January 25, 2000. The Fiscal Policy Institute’s annual budget briefing:

  • State government has begun to address one of New York’s most glaring social disparities (the large and growing number of New Yorkers without health insurance), and it has begun investing in several other areas in which there are significant social investment gaps (such as child care). Unfortunately, it continues to miss the opportunity to use the surpluses generated by the boom on Wall Street and several other factors to do more in these areas, to begin addressing the state’s numerous other unmet social and infrastructure investment needs, and to put its fiscal house in order.
  • Rather than contributing to the current surpluses, the large, multi-year, backloaded tax cuts of the last six years, have been financed in large part by the revenues that the state is receiving from the boom on Wall Street. Other factors that have assisted the state in balancing its budgets in the face of these seemingly unaffordable tax cuts include -real cutbacks in current services and increases in tuition and other fees, -the shifting of a variety of costs to local governments, -the stalling of the effort to ramp back up the portion of capital spending paid for on a pay-as-you go basis rather than through borrowing, -the fiscal relief generated by the federal government’s conversion of welfare assistance to a block grant combined with substantial declines in caseloads, and -the revenues from the tobacco settlement.
  • Since 1994, New York State has been doing much better in income growth than in employment growth. While the growth in personal income, as reported by the U.S. Bureau of Economic Analysis (BEA), has not returned to the rates attained during the 1980s, every year since 1994 has witnessed growth on this measure of between 4.3% and 5.8%. Moreover, capital gains income, which is not included in the BEA measure of personal income, has shown phenomenal growth in New York State, more than quadrupling from $12 billion in 1994 to $49.3 billion in 1999, according to NYS Division of the Budget estimates.
  • This helps to explain why the State Treasury is doing well despite the fact that employment growth has averaged less than 1.4% over the last five years, well below the rate of growth during the five-year heyday of the 1980s recovery. In fact, personal income tax receipts have grown by over $5.5 billion in the last two years, helping to offset the $3.3 billion in additional annual tax cuts phased-in over this period, and the first increases in current services spending in four years.
  • This briefing will examine the relationships that exist between recent economic trends and the state’s fiscal situation, as well as the factors that are resulting in increasing disparities between those at the top of the socioeconomic ladder and both the middle class and the working poor. This will be followed by a discussion of the nature of New York’s income inequality and the steps that state government can take to improve the economic prospects of middle income and needier New Yorkers. The briefing will conclude with an examination of several key fiscal issues.

New York’s Economy at the End of the 1990s

  • New York’s recent economic recovery has been modest by historic standards.
  • The state’s growth has been concentrated in a few industries and in the downstate area.
  • Unemployment remains high in many parts of the state, including New York City’s outer boroughs.
  • New York State has benefitted from the extended bull market but it has become very dependent on Wall Street.
  • The benefits of the recent recovery have not been shared by all segments of the workforce.
  • New York has lost middle income jobs and gained jobs in sectors that pay less well.
  • A decline in the level of unionization and the erosion of the purchasing power of the minimum wage help to explain the declines experienced by many New York workers.

The 2000-2001 Executive Budget misses the opportunity to address the economic and social disparities that continue to plague New York State.

  • The most important challenge facing New York State is the increasing divergence that exists between the relatively small number of New Yorkers who are benefitting from the current economic recovery and the rest of the state’s residents.
  • Unlike Governor Pataki’s previous budget proposals, the 2000-01 Executive Budget does not propose to make it harder for New Yorkers to move up the socioeconomic ladder by proposing actual cute in Medicaid or the Tuition Assistance Program (TA). It does, however, make college less accessible for many families by failing to update the income parameters for determining TAP awards and by cutting funding for the state’s highly successful higher education opportunity programs (EOP, HEOP, SEEK and College Discovery). On the bright side, last month’s agreement to establish Family Health Plus bodes well for addressing one of the state’s most significant problems — the increasing number of New Yorkers who are without health insurance, both absolutely and relative to the nation as a whole.
  • The budget does little however, to reduce the increasing number of New Yorkers who are living in poverty or to reduce the disparities that exist within the state in terms of the educational resources available to New York children or to address the state’s substantial social investment gap. Leveling up school spending through a substantial increase and a fundamental restructuring of the school aid system will prepare New York for the future and provide more effective tax relief for all property owners than the STAR program could ever do.

A major new national study places New York’s increasing income inequality in comparative and historic perspective.

  • Pulling Apart: A State-by-State Analysis of Income Trends is a new analysis by the Center on Budget and Policy Priorities and the Economic Policy Institute – two Washington, DC-based research organizations. The report uses the latest Census Bureau data to measure pre-tax changes in real incomes among high-, middle- and low-income families in each of the fifty states at similar points in the business cycle — from the late 1970s to the late 1980s and from then until recently.
  • The report is based on an original analysis of before-tax income for families recorded by the Census Bureau’s March Current Population Survey. The analysis compares “pooled” data from the three most recent years available — 1996, 1997, and 1998 — to similarly pooled data from the late 1970s and late 1980s. Using pooled data rather than data collected within a single year enlarges the sample size, thus increasing precision.
  • Comparisons between the three time periods chosen are appropriate because they are similar points in the business cycle. (The late 1970s and late 1980s were the peaks of the previous two economic expansions and the late 1990s are the highest point of the current expansion for which state data are available.)

Income inequality continued to grow in most states in the 1990s, despite economic growth and tight labor markets.

  • In two-thirds of the states, the gap in incomes between the top 20 percent of families and the bottom 20 percent of families grew between the late 1980s and the late 1990s. In three-fourths of the states, income gaps between the top fifth and middle fifth of families grew over the last decade. By contrast, inequality declined in only three states.
  • Over the 1990s, the average real income of high-income families grew by 15 percent, while average income remained the same for the lowest-income families and grew by less than two percent for middle-income families.
  • Over the longer term — from the late 1970s to the late 1990s — income disparities between the high- and low-income families increased in all but four states. In 45 states, the gap between the average incomes of middle-income families and of the richest 20 percent of families expanded between the late 1970s and the late 1990s.

The results are dramatic and demand action. They cannot be explained away. Rather than trying to understand and address the causes and consequences of these trends, some critics are claiming that the results do not show a problem. Others are trying to explain away the results.

  • Explanation #1. Americans constantly move up and down the income scale so a gap between the top and the bottom is not a problem. The Reality: The ability of Americans to move up the income ladder has not increased as inequality has increased. Income inequality in the United States is greater than in other countries but mobility is no greater. Low-income families and individuals with less education have the lowest income mobility. Some 60 percent of families in the bottom fifth remain there 5 years later.
  • Explanation #2: It is not a problem that the rich are getting richer faster because everyone is doing better; all have shared in the growth in income and wealth. The poor are not really badly off. The Reality: In New York, as in many other states, the rich have gotten richer while the incomes of poor and middle class families have declined. The distribution of wealth in the United States is more unequal than the distribution of income. For example, a recent study found that, in 1995, the wealthiest 10 percent of the U.S. population held 88 percent to 92 percent of stocks and mutual funds, financial securities, trusts and business equity, while the remaining 90 percent of the population held less than 12 percent. Poor families face serious problems paying for housing and utilities, putting food on the table and obtaining health insurance. A recent Urban Institute survey found that half of the low-income families surveyed reported food-related problems; close to one-third reported difficulties paying their rent, mortgage or utility bills and some 37 percent of the low-income adults surveyed lacked health insurance.
  • Explanation #3. These results are before taxes and ignore non-cash benefits that low-income families receive. The Reality: All cash transfer payments are included in the Census data. In New York, as in other states, the exclusion of non-cash transfer payments (primarily, food stamps and housing subsidies) for low-income families is outweighed by the fact that the Census data also excludes Capital Gains ($36 billion for New York resident taxpayers in 1997, with 75% of that amount going to the 1.7% of taxpayers with incomes over $200,000 per year). The Congressional Budget Office analysis of income after federal taxes (including the refundable portion of the Earned Income Tax Credit) found the same pattern of growing inequality that is revealed by the Census data. While the inclusion of federal income taxes narrows the income gap, the inclusion of payroll taxes widens it. State and local taxes are not included in the Congressional Budget Office study but because virtually all state tax systems collect a larger share of the incomes of poor and middle-income families than of high-income families, their inclusion would serve to widen the after-tax income gap.
  • Explanation # 4. The widening of the income gap is the result of demographic changes such as smaller family sizes and is the natural result of differences in education, skills and work effort. The Reality: This analysis includes only families; thus it is not skewed by the inclusion of teenagers and other young single workers. The income gap is even greater among families with children than among all families. The Congressional Budget Office study of income inequality which adjusts for family size also shows a widening income gap. The income gap has also grown for families with similar amounts of education and within age groups.

There is much that state governments can do to push back against this trend. States can:

  • Restore the purchasing power of the minimum wage
  • Strengthen their unemployment insurance systems
  • Strengthen Social Safety Nets and provide key supports for low-wage workers
  • Stop the movement toward greater regressivity in state tax systems

Strengthen state unemployment insurance systems.

Unemployment insurance has become less effective at maintaining income than in the past because a smaller share of unemployed workers now receive unemployment insurance. In New York, in 1997, only 34% of unemployed workers received unemployment insurance. If the recipiency rate in 1996 had been as high as it was in 1970, roughly 125,000 more people would have received unemployment insurance. There are a number of options for modifying state rules that govern unemployment insurance that would expand coverage among low-wage workers.

States can:

  • Establish a “Moveable Base Period” for eligibility so that a person’s most recent earnings are considered in the determination of unemployment insurance benefits. (New York currently provides for a moveable base period.)
  • Revise eligibility rules to require a minimum number of hours to qualify for unemployment benefits rather than a minimum amount of earnings.
  • Broaden the definition of good cause for leaving work. (New York’s definition is broader than that of most states but could be improved by specifically listing additional reasons that can be considered good cause for leaving work.)
  • Include workers who are only available for part-time work as eligible for unemployment benefits. (New York currently allows this only if the unemployed worker was previously working part-time.)
  • Establish a dependent allowance that acknowledges the special needs of working parents by providing additional unemployment insurance payments to workers with children.

New York can strengthen its Social Safety Net and provide supports for low-wage workers to assist them in moving up the income ladder.

  • Liberalize the earned income disregard
  • Make affordable transportation options readily available
  • Establish transitional employment programs
  • Increase welfare grant levels
  • Faithfully implement the new Family Health Plus program and increase outreach for the Child Health Plus program
  • Improve the availability of affordable child care

Despite its high poverty rates and great wage and income inequality, New York maintains a regressive state-local tax system.

  • A progressive tax system is one in which the portion of a household’s income that goes to taxes increases as its income increases.
  • A regressive tax system is one in which that portion decreases as one’s income increases. In other words, a regressive tax system is one in which wealthy households pay a smaller share of their income in taxes than do lower income households.
  • A proportional tax system is one in which all households, regardless of their income levels, pay about the same portion of their incomes in taxes.
  • While it is interesting to note if an individual tax is regressive, proportional, or progressive, the more important question is whether the tax system as a whole is regressive, proportional, or progressive. For most states, the question is not whether or not the progressivity of its personal and corporate income taxes and its estate tax balance out the regressivity of its consumption, excise and property taxes.

New York needs better information on the impact of state tax changes.

  • In New York, as in most states, tax reductions and tax increases have been adopted without information or debate over the extent to which various income groups would benefit or be harmed by the proposed tax changes.
  • In order for state policymakers to fashion tax reforms which reduce after-tax inequality, they must have access to consistent, timely information about the distributional impact of their existing taxes. In addition, tax incidence information should be available during legislative debates over changes to the tax system. Periodic reports on the tax system as a whole should also be prepared and disseminated.
  • Minnesota has routinely produced such information. Texas and Maine recently established requirements for regular reports on the incidence of their tax systems.

Most of the new tax cuts proposed in the 2000-2001 Executive Budget are unlikely to improve the state’s economy.

  • Unlike the other tax cuts proposed in the Executive Budget, the elimination of the gross receipts tax on energy companies makes sense from a tax policy perspective. While a 3% reduction in the cost of energy, if all of the tax savings are passed on to consumers, will be a welcome break, such a change is very unlikely to have the miraculous effect on the economy that is being attributed to it by its advocates.
  • While the elimination of the gross receipts tax on energy companies makes sense from a tax policy perspective, it should be done in lieu of tax cuts of equal value that are currently scheduled to take effect over the next several years (or some of the special corporate tax breaks that were implemented in the last several years) rather than in addition to those tax cuts, thus exacerbating the state’s structural deficit in future years.
  • Most of the other tax cuts being proposed this year are designed to encourage firms to create jobs in areas of New York State where job creation is needed. Most of these tax cuts, however, do not have accountability mechanisms to ensure that the promised job creation actually materializes and only one has any kind of even quasi-public reporting on what has actually happened. Most are also badly targeted – including some areas with vibrant economies while excluding areas, such as the Bronx and Brooklyn, with extremely high unemployment rates. More importantly, only one of these tax breaks has any job quality requirement, and that requirement is extremely inadequate – providing double-value tax breaks if an employer’s average wages paid exceed $8 per hour.

If New York State adopts tax breaks or other incentives in the name of job creation, it must establish standards that will ensure that the taxpayers of the state get their money’s worth and that they get what they pay for.

  • 46+ cities, states or counties now attach job quality standards to economic development subsidies such as tax-free loans, training grants, property tax abatements. Standards span wages, health care, full-time hours. About half require or encourage health care coverage.
  • These laws address the “hidden taxpayer costs” of subsidizing low-wage jobs. (Subsidized jobs should not have the hidden taxpayer costs of poverty-wage jobs such as Food Stamps, Medicaid, and Federal and State Earned Income Tax Credits.
  • Subsidies should not go to firms that violate environmental, worker safety, or other laws.
  • In the new information-based economy, investing in K-12 education; ESL, GED, and adult literacy programs; and, training for incumbent workers has greater pay-off than subsidies for low-wage jobs. Education must be protected from corporate welfare.
  • Subsidies don’t create markets. Retail and service businesses that serve local markets should not be subsidized except in extreme cases.
  • Piracy is indefensible in all cases. Even those who feel that New York has to compete with other states, should oppose subsidies for intrastate and intra-region relocations.
  • Favoritism to some companies is unfair to others.

The Fiscal Policy Institute wishes to thank the Ford and Charles Stewart Mott Foundations for their support of the state fiscal analysis work that makes this briefing book, and the briefings at which it is being presented, possible. It also wishes to thank the many labor, religious, human services, community and other organizations that support and disseminate the results of that analysis. Additional thanks to CSEA for printing this briefing book.