The State and Local Tax Burden: FY 2011

I received an e-mail from the Census Bureau, and found that its tabulation of state and local government finance data for FY 2011 has been released sooner than I had expected.  This will provide one more look before the Mayoral/City Council election at how New York City’s taxes and other revenues by type, spending by type and function, debts and pensions compare with the rest of New York State, New Jersey, and the national average, and how this has changed since the last pre-Bloomberg budget in FY 2002.  All normalized, as best as possible, for the differences between state and local responsibilities in different places, and the relative cost of living and ability of taxpayers to pay.  Just to get to the point where I have a spreadsheet, and can begin thinking about what it means and what to say about it, took me seven hours work this weekend.  It would be nice of someone actually on the public payroll were to do this sort of work instead.

Before moving on to the main spreadsheet, I’ve done a quick compilation of the state and local government tax burden for the U.S, every state, New York City and the rest of New York State (by subtraction).  The tax burden is measured as a share of the total personal income of all the residents of each state/area, which adjusts for both the relative cost of living and relative ability to pay.  The spreadsheet and a discussion of what it shows are after the break.

Over the years I’ve compiled this data I’ve found that once one adjusts for the average income in different states, and tabulates the entire tax burden for state and local government together rather than individual taxes at one level of government, most states fall in a narrow range.  Some have no income tax but have high property taxes, while others have lower property taxes but a higher income tax burden.  Some have higher state taxes and lower local taxes, while others (generally in the Northeast) have higher local taxes and less burdensome state taxes.  With the national average running at about 10.0% of personal income, virtually all states had a tax burden between 9.0% and 12.0%.  States where the federal government covered a lower share of Medicaid costs, and where public services were more extensive, tended to have higher taxes.

There have consistently been a few outliers.  Tennessee, Texas and New Hampshire have often had their tax burden fall below 9.0% of income.  And New York, Wyoming and Alaska have generally had their total tax burden in excess of 12.0% of income.  But Wyoming and Alaska are states with very small populations and very high taxes on the mining and petroleum extraction industries, so state residents and other businesses have a much lower tax burden.  In fact, Alaska sends state residents checks using money collected from the oil industry.  New York is actually the only real high tax state.  And the tax burden in New York City is higher still, assuming the burden of state taxes is distributed around the state in proportion to personal income.

The FY 2011 data may be found at the Census Bureau here.

My spreadsheet on total FY 2011 state and local tax revenues as a percentage of personal income is here.

State and Local Taxes FY 2011

It shows more states falling outside what had been the normal range.  Thanks to an oil boom, North Dakota has joined Alaska and Wyoming as states where mineral taxes inflate total state tax revenues relative to the income of the relatively small number of state residents.  For evidence that it isn’t state residents and other businesses that are paying those taxes, look at the tax burden in sister state South Dakota.  And remember that it was South Dakota, not North Dakota, that elected liberal U.S. Senator George McGovern.

 The bigger surprise is on the other end.  There are now 11 states with overall tax burdens below 9.0% of income, including the aforementioned South Dakota.  This is a big change, and I think it might have something to do with the tax structure in these states. 

 As I noted here, for decades Americans have been living large on borrowed money, with high consumer spending – and spending on housing – compared with the income American businesses have decided to pay them.  In addition to inflating (or at least maintaining) lifestyles relative to people’s incomes, this economy also inflated sales and property tax revenues relative to people’s incomes.

 The ongoing fall in inflation-adjusted U.S. paid compensation at work was not reflected on the sales end, first because more and more family members went to work (as women and the baby boomer swarmed into the labor force), then as FUTURE income in retirement was cut rather than cash wages and then, as cash wages fell behind inflation, by soaring debts. 

This entire house of cards collapsed in 2008.  With the baby boom aging, more and more people are being pushed into retirement (or lower paid jobs) sans pensions, and labor force participation has fallen.  Consumers are going bankrupt rather than deeper into debt.  Younger generations are being paid even less than those who came before, and are burdened by student loans.  They can’t pay as much for Generation Greed’s houses as Generation Greed (and its lenders) wants to sell them for, though an effort is underway to force them to.

With consumer sales and housing values falling to a more sustainable (if still far from fully sustainable) relationship to what people are actually paid, states that rely on sales and property taxes have seen their tax revenues stunted.  Some states have raised tax rates to make up the difference, but others have allowed their revenue base to shrink.

While a number of Red States had their tax revenues fall out of the normal range on the low side, other states were moving in the other direction, keeping the national average at about (actually slightly over in FY 2011) the 10.0% rate.  By underfunding its pensions and running up debts, New Jersey and Illinois long enjoyed total tax burdens at or below the U.S. average.  Their tax burdens are now well above the U.S. average relative to income, despite ongoing government cuts and fiscal crises, as a result of past irresponsibility.  Twenty years ago California had a total tax burden at about the U.S. average, and rock bottom public school spending relative to its residents’ income.  Californians voted to increase school spending but keep the lower taxes, and politicians accommodated this by passing budgets that could only be balanced at the peak of tech bubbles.  That state also now has above average taxes and an ongoing fiscal problem.

But California’s pension problems, fiscal problems, and tax burden are nowhere close to those of New York City, where the total state and local tax burden was 52.6% above the U.S. average in FY 2011, as a percentage of city residents’ personal income.

New York also has loads of special tax deals and breaks, from the former public employees who don’t pay a dime of state and local income taxes on their pension income, no matter how high it is.  To NYC homeowners who have their property taxes limited relative to those living in multiple dwellings.  To businesses with special tax breaks and deals.  But these deals do not mean that overall taxes are low.  They mean that the excess tax burden for those without such privileges (or with fewer than average) is even greater than the overall figure 52.6% higher than the U.S. average would suggest.

New York City’s tax burden has risen, as a percentage of its residents’ personal income and compared with the U.S. average, throughout Mayor Bloomberg’s tenure.  The reason is that public employees have become much richer compared with other (non-Wall Street) New Yorkers, and thus cost them more, due mostly to retroactive pension enhancements.  In FY 2002, New York City’s total state and local tax burden was 13.7 of city residents’ personal income, compared with 14.5% today, and was 34.4% above the U.S. average, compared with 52.6% above average today.

New York’s state and local tax burden was much higher relative to income in the 1970s, when people and businesses were fleeing the city and, to a lesser extent, the state.  Based on the years when data is available the burden peaked at 17.0% of city residents’ personal income in 1977, which was 57.6% above the U.S. average at the time.  Of course some of that burden was paid by non-residents in a commuter tax.

While the tax burden was high in the 1970s, rents were low.  Public employee unions, who had just made a big score in retroactive pension deals under Mayor Lindsay and were heading for the suburbs and Florida with the loot, grabbed a big tax burden and provided much less in services.  But people retaliated by reducing the amount of money they were willing to pay in rent, or fleeing themselves. 

Thus between taxes and real estate costs, one could make the case that between them the biggest donors to state and local political campaigns in New York, the real estate industry and the public employee unions/contractors, have never had it as good relative to the less powerful New Yorkers as they do right now.  And to judge by the Mayoral campaign, these interests fully expect to continue becoming better off relative to other New Yorkers, at their expense, in the next administration.