Institute.
Higher state taxes enacted during the early 1990s to boost state revenues drove jobs out of the state and drove revenues down, said It Didn't Work The Last Time, a report released today by The Public Policy Institute, the research affiliate of The Business Council. The full report is available in PDF
In fact, during both the recession of the early 1990s and the recovery that began in 1994, the paper said, taxes and revenues were shown to be inversely related: Just as tax increases in the recession suppressed revenues, the tax cuts begun in 1994 fostered economic growth that produced dramatic increases in state revenues.
New York's current downturn: New York lost 51,000 private-sector jobs in the 12-month period ending in October 2001, with a noticeable year-long decline in manufacturing and other sectors compounded by the Sept. 11 atrocity, the paper noted.
This downturn will produce a significant shortfall in state tax revenues, state officials have said. Although the state is still projecting a $1 billion surplus in the current fiscal year, significant revenue shortfalls are predicted for the next fiscal year, and the Pataki administration has already announced a refinancing of state debt, a partial hiring freeze, and other cost-cutting steps.
"Some voices - an editorial page here, a spending lobby there - are already calling for new taxes or the deferral of tax reductions that are scheduled to occur in 2002," the paper said. "But that would only make our fundamental problem - the weakness in our economy - even worse."
How higher taxes backfired the last time: In 1987, Gov. Mario Cuomo and the state Legislature enacted a multi-year tax cut as part of a long-term effort to make New York's tax code more competitive with other states'. But after a faltering economy weakened tax collections in 1989, It Didn't Work The Last Time noted, lawmakers deferred some planned tax cuts and enacted some new tax hikes, including a new 15 percent business surcharge.
This misstep had serious consequences, the paper noted.
"What had begun as a relatively mild downturn turned into the worst employment disaster since the Great Depression -- nearly 275,000 private-sector jobs eliminated in 1991, and another 80,000 the following year," the paper said.
"The Empire State continued to lose valuable jobs more than a year after most other states were on the rebound; companies investing in the recovery simply put more of their growth in states that had not raised the cost of doing business during the recession."
The 1990 tax increases intended to boost revenues actually produced a decline in revenues of $130 million over the previous year's total on a cash basis, the paper noted.
What's more, a dangerous precedent was set, the paper added: "The broken promises of 1990 seemed to make it easier for state leaders to repeatedly ignore their commitment to taxpayers," the paper added. "The personal income tax cuts that had been planned for 1990 were delayed again in 1991, yet again in 1992, and still again in 1993 and 1994.
How tax cuts helped reverse the downturn: Beginning in 1994, New York reversed course. The scheduled phaseout of the corporate tax surcharge finally took place, and Governor Pataki and state lawmakers began a historic seven-year run of tax cuts that totaled more than $8 billion.
As a result of the tax cuts, the paper noted, businesses added hundreds of thousands of jobs. The state's job-growth rate caught up with the nation's and, in 1999 and 2000, passed it. New opportunities blossomed for both highly paid individuals and entry-level workers, and poverty fall sharply, from 16.6 percent in 1996 to 13.8 percent in 2000.
These lower tax rates were producing higher state revenues - a reversal of the high-tax, reduced-revenue experience of the early 1990s, the paper added.
"In a virtuous cycle, the economic growth that had been brought about partly by lower taxes produced ever-greater revenue for important state services," It Didn't Work The Last Time said.
Tax cuts scheduled to take effect in 2002 include: a further reduction in the energy gross receipts tax for residential and consumer ratepayers; a reduction in bank and insurance tax rates; an expansion of the earned income tax credit; creation of a deduction for college tuition; and a reduction in the state marriage penalty tax.
"The main threat to a brighter future for working New Yorkers is the prospect that we could repeat the mistakes made in an earlier era," the paper said. "Deferring tax cuts and raising taxes didn't help the last time. Why would they this time?"