Commentary

Real Tax Cuts for Real Investments

GOV. Spitzer promises to revitalize the economy and “attract capital and jobs back to New York.” He’s even said he’ll cut taxes.

New Yorkers certainly need tax cuts. The overall tax burden in the state is 53 percent higher than the U.S. average on a per-capita basis, and 32 percent higher when measured as a share of income.

Alas, Spitzer’s rhetoric doesn;t match the reality of his proposals. His proposed $6 billion property tax cut isn’t really a cut at all: It wouldn’t lower rates, just raise state subsidies to local governments — which means that state taxes would have to be kept $6 billion higher in total than otherwise. So whatever the taxpayers gain on local taxes, they lose on their state bill.

Spitzer so far hasn’t offered much to encourage private businessmen to invest in New York. When he says he’ll revitalize the economy with more “investment,” he really means more government spending. Yet private investment is more likely to result in sustained growth than subsidy schemes like the governor’s Stem Cell and Innovation Fund.

New York’s tax problems are many. At 37 cents per gallon, the state’s gasoline tax is almost twice the national average of 20 cents, and it’s a big burden on small businesses.

New York’s high income taxes also hit small businesses, which file as individuals. The top individual tax rate in the state is 6.85 percent, where the average top rate for individuals and small businesses in the other 49 states is just 5.3 percent. (New York City, of course, adds its own 3.65 percent income tax, and also imposes a unique “unincorporated business tax” of 4 percent, resulting in a top rate of 14.5 percent for small businesses there.) Capital gains, which are taxed at these high personal rates, are also hit harder in New York than elsewhere.

A recent Tax Foundation study looked at 113 business tax factors — and found that New York had the fourth-worst business-tax climate in the country.

OK. Credit Spitzer with admitting that New York’s “business climate is uncompetitive” and that policymakers need to “reduce the burdensome cost structures that have driven businesses out of the state.” But the governor fails to even mention the most obvious way to do that: cutting the state’s corporate-income tax.

Corporate-income taxes reduce capital investment, incite a huge amount of tax avoidance (both outright cheating and less-productive use of capital to avoid taxes) and still generate little government revenue. In New York, the corporate-income tax raises only 5.5 percent of state tax revenues.

The state’s corporate tax rate is 7.5 percent; New York City tacks another 8.85 percent atop of that. Compare that to an average rate of 6.5 in the other 49 states.

In today’s economy, high corporate taxes make no sense, because capital is mobile and can flee high-tax jurisdictions. Some of the fastest-growing states today (such as Nevada and Washington) impose no corporate income tax at all. And the industries that New York depends on, like media and financial services, are more mobile than ever.

Consider the banking industry. Banks in New York City face the federal corporate tax rate of 35 percent, plus high state and local rates. Compare that to other financial centers like London, where the corporate tax rate is 30 percent, and Hong Kong, where it’s just 17.5 percent.

Mayor Bloomberg argues that the city’s high taxes are offset by great amenities. That’s partly true, but amenities don’t count for much when you’re dealing with the intense cost pressures of competitive global industries.

One objection to corporate tax cuts is that they are “tax cuts for the rich.” But state corporate taxes are borne mostly by workers, not shareholders, because it’s easier to pay local labor less than it is to attract global investors at lower rates of return. If Gov. Spitzer cut New York’s corporate taxes, he’d actually raise wages for New Yorkers.

And with revenues soaring, now is the perfect time to cut New York’s taxes. Census Bureau show that New York state’s revenues jumped 46 percent from 2002 to late 2006— outpacing the 38 percent increase nationally — and more than 7 percent in 2006 alone.

Spitzer says that he wants to “bring back the greatness New York once defined.” The best way to do that would be to cut — or, better, eliminate — the state (and city) corporate-income tax.

Chris Edwards is director of tax policy studies and author of Downsizing the Federal Government.