By JAMES PARROTT
First published: Tuesday, January 27, 2009

Both fairness and sound economics should play a role in closing New York’s budget gap.
Gov. David Paterson’s budget proposal shows that the top 5 percent of New York taxpayers had 59 percent of all income in the state in 2006. That’s one and a half times the combined income of everyone else. However, if you put this together with the income numbers from 2002, and with the budget’s projections for 2009, a curious picture emerges.

Even allowing for some slippage in high incomes in the recession, all of the income growth between 2002 and 2009 will go to the wealthiest 5 percent. The other 95 percent of households taken together will have about the same income this year as in 2002 (and that’s without adjusting for inflation.) The incomes of the top 5 percent will have doubled over that period. That’s a $200 billion income gain.

That’s a staggering set of figures, even to those of us who have been shining a spotlight on income polarization for years. No income growth for 95 percent, double for a handful.

This picture is particularly curious because, when it comes to tightening our belts in the recession, the governor’s budget has all of the tightening done by the 95 percent, sparing the one in 20 at the very top of New York’s economic pyramid.

The economic carnage hits harder at those with modest incomes and those losing their homes and/or jobs and/or retirement savings than at those whose incomes may fall from $3 million to $2 million.

Asking the top 5 percent — or maybe just the top 3.5 percent with incomes over $250,000 — to pay a slightly higher rate on their state income taxes seems like a reasonable way to share the sacrifice that’s being exacted by a damaged economy and a tighter budget.

It would also be a step in the direction of restoring fairness to New York’s graduated income tax, which has become significantly less graduated over the years. Today, New York’s middle- and lower-income households pay a higher share of their incomes in state and local taxes than the top 1 percent or top 5 percent.

Will higher earners desert New York if their taxes are raised? They didn’t after 2003 when the state (and New York City) instituted higher tax brackets at the top. (Those increases expired in 2005.)

Similarly, a Princeton University study showed that an increase in New Jersey’s top income tax rate in 2004 did not adversely affect the number of high earners choosing to live there.

There is a very good chance that President Barack Obama’s stimulus package will include significant fiscal relief to New York and all states. However, federal aid alone will not stave off all of the proposed service cuts that could worsen the New York economy.

The state needs to do its share as well. One hundred and twenty economists from across the state wrote to the governor last month telling him the right answer: “economic theory and historical experience (shows) it is economically preferable to raise taxes on those with high incomes than to cut state expenditures.” New York, which unlike the federal government has to balance its budget, doesn’t have a perfect set of choices. In a recession, it’s not ideal either to raise taxes or to cut services. But high earners typically spend only a fraction of their income in any given year, saving the rest. On the other hand, state spending employs workers, provides services and puts money in the hands of New Yorkers in need — all of which put money in circulation, priming the economic pump.

The Legislature should use any federal aid to trim the proposed budget cuts as much as possible. That’s the idea behind the stimulus. To further trim the remainder, we should modestly raise taxes, restoring progressivity to the state’s graduated income tax, and minimizing harm to an already damaged economy.

James Parrott is the deputy director and chief economist of the Fiscal Policy Institute.

Tax burdens
by income group

Bottom 20%: 12.5%
Second 20%: 11.3%
Middle 20%: 11.6%
Fourth 20%: 11.1%
Next 15%: 10.2%
Next 4%: 8.4%
Top 1%: 6.5%

Source: Institute on Taxation & Economic Policy.

Tax burdens, by income group

Less affluent New Yorkers pay a notably higher portion of their income in taxes than the top earners do, thanks to the state’s regressive tax structure.
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