Monday, March 30, 2009

Balancing the Budget in Albany During a Recession

Leadership in Albany is often criticized, and none of us have forgotten the study that showed the the New York State legislature was the most dysfunctional in the United States. The events of the last two days might be a sign that Albany is changing in ways that are healthy for New York State, New York City, and our borough of Manhattan.

Democratic Control Means Democratic Responsibility

The State Senate is in the control of the Democrats for the first time in many decades, and the Democrats now control the entire legislature and the Governor's mansion. It is far too early to give the elected leaders in Albany an overall grade, but they deserve extra credit points for the compromise they have reached regarding increasing tax revenues  to bring the New York State budget into balance in the coming fiscal year and those to follow immediately thereafter. During a recession, taking steps aimed at generating economic growth or avoiding steps likely to deepen the recession are paramount. The tax compromise reached in Albany late last week has all of the appearances of an honest attempt to solve two incompatible problems, increasing state government revenues and avoiding further harm to our state's economy.

The Democratic Party must continue to make these good-faith attempts to do what is right in these complex and controversial areas. It will not be easy, but it will be necessary. If the Democrats cannot develop a record of good-faith hard work and compromise in Albany, there won't be anyone willing to see the blame for those failures as shared with the Republicans. The Democrats must deliver or find themselves back to the structure of the past several decades, where Republican control of the State Senate made success on nearly all controversial issues impossible.

With control of the Executive Branch and both houses of the legislature in both our nation's capitol and in Albany, the time has come for Democrats to deliver for the people. No excuses, and no blaming the Republicans . . . This election is the beginning of our journey rather than the end.
Economic Growth and Government Budgets

During economic downturns, the United States federal government should increase spending (and perhaps reduce taxes) in order to spur economic growth. The reduction in tax revenues from the reduced economic activity (coupled with lower taxes, potentially) and the increased government spending combine to result in deficits (or lower surpluses). The goal of ending recessions creates the environment in which deficits increase.

At the state level in the United States, budgets are less flexible. New York, like all fifty states, is required to have its revenues match its expenditures in each year's budget. It would not be wise to allow states to create deficits unless the sizes of those deficits were strictly limited. The capital markets would find it difficult to absorb the financing of large and growing deficits from fifty states, and only the Federal Reserve can create new cash. States would not be able to provide adequate certainty of repayment without strict limitations. The requirement of a balanced budget can promote longer recessions and slower recoveries by forcing state governments to reduce spending and raise taxes when the economy is in need of the opposite.

Here in the New York State, the government in Albany is in just that dilemma, and they are making the best of a bad situation.

Higher Taxes That Could Have Been Worse

Higher taxes, especially in a state like New York that is already at the top of the list of the states who impose the largest tax burden on their residents, are unwelcome and counterproductive. They are also often necessary during difficult economic times, and we are in such times.

The budget that is very close to becoming law in Albany could have been much worse on the taxation question. Many groups pushed for permanent or long term levels of much higher taxes. Others pushed for increases in sales taxes. Because both ideas were rejected in favor of a small increase in income taxes (a one percent increase for those earning over $250,000 per year and another approximately one percent for those earning over $500,000) for only 3 years, we should take a moment to appreciate the wisdom of the Governor, the State Senate, and the State Assembly in compromising amongst each other in what must appear to each of them to be a "no-win" situation.

New York State already relies heavily on regressive sales taxes, and because of that reliance, New York State's overall tax scheme is regressive (meaning that it imposes the greatest tax burden, as a percentage of income, on New Yorkers with the least income). Adding large new sales taxes to the New York State tax scheme would have made that bad situation worse.

A long term increase in income taxes would likely result in reduced economic activity as the workers subject to the higher tax rates move to other states or otherwise alter their economic behavior to reduce their tax burden. At least as important is that New Yorkers would reduce their spending to account for the reduced take-home pay resulting from the higher taxes.

With a short-term tax increase, New Yorkers are far less likely to reduce spending, leave New York State, or take other counterproductive actions that could have resulted from a longer term tax increase. The potential negative consequences are also mitigated by the small size of the tax increase. 

In the end, the leadership in Albany deserves credit for a job well done on taxes, and they are unlikely to be praised for it. Let's hope that they continue to pursue responsible compromises and earn praise in the months ahead.

1 comment:

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