Facing a $2.3 billion budget deficit, New York Governor Andrew Cuomo is blaming the Trump tax reforms for causing this fiscal upheaval. Cuomo asserts that Trump’s tax reforms have raised taxes on wealthy New Yorkers, therefore forcing them to leave the state for friendlier tax climates.
There is some truth to Cuomo’s assertion.
Trump’s tax reforms in 2017 caps the state and local tax deduction (SALT) that taxpayers can take advantage of. This hits residents of high-tax blue states. Before the tax reforms were passed, SALT deductions usually averaged $22,000.
After the 2017 reforms, however, the deductions have been lowered to $10,000. Under the 2017 Tax Cuts and Jobs Act, taxpayers are limited to deducting a maximum of $10,000 in state income and property taxes combined.
That being said, economists like Dan Mitchell argue that the SALT exemptions are actually write-offs for the rich in high-tax states like New York. Mitchell adds that these deductions encourage reckless fiscal behavior:
“Simply stated, greedy politicians in a state like California can boost tax rates and soothe anxious state taxpayers by telling them that they can use their higher payments to Sacramento as a deduction to reduce their payments to Washington.”
New York is getting its very own taste of the Laffer Curve. The Laffer Curve shows that the relationship between tax rates and tax revenue is not linear. In other words, doubling taxes does not double revenue. For the most part, lower taxes to increase the amount of taxable income in the economy.
Lowering the tax rate incentivizes entrepreneurs to produce more, thus growing the economy. However, there are limits to these policies as spending will have to be decreased for deficits to truly be tamed.
New York is in desperate need of fiscal reform. According to a report from Michael B. Sauter, New York had the third highest per capita state and local government spending per capita in the nation at $14,647. William P. Ruger and Jason Sorens’s Freedom in the 50 States rankings paint an unflattering picture of New York’s economic climate.
With regards to local taxes, New York has work to do:
“New York’s local tax burden is twice that of the average state: 8.5 percent of income in FY 2015. This is a dramatic rise from the early 2000s when it was 7 percent.”
Its overall state tax burden also makes up “a projected 6.8 percent of income in FY 2017”. Last but certainly not least, New York’s debt is the highest in the country at 31.2 percent of income. So, it’s no surprise that New York ranks dead last in fiscal freedom in the Freedom in the 50 States rankings. New York even occupies the last place for overall regulatory policy rankings.
New York citizens are taking notice of the state’s unstable economic climate as Freedom in the 50 States highlights how in “the calendar year 2015–16 alone, 166,000 more people moved from New York to another state than moved in.”
No matter Andrew Cuomo spins it, he must get New York’s fiscal house in order and make the state more economically competitive by reducing the government’s presence in the economy. If not, fiscal deficits like the one currently making headlines will become the norm and New Yorkers will end up going to lower tax and more business-friendly jurisdictions.
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