If tax hikes are inevitable, ensure they are prudent

By the end of this month, the state Legislature will likely increase taxes on wealthy residents of New York, notwithstanding that some have already fled for warmer and tax-friendlier climates such as Palm Beach.

Even with President Joe Biden’s COVID-19-relief bill pumping $12 billion in desperately needed funding into New York’s red-stained state coffers (and$5.6 billion into New York City), these tax hikes will be justified as an antidote to what is likely still to be a gap of at least $3 billion in the state budget thanks to the pandemic. Steeper progressive taxation will also be justified by the growing belief among many in Albany that too much capital has accumulated in too few hands and that, accordingly, even putting fiscal necessity aside, the state should tap that accumulated capital to address its many long-standing social needs.

Given the foregoing, those who are concerned about the impact that rising taxes could have on New York’s long-term economic competitiveness face a stark choice. Either they can continue to try to stop these increases altogether and likely fail, or they can earn a “seat at the table” by bowing to the political reality and focusing on ensuring that any tax hikes be done in a manner that is prudent and responsible. Now is the time to accept reality and focus on the latter strategy. 

So, what might a prudent and rational tax increase look like? The key is pairing it with the following conditions: 

* For every extra dollar in taxes raised to close the budget gap, governments should be required to prune the same amount on the expense side, either by eliminating ineffective programming or instituting real efficiency gains.

* Because any tax increases are likely to make New York among the very highest-taxed jurisdictions in the United States (especially in the city, thanks to its personal income tax), they should be temporary emergency measures aimed at lifting the city and state out of their twin health and economic crises, meaning that they must truly sunset after a brief period, such as three years.

* All the money raised through the tax increases should be earmarked for specific purposes, such as supporting critical basic services, creating a relief fund for local small businesses, combatting homelessness or fixing our public transit, with this money placed in a “lock box” that can only be accessed once a neutral third party — such as the New York State Financial Control Board or the state and city comptrollers — have certified that the state and city are allocating this money properly and otherwise have complied with the conditions attached to the tax hikes.

Why, in an environment in which so many on the upper end of the wealth spectrum in New York have done so well should we even consider such conditions? The answer is simple: The business community and the wealthy are vital to New York’s long-term financial health. They pay a large share of taxes. Their spending supports many local businesses. Their philanthropic dollars underpin the robust non-profit sector. If rich people decide to move, or if high-paying firms take their operations elsewhere (as Goldman Sachs recently did, moving some of its employees to Florida), then New York’s continued economic decline will not be easily reversed.

However, if business owners and wealthy residents can see that their additional tax dollars are funding a better and more effective government and that the additional tax dollars they are being asked to pay are tied to a clear and present emergency, they will feel confident that the fiscal ship will soon be back on smoother waters, with enlightened management at the helm.

And making government more efficient and effective is in everyone’s interest. New York City’s annual budget ballooned to $88 billion last year, up from $68 billion just seven years ago. Has that additional $20 billion in annual spending under Mayor Bill de Blasio led to better delivery of services? Are there fewer homeless people on the streets? Are our streets cleaner? Are the public schools significantly better? If you answered no, no and no, you get the idea that just throwing more money at chronic problems won’t lead to long-term solutions.

Of course, this leads to an important question: Is it even possible for the city and state to become more responsible fiscal stewards? Yes. Take the city, for example: Through attrition in certain agencies, the city government could easily shed some of the bloat in personnel that has steadily increased during the last seven years (with city headcount up more than 30,000 municipal workersunder de Blasio). Negotiating productivity and efficiency agreements with municipal unions is not only long overdue, but would also send a message to all New Yorkers that, in spending our tax dollars, we are actually increasing and improving vital services and not wasting them on boondoggle programs.

Another important component of any tax hike must be reframing these hikes not as punishment, but as meeting an immediate need. This is why strict sunset provisions are so crucial, ensuring that these tax hikes will expire once we have fought our way out of our “once in a century” health and economic crisis, rather than becoming permanent fixtures in the tax code as has happened with so many other “temporary” taxes. Doing so would be an important part of convincing the key economic players that we are asking to pay more not to leave New York and instead to stick around to be a part of our economic recovery.

For decades, New York has had the luxury of raising taxes on businesses and wealthy residents without losing large numbers of them to other jurisdictions. COVID-19, however, should give all of us pause before we assume that what has held in the past will continue to hold going forward. Not only have many of the magnets that have traditionally bound these interests to New York been significantly diminished by the pandemic, but business leaders and the wealthy have now seen that they can successfully operate remotely. Losing even a small portion of this cohort of organizations and individuals would doom New York to a ruinous fiscal and economic future.

By contrast, with just a few key modifications, it should be possible to get the buy in of many of those targeted by the proposed tax hikes without “killing the golden goose” that has helped make New York what it is today. In this way, we can turn what is now an us-versus-them dynamic into an us-with-us dynamic that actually makes city and state coffers less bare, while also making our city and state governments more effective – a win-win scenario if ever there were one.