by Chris Jones, Vice President for Research, RPA
The following essay is the second in a series of background pieces prepared for the 15th Annual Regional Assembly, to be held on Friday, April 29 at the Waldorf-Astoria in New York City. The Assembly, "Beyond Red and Blue: The Tri-State Region in a Changing National Context," will focus on the Tri-State Region's relationship with the nation in the wake of the 2004 presidential elections.
The effects of national fiscal policy on New York, New Jersey and Connecticut are pervasive, even beyond the obvious impacts of tax policies that send over $250 billion to the federal government each year and federal expenditures on which both state and local governments have come to depend. National deficits and monetary policy have a large impact on the borrowing costs of states, towns, cities and authorities that have escalating piles of debt. Key industries from Wall Street to pharmaceuticals can boom or bust as a result of budget decisions made in Washington. Even state and local tax codes are often so tightly intertwined with federal codes that changes in national regulations will have an immediate effect on the balance sheet of other units of government.
What Does Washington Have In Store?
The November elections have triggered a slew of far-reaching proposals that could fundamentally change the way the nation taxes its citizens and pays for entitlement programs. While Social Security currently dominates the domestic policy debate, several other proposals could have even more profound implications for the economic and fiscal health of the region. All of these require intense scrutiny for their impact on U.S. fiscal stability, fairness and economic growth. In addition, as indicated in the examples below, they would also have an impact on which parts of the country have the most to gain or lose.
State and local tax deductions and the alternative minimum tax: Deductions for state and local taxes largely benefit high-income states, to the tune of $64 billion in 2002 for New York, New Jersey and Connecticut. Proposals to eliminate these deductions have been floated and could well be part of a package of reforms that emerges later this year. Meanwhile, the alternative minimum tax, originally intended to require a small percentage of the very wealthy to escape paying little or no taxes, is becoming a middle-class tax that disproportionately affects taxpayers who deduct state and local taxes. The number of taxpayers affected could rise from 1 million in 1999 to 36 million in 2010. There will be increasing pressure to reform this tax, but the budget implications would be substantial.
National sales tax: A more radical proposal would institute a national sales or consumption tax as either a full or partial replacement of the income tax. Proponents claim that it would increase the nation's low savings rate while opponents argue that it would be far more regressive than the income tax and that the impact on savings is greatly exaggerated. In theory, it might reduce the amount of tax revenue flowing from the region to Washington for this reason. However, a change of this magnitude would have far-reaching implications, and the impact on geographic winners and losers is difficult to predict.
Medicaid and entitlement caps: The cost of several entitlement programs, such as Medicaid and Unemployment Insurance, are shared by federal and state governments. The President's current budget proposal contains substantial cuts in entitlements, and several proposals have been made in Congress to place a cap on the federal contribution to some or all of these programs. Medicaid in particular is a huge issue in all three states, consuming a large and growing share of state budgets (and of New York City and county governments in the case of New York). Most of the heavy lifting for controlling costs needs to take place at the state level, but Washington will have an enormous impact through funding levels, formulas and incentives for state reforms.
Shifting the Mindset from Dependence to Interdependence
The magnitude of these proposals and their impact on the region call for an examination of both political and budget strategies. Yet a large reliance on the federal government combined with shrinking political influence in Washington has resulted in a largely defensive posture. In addition to thinking more broadly about levers of influence, it also requires an examination of how state and municipal fiscal policies might be changed to take advantage of national policy debates. A first step requires recognition of the region's contributions to the nation, as well as the region's need for federal resources.
The late Senator Daniel Patrick Moynihan never tired of pointing out that New York and most other Northeastern states received far fewer dollars from federal expenditures (including payments to individuals as well as grants, procurements and salaries) than they sent in tax revenue. A recent report by the Tax Foundation (Federal Tax Burdens by State, Sumeet Sagoo, December 2004) demonstrates that New York, New Jersey and Connecticut still hold the dubious honor of being among the leading "net contributors" to the federal government. In fact, New Jersey receives less per dollar of tax revenue (57 cents) than any other state. Connecticut is third (65 cents) and New York is ninth (80 cents).
However, while this is often portrayed as a geographic and political inequity, the real issue is not so much a question of fairness as it is of how to nurture the economic bond that benefits both the region and the nation. By and large, most of the imbalance between revenues and expenditures is the result of a progressive tax structure. Residents of the Tri-State Region generate more tax revenue than the average U.S. citizen because they have higher incomes. For example, in 2003 the average Connecticut tax payer paid $10,053 compared to $6,025 nationwide. On the expenditure side, the picture is mixed. Connecticut receives more than average per person--$6,570 versus $6,025--but not enough to make up for the difference in revenue. New Jersey receives one of the lowest per capita expenditures, $4,865, while New York is about average at $6,008. There are certainly reasons for states and localities in the region to complain about specific program allocations, but it is impossible to argue against wealthier states contributing more to the national budget without arguing against the fairness of progressive taxation.
Somewhat obscured by this accounting is the importance of the region to the national economy. High incomes are not only important for filling federal coffers. They also stem from a high productivity economy that serves a number of critical national functions, from centers of global financial transactions to concentrations of international media, arts and culture. With these functions come a number of demands that are disproportionate to those in other parts of the United States, including an expensive transit network that supports the urban density necessary for this high-value service economy, high security needs, and the need to assimilate the large, diverse immigrant population that is drawn to this job-rich metropolitan economy. A high cost of living and doing business also makes the health of this economy somewhat precarious. Providing the resources to address these needs should be a national as well as regional priority.
Fiscal and Political Implications
As always with issues of this size and complexity, it is far easier to point out problems than implement solutions. Coming up with effective answers will require extensive debate on a number of questions. On the political side, are there ways of creating more effective issue-based coalitions that go beyond the usual partisan or geographic alliances? There are many growing metropolitan areas in the South and West, in addition to those in "blue" coastal and Midwestern regions, that have increasing affluence and are beginning to face similar problems of financing infrastructure and assimilating growing immigrant populations.
Internally, are there state and local reforms that can either help shape national policy or take advantage of new or proposed policies? Medicaid is certainly a candidate for an issue where state and federal reforms need to be in sync. Amtrak and interstate high speed rail is an area where Northeastern states could fill a void in funding and leadership on the federal level. The alignment of state and city tax codes with the federal government is also a topic that may require some fresh thinking.
The region has a long history of enacting reforms that led the way to national policies, from infrastructure investments like the Erie Canal to labor and social welfare reforms enacted in the early 20th Century. In the current climate, it is even more important to try and devise proactive, rather than reactive, fiscal and political strategies.
The following essay is the second in a series of background pieces prepared for the 15th Annual Regional Assembly, to be held on Friday, April 29 at the Waldorf-Astoria in New York City. The Assembly, "Beyond Red and Blue: The Tri-State Region in a Changing National Context," will focus on the Tri-State Region's relationship with the nation in the wake of the 2004 presidential elections.
The effects of national fiscal policy on New York, New Jersey and Connecticut are pervasive, even beyond the obvious impacts of tax policies that send over $250 billion to the federal government each year and federal expenditures on which both state and local governments have come to depend. National deficits and monetary policy have a large impact on the borrowing costs of states, towns, cities and authorities that have escalating piles of debt. Key industries from Wall Street to pharmaceuticals can boom or bust as a result of budget decisions made in Washington. Even state and local tax codes are often so tightly intertwined with federal codes that changes in national regulations will have an immediate effect on the balance sheet of other units of government.
What Does Washington Have In Store?
The November elections have triggered a slew of far-reaching proposals that could fundamentally change the way the nation taxes its citizens and pays for entitlement programs. While Social Security currently dominates the domestic policy debate, several other proposals could have even more profound implications for the economic and fiscal health of the region. All of these require intense scrutiny for their impact on U.S. fiscal stability, fairness and economic growth. In addition, as indicated in the examples below, they would also have an impact on which parts of the country have the most to gain or lose.
State and local tax deductions and the alternative minimum tax: Deductions for state and local taxes largely benefit high-income states, to the tune of $64 billion in 2002 for New York, New Jersey and Connecticut. Proposals to eliminate these deductions have been floated and could well be part of a package of reforms that emerges later this year. Meanwhile, the alternative minimum tax, originally intended to require a small percentage of the very wealthy to escape paying little or no taxes, is becoming a middle-class tax that disproportionately affects taxpayers who deduct state and local taxes. The number of taxpayers affected could rise from 1 million in 1999 to 36 million in 2010. There will be increasing pressure to reform this tax, but the budget implications would be substantial.
National sales tax: A more radical proposal would institute a national sales or consumption tax as either a full or partial replacement of the income tax. Proponents claim that it would increase the nation's low savings rate while opponents argue that it would be far more regressive than the income tax and that the impact on savings is greatly exaggerated. In theory, it might reduce the amount of tax revenue flowing from the region to Washington for this reason. However, a change of this magnitude would have far-reaching implications, and the impact on geographic winners and losers is difficult to predict.
Medicaid and entitlement caps: The cost of several entitlement programs, such as Medicaid and Unemployment Insurance, are shared by federal and state governments. The President's current budget proposal contains substantial cuts in entitlements, and several proposals have been made in Congress to place a cap on the federal contribution to some or all of these programs. Medicaid in particular is a huge issue in all three states, consuming a large and growing share of state budgets (and of New York City and county governments in the case of New York). Most of the heavy lifting for controlling costs needs to take place at the state level, but Washington will have an enormous impact through funding levels, formulas and incentives for state reforms.
Shifting the Mindset from Dependence to Interdependence
The magnitude of these proposals and their impact on the region call for an examination of both political and budget strategies. Yet a large reliance on the federal government combined with shrinking political influence in Washington has resulted in a largely defensive posture. In addition to thinking more broadly about levers of influence, it also requires an examination of how state and municipal fiscal policies might be changed to take advantage of national policy debates. A first step requires recognition of the region's contributions to the nation, as well as the region's need for federal resources.
The late Senator Daniel Patrick Moynihan never tired of pointing out that New York and most other Northeastern states received far fewer dollars from federal expenditures (including payments to individuals as well as grants, procurements and salaries) than they sent in tax revenue. A recent report by the Tax Foundation (Federal Tax Burdens by State, Sumeet Sagoo, December 2004) demonstrates that New York, New Jersey and Connecticut still hold the dubious honor of being among the leading "net contributors" to the federal government. In fact, New Jersey receives less per dollar of tax revenue (57 cents) than any other state. Connecticut is third (65 cents) and New York is ninth (80 cents).
However, while this is often portrayed as a geographic and political inequity, the real issue is not so much a question of fairness as it is of how to nurture the economic bond that benefits both the region and the nation. By and large, most of the imbalance between revenues and expenditures is the result of a progressive tax structure. Residents of the Tri-State Region generate more tax revenue than the average U.S. citizen because they have higher incomes. For example, in 2003 the average Connecticut tax payer paid $10,053 compared to $6,025 nationwide. On the expenditure side, the picture is mixed. Connecticut receives more than average per person--$6,570 versus $6,025--but not enough to make up for the difference in revenue. New Jersey receives one of the lowest per capita expenditures, $4,865, while New York is about average at $6,008. There are certainly reasons for states and localities in the region to complain about specific program allocations, but it is impossible to argue against wealthier states contributing more to the national budget without arguing against the fairness of progressive taxation.
Somewhat obscured by this accounting is the importance of the region to the national economy. High incomes are not only important for filling federal coffers. They also stem from a high productivity economy that serves a number of critical national functions, from centers of global financial transactions to concentrations of international media, arts and culture. With these functions come a number of demands that are disproportionate to those in other parts of the United States, including an expensive transit network that supports the urban density necessary for this high-value service economy, high security needs, and the need to assimilate the large, diverse immigrant population that is drawn to this job-rich metropolitan economy. A high cost of living and doing business also makes the health of this economy somewhat precarious. Providing the resources to address these needs should be a national as well as regional priority.
Fiscal and Political Implications
As always with issues of this size and complexity, it is far easier to point out problems than implement solutions. Coming up with effective answers will require extensive debate on a number of questions. On the political side, are there ways of creating more effective issue-based coalitions that go beyond the usual partisan or geographic alliances? There are many growing metropolitan areas in the South and West, in addition to those in "blue" coastal and Midwestern regions, that have increasing affluence and are beginning to face similar problems of financing infrastructure and assimilating growing immigrant populations.
Internally, are there state and local reforms that can either help shape national policy or take advantage of new or proposed policies? Medicaid is certainly a candidate for an issue where state and federal reforms need to be in sync. Amtrak and interstate high speed rail is an area where Northeastern states could fill a void in funding and leadership on the federal level. The alignment of state and city tax codes with the federal government is also a topic that may require some fresh thinking.
The region has a long history of enacting reforms that led the way to national policies, from infrastructure investments like the Erie Canal to labor and social welfare reforms enacted in the early 20th Century. In the current climate, it is even more important to try and devise proactive, rather than reactive, fiscal and political strategies.
@RegionalPlan