I Love New York . . . Economists

December 7, 2008By Chuck Sheketoff

Sure, New York has brought us some Big Apple-sized stinkers of late, from the Wall Street derivative house of cards to the Bernard Madoff massive Ponzi scheme.

But there’s still some good that emanates from the Empire State, or at least from more than 100 of its economists.

In response to the state’s 10 percent revenue shortfall ($12.5 billion) in the current fiscal year, a group of New York economists recently wrote (PDF) to New York Governor David Paterson, urging him to take “a balanced approach” to closing the revenue shortfall. These economists from academia and the private sector rejected the Governor’s strategy of balancing the budget through cuts only, and implored him to raise taxes on those with very high incomes:

We are concerned, however, that steep state budget cuts will exacerbate the economic downturn and harm vulnerable low- and moderate-income New Yorkers. Constrained by a balanced budget imperative, states face only difficult choices in balancing their budgets during recessions. Economic theory and historical experience gives a clear and unambiguous answer: it is economically preferable to raise taxes on those with high incomes than to cut state expenditures.

The reasoning is straightforward: in a recession, you want to raise (or not decrease) the level of total spending—by households, businesses and government—in the economy. That keeps people employed and buying things, and makes it more likely that businesses will want to invest to serve that consumer demand. Budget cuts reduce the level of total spending. Raising taxes on high income households also will reduce spending, but by much less than the amount of the tax increase since those with plenty of income typically spend only a fraction of their income.

By contrast, almost every dollar of state and local government spending on transfer payments to the needy and for the salaries of public servants providing vital services to our communities enters the local economy right away, generating a greater economic impact. The New York local spending impact difference is even greater when you consider that much of the higher state income tax will be deductible against federal income taxes, and that non-residents who commute to high-paying jobs in New York will pay much of the increase.

It is economically preferable to raise taxes on those with high incomes than to cut state expenditures to address the revenue shortfall. That is a message that rings true from coast to coast, and one that Governor Kulongoski and state lawmakers ought to heed as they grapple with Oregon’s own revenue shortfall this budget period and next.

Oregon needs to address our revenue problem with revenue solutions, as well.

Charles Sheketoff is executive director of the Oregon Center for Public Policy, which does in-depth research and analysis on budget, tax, and economic issues with the goal to improve decision making and generate more opportunities for all Oregonians.