The Politics of Taxe$

By Robert A. Fois
Empire State Report

Pataki's tax cuts have spurred a new state of mind when it comes to  fiscal politics - but detractors on both sides are questioning whether some of  it might just be a shell game.

The new millenium began with Governor George Pataki condemned by  fiscal conservatives for a 55 cent increase in the tobacco tax. Health experts  praise the measure but fiscal watchdogs predict a ballooning "local share" of  HCRA 2000 to counties.

It was an untypical movie for a Governor who has cut taxes 48 times  since 1995, a notable reversal from prior administrations. Pataki has saved  New Yorkers $28 billion dollars, $18 billion alone in income tax cuts.  Democrats claim not enough of that tax relief goes to the middle class, demanding  more taxes pulled from upper income brackets. Pataki can boast of cutting  business taxes 30 times but Democrats counter again that those cuts don't trickle  to consumers.

Assemblyman John Flanagan, Jr. (R-Northport) believes Pataki has led  a change in fiscal thinking. "A lot of the focus of the discussion in Albany now  is different than it was 6-8 years ago. There appears to be much more  emphasis on taxes and how we reduce them, than what we are going to do to meet our  spending needs"

However, the shift in thinking has also caused a shift in funding,  causing numerous headaches for counties and cities.

"You can't have cuts at the state level and taxes at the same time  ­ and not support through direct revenue sharing your urban cores." warns  Buffalo Mayor Anthony Masiello. "Tax policy also includes how do you keep your  property taxes down. Without doing that in core areas, we're not going to attract  business here or keep the existing busineses we have,"

"We have seen reductions in the state income taxes and we have seen reductions in corporate taxes - but with the exception of the STAR  program, we have not seen a lot of assistance as it relates to other property taxes,  whether you're upstate or downstate." says Edward Farrell, Executive Director of  the New York State Conference of Mayors and Municipal Officials, "To get the  state exemption, you have to be a homeowner and the people who live in cities,  the majority of which don't get STAR assistance - they're not homeowners."

Republicans could be facing a fight to maintain the integrity of  Governor Pataki's School Tax Relief (STAR) program with the first attack coming  from the New York State School Boards Association, which called on the  Legislature to reject amendments to STAR concerning direct rebates to homeowners and  caps on school budgets.

"Everyday, I walk down the street in my district and a senior citizen  comes up and gives me a hug and says thank you and says thank you to the  Governor. It's been very successful," says State Senator Tom W. Libous  (R-Binghamton) but not every pronouncement about STAR has been positive.

"If you want to reduce property taxes, then the way to do it is  across the board through revenue sharing. Not through a gimmicky STAR which gives  more tax relief to the New York City suburbs than the rest of the state - which  is designed really to undercut the school aid formula." complains Frank  Mauro of the Fiscal Policy Institute, "STAR is a way to shift huge amounts of  school aid to the suburbs - that you could not do through any legitimate school aid  formula."

One lawmaker who disagrees with Mauro is Assemblyman Richard Brodsky (D-Greenburgh), a Democrat from suburban Westchester County.

"In my district, enhanced star is worth an average of $2,400 per   household" explained Brodsky. He supports direct rebates of STAR payments and goes  one step further, proposing that STAR be extended to local and county taxes, "In Greenburgh, where I'm from, town taxes and county taxes have gone up dramatically. Since the towns and the counties obviously can't control  their taxes, if the state has the revenue for tax cuts, that's where it ought  to go. To the property taxpayer".

Brodsky joined a contingent of downstate Democrats who upstaged  Republicans over the commuter tax last year. During a special election in Rockland  County, GOP leaders suggested repealing the temporary tax, never expecting  Democrats to bite at the idea.

Pat Lynch, Press Secretary for Assembly Speaker Sheldon Silver says  Assembly Democrats didn't hesitate, " It was time to do something for the  suburban folks. Everyone assumed that Shelly would never do it. And we said, you know  what? There's a surplus in the city. Giuliani's got his own tax package.  Vallone has his own tax package. City coiffures aren't being hurt. It's time to do  something for the suburban guys and gals. And that's why it got done."

Matt Maguire, Director of Communications for The Business Council of  New York State commends the state legislature for New York's historic shift away  from taxing. "Let's give the Democrats credit. All the historic tax cuts that  have been passed since Governor Pataki took office - Every single tax that  was passed, was passed by, negotiated by, endorsed enthusiastically by a  Democratic Assembly. They're equal partners and deserve equal credit."

State Senate Republicans countered with the full elimination of the  Gross Receipts Tax on energy. The Senate Majority plan - worth $710 million in  tax savings to residential and business energy customers - would eliminate  the 3.25 percent tax over three years, and provide annual average savings of $83  for residential electric and gas customers, rising to an average of $4,600  for the average industrial user. Pataki's GRT cut on utility services and telecommunications would only save taxpayers $440 million on their bills  when fully implemented.

"I think its beginning to send a signal that New York State means to  be more competitive." says Masiello. "I can tell you as an upstate Mayor that   taxes and the cost of doing business in New York is an issue that has to be dealt   with New York if you want to create a better business climate in New York. In   cities that still have a strong industrial base, that's significant. - because the   business leaders that I talk to that are involved in industry and manufacturing,   utility costs are the biggest obstacle."

"We're the only state in the union that taxes in the form of a GRT,  so that makes us anti-competitive." emphasizes Flanagan. " The removal of that   tax, I believe will stimulate the economy and potentially bring some other   companies in."

Pat Lynch said that the Assembly Speaker will seek to reduce energy  costs by 20-25% and that the GRT repeal is not enough, only delivering an 8-9%  drop. "He is not closing the door on it - but it cannot be the only component to  reducing rates upstate." according to Lynch, "He wants the utility companies to   kick in as well."

Mayor William Johnson of Rochester believes the GRT repeal has  "ominous implications". His city levies their own GRT that generates $10-million   annually in revenue. "It would be very difficult for us or any other municipality  to maintain a GRT, if the state tax has been eliminated."

Lynch stresses that a tax cut alone would not satisfy the Speaker  "That is not his philosophy when he looks at the politics of tax cuts. Tax cuts  need to be targeted to job creation and to job retention. If we as a state,  through our Empire State Development Corporation, have not been able to take  advantage of the national resurgence, it's the state's economic policies that have  failed."

"Tax cuts are one part of the equation to attract and retain  industry. You need to have a hospitable business climate. You need to promote the  resources of the state. You need to aggressively search out and bring companies here,  not just in the United States but all over." adds Lynch in detailing the  Speaker's plans. "I would think he would be looking for accountability, not from  the corporations, but from the state in its economic development policies."

"New York State has a long-standing reputation for imposing taxes  that are far above the national average at all levels." explained Maguire, "A   dramatic step like repeal of the GRT sends a very powerful message to the rest of   the country, in particular to our competing states that New York State is   serious about getting its taxes under control."

Another perception that poisons political wells - is that upstate  communities don't receive as much as downstate suburbs. "I would say its a battle  between the New York City suburbs and the rest of the state," claims Frank Mauro  but Richard Brodsky knows the numbers say otherwise.

"It's the downstate communities that are subsidizing the upstate  communities in terms of state taxes and state revenues," Brodsky argues. Though he acknowledges upstate communities have not felt the recovery, he points  out that they receive far more percentage-wise in school funding, "Upstate  taxpayers receive back in state benefits much more than they pay in."

In the town of Norwich, population 7,900, Supervisor Adolph Charino  is realistic about his share of state funding. "When you're talking about Westchester County or Suffolk County and you see them getting 30 and 40  and 50 and 60 times what you're getting, a hundred times what you're getting,  you think you're getting the raw end of the deal. But then you don't realize the population is that much greater," notes Charino "We don't at times. We  just see that Chenango County is going to get a 100,000 and Westchester 450,000,  for example. I don't think we get shorted that much."

Buffalo Mayor Masiello doesn't mince words about what his city needs  to spur economic development. "There has to be an agenda that deals with helping  the upstate cities - because of their weak tax base"

"What good is it if the county government reduces taxes, the state   government reduces taxes, and then the municipalities that are the poorest; like   Buffalo, Rochester, Syracuse and Albany have to raise property taxes. To me,   that's counter productive for any business investment in upstate New York."

Ed Farrell and others note that for all the taxes that have been cut,  a bill still ends up getting sent to someone else. "For the taxpayer, whether  you take it out of your right hand pocket or your left-hand pocket, if you're  paying the same amount, it's somewhat irrelevant - But for the legislature and  Governor, they get the credit for cutting taxes."

Farrell asserts that county governments are causing additional  damage. "The county governments have not raised taxes in recent years and many of  whom have actually lowered taxes. The same is not true in cities. Cities have been  spending at or below the rate of inflation, yet taxes in cities continue  to escalate. So when the county gives away the sales tax for those counties  that share it with local governments, they're also giving away the city  share."

Ken Crannell, Director of Intergovernmental Affairs for the New York  State Association of Counties insists that counties have trimmed, made the  tough choices, implementing cost-effective management and structural changes.  Crannell says Albany should pay for what Albany wants. "The base of this is that  the level of government that decides what programs, decides what level  programs should be funded at, decides who is served by a program - should be  responsible for paying for it fully."

"The relationship between the state and the county is that the  Governor and the Legislature can enact essentially any enhancement of a service or  program they would like - and counties will pick up a portion of the cost."  added Crannell "It's like having a credit card - where you only pay 24% of the  bill."

Rochester Mayor William Johnson, a self-described progressive to  liberal Democrat, has struggled to nurture the city's industrial core.  Downsizing by companies like Bausch & Lomb has been matched by what Johnson  describes as a "durable" job market in Rochester but he will not connect the  availability of jobs to Pataki's corporate tax relief. Challenges to assessment by these  same corporations have further eroded an already weak tax base and Johnson is  decidedly bitter about Rochester's plight.

"We have the highest tax rate of any municipality in Monroe County.  We got the poorest taxpayers. We cannot afford to put anymore stress on these taxpayers," warned Johnson. "Those with choices are just going to move  out of the city."

"It is not inappropriate for us to lobby the state for an additional   increase in state aid," Johnson firmly argued, "We don't have many non-recurring expenses. We need to be able to count on this aid. We don't need to be   forced to go to Albany every year with a tin cup in our hand, just to keep pace   where we were in the previous year."

Though far more supportive of the Governor's tax remedies than  Johnson, Syracuse Mayor Ray Bernardi expresses the same fears about the growing  urban tax crunch, "I think its no secret to anyone that the difficulty we have in  upstate New York but throughout this entire state is that our property taxes  here are higher in comparison to other states - with properties of equal dollar  value. I don't care if you go to North Carolina, whether you go to Florida or  Texas, even as close as Ohio."

Assembly Speaker Sheldon Silver pulled no punches in his response to  the Governor's State of the State address, "Those of us who have watched our   college graduates leave the state for better opportunities elsewhere want to   know: Will the good jobs be here when our children complete their education? If you   work on Wall Street, the answer is yes. But if you live in Schenectady, Utica,   Syracuse or Rochester, Buffalo or the Bronx, the answer is less certain."

One lawmaker who has seen Pataki's policies work is Assemblyman  Patrick Manning (R-Hopewell Junction) from Dutchess County.

"The day after he won the election, he called Lou Gerstner - and that   started the relationship." Manning explains, "The message he sent when he called  the next day and said SIBM has a place in New York`, I think sent a   message to all corporate heads. And if you don't deal with the corporate heads as well  as the small business community concurrently, then you're a fool. The Governor   has done both."

The "trickle down" has worked in the Mid-Hudson valley. 7,000 new  jobs have been created since 1994. "We have been the beneficiary, not just of tax   cuts but the targeted economic development plans that have been available." says  Manning, "I'm happy he's courted the corporate giants as much as he courted the  small business because without the corporate giants, we would have lost   thousands of jobs."

"If Lou Gerstner and IBM didn't believe George Pataki had a firm  control, it would be in Texas, or it would be anywhere but New York - but who would  ever think New York would be in the running for anything?" adds Manning,

Another place where Pataki's tax policies have worked is Broome  County. State Senator Tom Libous directly attributes Broome's economic growth to  corporate tax relief.

"I'll take Pataki's upstate New York over Cuomo's upstate New York.  The upstate New York of Mario Cuomo was just devastating. We were losing  thousands of jobs." explains Libous, noting how Pataki's economic development  packages have attracted high technology to the Southern Tier, "Upstate New York  depended so much on farming and it depended on manufacturing. Farms have  disappeared and manufacturing is disappearing. I think technology is the next place we  have to be."

Pataki's income tax cuts translated into increased revenue but this  paradigm shift has doubters.

"The income tax cuts don't really benefit the upstate economies very   much." observes Frank Mauro, "What Pataki ran on in 1994 was basically a   misleading promise for the upstate economy. He basically promised that the cuts in   the income tax would lead to a booming of the upstate economy and logically   that doesn't wash."

"The overwhelming bulk of the Republican tax cuts always goes to the  top 1% of taxpayers." Says Richard Brodsky (D-Greenburgh) "I think its clear  that the tax breaks that have gone to big corporations haven't been used to  improve the lives of New Yorkers. They've gone to increase the bottom line of a  corporation that has stockholders all over the world."

But Syracuse Mayor Roy Bernardi defends Pataki's tax-cutting  principles. "As you reduce taxes, you not only entice business to stay but you bring  more business in and people expand your operations - As you expand their  operations, you have more people that are contributing to your revenue source  through taxation -Albeit, it's spread-out and I think that's what the Governor  is accomplishing here, is to spread that base out."

Frank Mauro complains that all the growth has gone into tax cuts.

"He's not using the resources from Wall Street's boom intelligently,"   Mauro warns, "If you have this windfall coming in from Wall Street doing well,   don't think its going to last forever and change your permanent tax system on   that. Those resources should be invested in ways that make it possible for   people to move up the socio-economic ladder"

Mauro warns of impending disaster from a Wall Street slowdown but  Matt Maguire believes Mauro's think-tank is one-sided, "The Fiscal Policy  Institute gets its funding from unions and in particular, from employee unions -  They don't want to see spending go down."

Another problem finally being dealt with by the Governor is debt  reform. According to a Moody's Investors Service report, 1999 State Debt  Medians, New York's debt ranks among the top four of all states in two measures of tax-supported debt burden: Only Connecticut, Hawaii and Massachusetts  have heavier debt loads per person ($1986/person - 3 times the national  average) and tax-supported debt as a percentage of personal income (6.6% - two times  the average level of all states).

Patrick Manning (R-Hopewell Junction) underlines what is at stake  with New York's penchant for borrowing, "Over three billion dollars in interest  we pay will never educate a child, will never pave a road, will never come back  to tax cuts, will never help someone in need."

John Flanagan (R-Northport) describes the reliance on borrowing as a "proverbial structural imbalance" but it has been State Comptroller Carl  McCall, not the Governor, who has seized on the issue. Pataki's debt reform  package closely mirrors McCall's prior proposals.

"Albany has an insatiable appetite for spending and borrowing." notes   Flanagan, agreeing it is a hidden tax. "It's not a sexy front page   issue. It's critically important but it doesn't draw headlines."

Frank Mauro blames Pataki's over zealous tax cutting for the debt  imbalance, pointing to tax revenues that have been flat at approximately 35-36  billion for the past five years.

"Why has debt service gone up? Debt service has gone because there is  more borrowing. And why has borrowing gone up? Because we're paying for less  of our capital program on a pay as you go basis. Why can't we pay for as much  of out capital program on a pay as you go basis as we used to. It's because we  cut tax revenues by nine billion dollars"

Flanagan disagrees with Mauro, emphasizing the long-benefits, "If we  knock off 500 million dollars on our debt this year, over the long term, I  think we save over a billion and a half. That's something we can do now."

The harshest criticism against Governor Pataki came from Change-NY  President Tom Carroll, who detailed what he considered Pataki's shift to the left  in a New York Post editorial. Fiscal conservatives remain unhappy with the  Governor and there is a sense they shall remain skeptical until his latest tax  reforms are agreed upon in the state legislature.

"If they're not happy, then they're greedy" Frank Mauro exclaims   "They can't deny that there have been nine billion dollars of annual tax cuts and  three billion more to come. If they're unhappy, they're being ungrateful."

Matt Maguire has a more patient assessment "It took New York State  decades to tax its way into this reputation of being a high tax state, a deserved reputation. It's not going to go away with 1 or 2 rounds of tax cuts,  especially not before being fully phased in."