State & Local Taxes: 2017 Census of Governments Finance Data

In FY 1997, New York State’s state and local government tax revenues totaled $132.88 for each $1,000 of state residents personal income, far above the U.S. average of $102.80, and second in the country behind Alaska, where revenues were inflated by state taxes on oil and gas extraction.  And yet by FY 2017 New York State’s tax burden had increased further, to $138.22 per $1,000 of personal income, now first in the nation.  The District of Columbia and Vermont also had above average tax burdens in FY 1997, and saw those burdens increase further by FY 2017.  In FY 1997, Arizona, Colorado, Florida, Georgia, North Carolina, Oklahoma, Tennessee, Texas, and Virginia all had state and local government tax burdens that were below the U.S. average, though all but Tennessee were above $90.00 per $1,000 of personal income.  And yet by FY 2017 the tax burden in each of these states had fallen further, in some cases plunged, and now all are below $90 per $1,000 of state residents’ personal income, in some cases substantially.

Nationally, the overall state and local government tax burden increased from $102.80 per $1,000 of personal income in FY 1997 to $106.92 in FY 2007, but then fell sharply to just $97.77 per $1,000 FY 2017.  It has been in the vicinity of $100 per $1,000 of personal income for decades.  Almost all of that 2007 to 2017 decrease was at the state government level, with the overall state tax burden falling from $63.11 per $1,000 to just $55.89, and with nearly all types of tax revenues falling relative to income, but corporate income tax revenues falling (on a percentage basis) most of all. State aid to local governments also fell sharply from $37.95 per $1,000 of personal income in FY 2007 to $32.41 per $1,000 in FY 2017, due in large part to fewer children in school (relative to the number of adults with income) as the large Millennial generation exited.  On the other hand, federal aid to state governments increased from $33.90 per $1,000 in FY 2007 to $37.86 per $1,000 in FY 2017, due in large part to soaring Medicaid expenditures, which are substantially federally-funded, and go mostly to the old.

Posts on state and local revenues other than taxes and spending by category will come later.   A detailed discussion of state and local taxes follows.

 

This is the second in a series of posts based on state and local government finance data from the U.S. Census Bureau’s 2017 Census of Governments, along with the same data for the 2007 and 1997 Censuses.  The first post, which explained where the data comes from and what I did with it, and which includes spreadsheets with revenues and expenditures per $1,000 of area residents’ personal income in all categories, for all states, and for all local governments in counties around the country, is here.

https://larrylittlefield.wordpress.com/2020/04/19/background-and-databases-2017-census-of-governments-finance-data/

A reorganized spreadsheet with four tables of state and local taxes by type, and with most of the charts that will be used in this post, may be found here.

Tax All State and County

The line charts of total state and local taxes as a percent of state residents’ personal income, for each available year since 1972, may be found in this spreadsheet.

Tax ALL-YEAR 2017

Up until the 2007 Census of Governments, released a decade ago, the Census Bureau had provided spreadsheets showing state and local government revenues, expenditures and debt, for all data items, by level of government, for each state and for every year starting in 1972.  I used “individual unit” data to create a similar tabulation for the City of New York, allowing data for the rest of New York State to also be had by subtraction.

Then the Bureau stopped producing these DAC-REX files.  In 2018, working nights and weekends, I painstakingly re-created them through FY 2016, using the annual data released at the state level each year, and will now extend the some of the data through 2017. Like the County Area files, the long-term line chart data you will see can, for the moment, can only be produced by me, something I still hope will change in the future.

It isn’t really the case that the tax burden in all already above average tax states as of FY 1997 rose higher by FY 2017, and that the tax burden in all already low tax states fell still lower.  A few states that were below the U.S. average in FY 1997 saw that burden increase by FY 2017.  These states, in purple in the table, are New Jersey, Illinois and Maryland. And some states that had above average taxes in FY 1997 had substantial decreases by FY 2017.  Connecticut, Massachusetts, Maine, Kentucky, New Mexico, Michigan, Minnesota and Wisconsin are in red.

When I first started compiling this data, virtually all states had a state and local tax burden of between 9.0% and 12.0% of personal income. Only New York and DC were significantly above this range, aside from states such as Alaska and Wyoming where taxes on mineral extraction inflate the take, and only a few states such as Tennessee were below. Today fully 19 states are below 9.0%, with Michigan getting closer.

This trend follows the ascendance and self-interest of the Baby Boomers, a generation that likes to get public services and benefits but doesn’t like to pay for them.  Assured their Social Security, Medicare, nursing home and home health care needs would be taken care of regardless of how much the federal debt soared, their hostility to taxes has increased in much of the country. And in New York, taxes have increased not so much to pay for services for everyone else, but rather for soaring Medicaid expenditures for seniors, debts older generations ran up despite inadequate infrastructure maintenance and replacement, and soaring costs for public employee pension benefits that were retroactively increased in deals between the state’s powerful public employee unions and their elected officials.

In 2016 the Baby Boomers elected yet another member of their generation, perhaps the most exemplary member of their generation, Donald Trump, as President.  And in 2017 Trump and the Republican Congress scored their one major legislative accomplishment – a third major tax cut for the rich and corporations.  Since wealthy asset holders can arrange their accounting to shift income from one year to another, they reputedly shifted income from 2017 to the lower federal rates of 2018.  This raises a question as to whether FY 2017 was a typical year for state and local taxes.

There were slight dips in U.S. state corporate income tax revenue as a percent of personal income from FY 2016 to FY 2017, from 0.29% to 0.26%, and U.S. state personal income tax revenue from 2.13% of income to 2.08%.  The effect on personal income tax revenues seems to be greater in New York, where high earners account for a large share of the total, a share that increased after a temporary extra “$millionaires” tax was enacted in 2009, during the Great Recession…

And then kept.

https://www.forbes.com/sites/ashleaebeling/2019/04/09/new-yorks-temporary-millionaire-tax-extended-5-more-years/#89b408559bda

New York’s “millionaire tax” was meant to be temporary, with a short three-year life, when it took effect back in 2009, a response to the financial crisis. But now, 10 years later, the state budget Governor Andrew Cuomo just signed into law has extended the tax which hits millionaire earners with a top 8.82% rate for another five years—through 2024.

https://www.wsj.com/articles/ny-nj-governors-blame-shrinking-revenue-on-federal-tax-changes-11549321915

In New York, officials said the highest-earning 1% of taxpayers accounted for $17.8 billion of personal income tax revenue, or 45.8% of the total.

The New York City personal income tax, a rarity at the local level, is similarly dependent on those at the top.  From FY 2016 to FY 2017, NY State personal income tax revenues fell from 3.87% of personal income to 3.47%, and NYC personal income tax revenues fell from 2.03% of personal income to 1.89%.  New York’s personal tax revenues rebounded the following year, but some of the decrease may become permanent, in part because the wealthy may move out (or at least pretend to move out) to avoid New York’s high taxes.

New York’s top fiscal officers said Monday that tax collections have fallen another $2.3 billion below their projections, a revenue shortfall that will prompt revisions to the $175 billion spending plan the governor proposed on Jan. 15.

In addition, a rising share of New Yorkers’ income may be exempt from state and local income taxes, either because it is too low, as wages continue to fall, or because it is the retirement income of public employees, which is fully exempt from both New York State and New York City income taxes, no matter how high that income is.  Private sector retirees get smaller exemptions.  The generations now retired are the richest in history, and those still below age 62 have earned less at each phase of lives than preceding generations had.  Many states tax retirees less than workers, a policy held over from a time when each generation was better off than the one before, so more income in the hands of the retired means a smaller tax base.

(One finds the same trend at the federal level, where a smaller share of total income for labor, a higher share for capital, and more labor income concentrated at the top shrink revenues, because capital is taxed less by the income tax, and the highest wage earners are taxed less – or not at all — by the payroll tax).

Moreover, some of the decrease in income tax revenues for New York pre-dates the Trump tax cuts, let alone the coronavirus crisis.  At one time Wall Street pillage provided both the city and the state with substantial personal and corporate income tax revenues.  But although one could argue that industry is still vastly overpaid in Manhattan and Fairfield County, it’s share of the U.S. economy has fallen since the financial crisis of 2008.  New York State’s corporate income tax revenues fell from a peak of 0.60% of state residents’ personal income in FY 2007 to 0.35% in 2016 and 0.31% if 2017.  From a peak of 1.69% of New York City residents’ personal income in FY 2007, the city’s corporate income tax take fell to 1.13% of income in 2016 and 1.06% in 2017.

U.S. corporate income tax revenues, as a percent of the personal income of all U.S. residents, had also been falling since peaking at 0.44% in FY 2007.  Some of this may represent cut-throat competition among states to pander to business to attract jobs. But some of it may reflect that fact that as in the late 1990s stock market bubble, the actual earnings on which corporations pay taxes may have been falling, even as stock prices have been soaring, as yet another bubble inflated.

Regardless, the extent to which New York’s total state and local tax burden exceeded the U.S. average in FY2017, great as it was, was down significantly from FY 2016.  There were no significant changes in New York tax policies at the time, as best as I can remember, just changes in the timing and composition of income relative to the total.  With the income of most working New York residents now falling, another asset price bubble possibly deflating, and yet the wages and retirement costs of New York public employees and the Medicaid benefits of seniors still rising, the total New York tax burden in FY 2017 may represent a temporary low.

And it is the total state and local government tax burden that matters. In some states, such as Vermont, California, and most Midwestern states other than Illinois, the state tax burden is very high, but the local tax burden is relatively low.  That is also true in Hawaii, where the public schools are a state government function.  In New Hampshire and in most Northeastern states, on the other hand, the local tax burden tends to be relatively high, but in many of those states, and in particular in New Hampshire, the state tax burden is below average.  The District of Columbia has no state government, and all its taxes are local.

Some states, including Washington, have not state income tax at all.  They tend to have relatively high sales and property taxes, per $1,000 of their residents’ personal income.  On the other hand Oregon has no general state sales tax at all, but it has a very high personal income tax.

On the other hand, 12 states have no local government general sales tax revenue at all, and most states have relatively low sales taxes at the local level.  And local personal and business income taxes are relatively rare.

What matters is how everything adds up.  This can be shown in a series of charts.

In FY 2017, total U.S. state and local government tax revenues equaled $97.77 per $1,000 of U.S. residents’ personal income.  The New York State average was $138.22. Assuming the burden of state taxes is distributed in proportion to personal income (it isn’t – in New York State “dedicated” MTA taxes count as state taxes and are only collected downstate, though sometimes spent elsewhere) the comparable figures were $151.63 for New York City and $125.85 for the rest of New York State, taken together.

Among the states generally portrayed as high tax in the media, particularly the conservative media, are New Jersey ($107.48), Connecticut ($105.77), California ($102.56), Illinois ($106.86), and “Taxachusetts,” now below average at $96.20.  The reputations are undeserved, because high tax rates in some categories are offset by lower tax rates in other categories.  Whereas New York tax rates are high in every category, except for those who benefit from the state’s unusually extensive special tax breaks, deals, and exemptions.

The District of Columbia really is high at $135.71 per $1,000 of city residents’ personal income, though not as high as New York City.  Leaving aside the oil and gas tax state of North Dakota, at $126.54, Hawaii, at $124.95 was the only other state over $120 per $1,000, which is to say over 12.0% of personal income.

Other states with relative highly state and local government tax revenues, per $1,000 of state residents’ personal income, include Vermont at $116.29, Maine at $113.86, and Minnesota at $112.46.  But 19.3% of the housing units in Maine and 17.5% of the housing units in Vermont (along with 11.8% of the housing units in New Hampshire) are second homes.  A large share of the property taxes in these states, therefore, are paid with the incomes of people other than state residents.   Starting after FY 1997, in fact, Vermont has funded its schools with a statewide property tax, to distribute the bounty of second home revenues around the state.

On the other hand, the lowest state and local tax burden for FY 2017 was Alaska at $72.12 per $1,000 of state residents’ personal income, with Wyoming second lowest at $83.34.  In past years the tax burden in these states had been close to, or even higher than, New York.  Taxes on oil, gas, and other mineral production, combined with small populations on which those revenues were spent, were the reason.  I once described these states as the Republican fantasylands, with very high state and local government spending as a share of state residents’ income, but little if any tax burden on residents and most businesses (Alaska actually sent them checks).  Thanks to those oil, gas mineral tax revenues, and to a high level of federal aid per capita.  But it appears the fantasy has become a nightmare that may get worse given the recent collapse of the oil price.

Other low tax states include Tennessee at just $75.76 in state and local tax revenues per $1,000 of state residents’ personal income, Florida at $76.30, Oklahoma at $81.21, Arizona at $81.68, South Carolina at $83.70, New Hampshire at $83.82, Georgia at $83.97, Indiana at $86,09, Virginia at $86.74, Texas at $86.82, and North Carolina at $89.64.

One doesn’t hear much about rich people and corporations moving to metro St. Louis, Denver, Detroit and Seattle because they want to locate in a right-wing, low tax area.  Nor are public services generally described as inadequate, due to low taxes, there.  And yet as of FY 2017, overall state and local government tax revenues totaled just $83.52 per $1,000 of state residents’ personal income in Missouri, $88.20 in Colorado, $90.55 in Michigan, and $91.23 in Washington State.  Washington, like Alaska, Wyoming, Florida, and Texas, has no state income tax; Tennessee’s state income tax revenues are close to zero.

Many of the low tax states are fast-growing Sunbelt states, and their low tax levels come with an important caveat.  Since 1980 a substantial share of new housing has been built in private developments. The Villages in Florida, a senior citizen development, is now so large that it counts as its own metropolitan area.  In these developments, services such as road and street maintenance, street lighting, water systems, sewer systems, solid waste pick up, parks and recreation, and even security, are privately funded, by mandatory homeowner association dues.  Those dues are the equivalent of property taxes for the same services elsewhere, and those who don’t pay can have their property foreclosed, but are not counted as taxes.

https://ipropertymanagement.com/research/hoa-statistics

Homeowners’ associations, also known as HOAs or community associations, are governing organizations over neighborhoods and communities. These can include single-family homes, townhouses, condominiums, and other groups of homes in planned “covenant” communities. Since the 1970s, American neighborhoods have been increasingly governed by these associations.  There are very few newly constructed neighborhoods without them…

Approximately 24% of the United States population resides in HOA-governed housing…

The HOA fees add up. Annual revenue ranged at approximately $95.6 billion, and this represents monthly fees collected from homeowners.

U.S. local government property tax revenues totaled $509.4 billion in FY 2017.

Sometimes the fees can be extremely steep. In 2015, the typical monthly HOA fee was over $330.00, and in communities where the fee is a percentage of the property value, it’s even higher. In many communities, the HOA fees have risen at a rate that is not proportionate with the national housing prices. Between 2005 and 2015 HOA fees rose 32.4%. This does not correspond to the 15.1% increase in home prices during that time. Homeowners in the Southern and Western areas of the United States pay much higher premiums than elsewhere.

As homes and properties age, the cost of maintaining them goes up. In communities where HOA fees pay for portions of maintenance on older structures and homes, this is justifiable. However, in many regions, the increase in fees doesn’t always correlate with the age of the community.  Many Americans bristle at the level of control an HOA board exerts over their properties…

In addition to the monthly fees, the need to replace major infrastructure, such as private sewage plants, can lead to special homeowner association assessments.   In less well off communities, the result can be a crisis, and an attempt to shift those costs to local government.  Since they are a recent phenomenon, most private developments have not yet reached the point were this has become necessary, but that may change in the next few decades.

As noted in the prior post, I divide New York State into four regions. Assuming that the burden of New York State taxes is divided among them in proportion to personal income, New York City’s state and local tax burden of $151.63 per $1,000 of city residents’ personal income, compares with an average of $128.28 for the Downstate Suburbs, $123.58 for the Upstate Urban Counties, and $127.88 for the rural and small city counties in the Rest of New York State.

Among the Downstate Suburbs, a big gap has opened up between Westchester County ($116.69); and Putnam ($139.33) and Rockland ($144.36). Adjacent Orange ($139.10) is also relatively high.  These Hudson Valley counties may not be as affluent as they once were, but still have government costs similar to Westchester.  Suffolk County ($136.77) also has a relatively high total tax burden as a percent of the income of year-round residents, but some of those taxes are paid by second homeowners, whose income is counted elsewhere. Second homes account for 9.3% of all housing units in Suffolk, which includes The Hamptons, and most of the highest priced.  This compares with 4.2% of all U.S. housing units.

Second homes are also prominent in rural New York counties, accounting for 10.8% of the housing in the Rest of New York State – with many counties in the Catskills and Adirondacks far higher.  Rural and small city New York shares this characteristic, and cold, snowy winters that increase road maintenance costs, with Maine, New Hampshire and Vermont.  The $127.88 per $1,000 of personal income tax burden for the Rest of New York State, however, is far above Maine ($113.86) and Vermont ($116.29) let alone New Hampshire ($83.82).

I compare New York City with the counties containing some of the nation’s largest cities, those at the center of the nation’s largest metro areas, older central cities, and still others newer cities NYC now competes with for people and firms seeking an “urban” environment.  New York City’s state and local tax burden is higher than any of them, and with the exception of DC, as mentioned, none of them are even close.

Compared with the U.S. average of $97.77 in state and local tax revenues per $1,000 of personal income, and $151.63 in New York City, the averages are just $82.10 in Fulton County (Atlanta), $86.67 in Miami-Dade, $86.73 in King County (Seattle), $89.67 in Dallas County TX, $90.75 in Harris County (Houston), $91.26 in Travis County (Austin), $95.56 in Mecklenburg County (Charlotte), and $96.50 in Denver County, CO.

Not surprised?  How about just $106.25 for Los Angeles County, $108.31 for San Francisco, $109.11 for the city of Baltimore, $113.81 for Cook County (Chicago), $115.28 for the city of Philadelphia, and $116.85 for Multnomah County (Portland, Oregon). And just $99.88 for Suffolk County, MA, which is mostly the city of Boston a long with a few urban localities just to its north.

I compare the average for the Downstate Suburbs, at $128.28 in state and local tax revenues per $1,000 of personal income, with Fairfield County in Connecticut and the counties of Northern New Jersey. Only two of them are even close:  Union County (including Elizabeth, NJ), at $113.78, and Passaic County (Paterson) at $117.57.  Fairfield County in Connecticut is at $98.14.  Hudson County in New Jersey, an urban county that is perhaps better compared with Brooklyn and Queens in New York City, is far below the U.S. average at $87.85, thanks to an influx of working young adults and empty nesters with income, and relatively few children requiring public education.

I also compare the Downstate Suburbs with affluent, dynamic suburban counties around the country.  In these counties high incomes, and low poverty rates and social service burdens, tend to push down local taxes relative to personal income. Montgomery County in Maryland, outside DC, at $107.80, is the only one I included that was over $102.  Fairfax County, on the other side of DC, was very low at $88.60, as was Palm Beach County, Florida, where many affluent New Yorkers retire, at $75.59.  Even along the Northeast Corridor, however, Montgomery County PA, at $94.72, Middlesex County Mass, at $95.25, and Baltimore County Maryland, at $95.34, were all below the U.S. average.

The Upstate Urban Counties share many characteristics with the portion of Connecticut outside Fairfield County – a state capital, a number of older cities that were once manufacturing powerhouses, and a high level of current employment in the institutional, substantially non-profit and tax-exempt, education and health services sector. I also compare the New York counties that contain such cities as Binghamton, Albany, Schenectady, Troy, Saratoga Springs, Utica, Syracuse, Rochester and Buffalo with the “Rustbelt” counties that include Pittsburgh, Cleveland, Columbus, Cincinnati, Detroit, Milwaukee, Minneapolis, and St. Louis.  And suburban Oakland County, Michigan and St. Louis County, Missouri.

Here as well, the Upstate Urban average of $123.58 in state and local tax revenues per $1,000 of personal income is higher than any of the other areas chosen for comparison.  But the gap is smaller than for New York City and the Downstate Suburbs. And surprisingly, two of the places in the group with the most successful economies, Hennepin County (Minneapolis) and Franklin County (Columbus), have relatively high state and local government tax burdens at $112.51 and $118.77 per $1,000 of income, respectively.  The Minneapolis tax level isn’t that much different than the $119.33 for Monroe County (Rochester), which shares a history of precision instrument manufacturing.

On the low-end, meanwhile, one finds St. Louis County ($82.53), which has a successful agro-technology cluster but is also home to depressed industrial suburbs such as Ferguson.  Wayne County (Detroit), at $99.59 per $1,000 of personal income, and Alleghany County (Pittsburgh), are close the U.S. average.  The Rest of Connecticut had $111.13 in state and local tax revenues per $1,000 of personal income, well above the U.S. average but well below the average for urban Upstate New York.

For the U.S. as a whole, in FY 2017 the personal income tax was the leading source of state tax revenue at $20.80 per $1,000 of U.S. residents’ personal income, despite the several states that don’t have one.  The general sales tax, long the number one state tax until recently, fell to second at $17.77.  Motor vehicle fuel and license taxes, often in theory dedicated to transportation infrastructure, came in at $4.37, with corporate income taxes at $2.65, and utility taxes at $0.82.  “Other” taxes, including mineral, oil and gas extraction taxes and Vermont’s state property tax, add up to a substantial $7.95 per $1,000 of personal income. Every state seems to have substantial “other” taxes, but for most states I don’t really know what they represent.

The State of New York is distinguished by its relatively high personal income tax, at $34.71 per $1,000 of state residents’ personal income. Other states with state personal income tax burdens over $30 include Oregon at $41.78, a state with no state sales tax, Minnesota at $35.83 and California at $35.52, two states with relative low local government taxes  And nearby Connecticut at $30.84 and Massachusetts at $31.44.  Since income taxes generally fall harder on those with the highest incomes, and those with the highest incomes are also the most demanding, relatively high state income taxes might explain the continual grousing in these states, despite moderate tax burdens overall.

The state corporate income tax burden is also high, compared with the U.S. average of $2.65 per $1,000 of personal income, in Minnesota at $4.01, Illinois at $4.17, California at $4.27, and Massachusetts at $4.69, perhaps also adding to the misleading (in general) high tax reputation of those states. Highest of all for state corporate income taxes, however, is low-tax New Hampshire at $7.28.  On the border the high earners live free or die in low-tax New Hampshire, but their jobs are in Massachusetts.

Among the states selected for this chart, Washington, at $33.37, and Texas at $23.93, have state general sales tax revenues well in excess of the U.S. average of $17.77 per $1,000 of personal income.  Florida ($25.24) and Maine ($23.19) may have some of their relatively high state general sales tax burden paid for by second homeowners and visitors; Ohio ($24.52) and Indiana ($25.09) not so much.

Compared with the U.S. average of $4.37, state motor vehicle fuel & license tax revenues are relatively low per $1,000 of personal income in New York State ($2.48), New Jersey ($2.18), Connecticut ($2.97), Massachusetts ($2.79), and Rhode Island ($2.21).  In part because residents of most of these states drive less and use mass transit or walk more, and drive shorter distances even when using motor vehicles to travel.  In part because, as with the federal gas tax, rates were frozen rather than allowed to rise with inflation once Baby Boomer politicians took over.

Moreover, while these and other similar revenues were assigned to “dedicated” Transportation Trust Funds in New York and New Jersey in the late 1980s, those funds were raided for other purposes almost immediately.  Starting in the early 1990s money was borrowed to fund transportation infrastructure instead, with bonds backed by future “dedicated” revenues, to the point that most of the motor vehicle taxes these states now collect is primarily dedicated to paying off bonds.  The same is true for the “dedicated” taxes for New York’s Metropolitan Transportation Authority (MTA).

Not surprisingly, when I calculated the extent of investment in infrastructure construction as a percent of their residents’ personal income over the past few decades, New Jersey, Connecticut, Massachusetts and Rhode Island were near the back of the pack.

https://larrylittlefield.wordpress.com/2018/12/12/sold-out-futures-by-state-in-2016-debt-and-infrastructure/

In Massachusetts, mass transit investments promised in association with the “Big Dig” highway project were never made, and decades of disinvestment and poor maintenance caused the T urban transit system to essentially collapse back in 2015 (not by coincidence there were rail transit collapses in New York, Washington, and Baltimore at about the same time).

https://www.theguardian.com/us-news/2015/feb/11/boston-public-transit-mbta-head-resigns-snow

Massachusetts finally increased its gas tax, under legislation that also provided an ongoing increase for inflation.  The latter automatic increases were subsequently voided by referendum.

https://www.governing.com/topics/elections/gov-massachusetts-rolls-back-inflation-measure-for-gas-tax.html

In Connecticut, where tolls were removed on I-95 in the 1990s during the political ascendance of the Baby Boomers, and where the transportation system is in poor repair, an attempt to restore them, and then to restore them just for trucks, could not pass the aging legislature.

https://www.ctpost.com/politics/article/Lamont-expected-to-give-up-on-tolls-15068492.php

Trucks only tolls did pass in Rhode Island, but are the subject of a lawsuit.

https://www.providencejournal.com/news/20200122/shortfall-in-truck-toll-revenue-wont-affect-ri-road-projects

For the nation as a whole, the dominant tax at the local government level is the property tax.  For the U.S. local government tax revenues totaled $41.88 per $1,000 of personal income in FY 2017, and property taxes accounted for $30.20 of that, or just under three quarters.

General sales tax revenues at the local level averaged $5.29 per $1,000 of personal income, and selective sales and license taxes came next at $3.25.  Many localities enact extra selective sales taxes on items such as hotels and rental cars, hoping that travelers will end up doing most of the paying.  Often those taxes are used to fund vanity-subsidy projects such as stadiums and convention centers.

Most of the states with the highest average property tax burden are located in the Northeast.  Illinois is a Midwestern exception at $41.41 per $1,000 of state residents’ personal income in FY 2017, well above the U.S. average of $30.20 and far higher than nearby Wisconsin ($33.12), Minnesota ($26.21), Michigan ($26.00) and Indiana ($22.98).  For most years prior to the present, Illinois’ overall state and local government tax burden was below the U.S. average, but its property tax burden was still high, and its overall state and local tax system very regressive. Its state personal income tax is flat rate, not graduated, due to a constitutional provision, something its current Governor is trying to change.

https://www.chicagotribune.com/columns/eric-zorn/ct-column-progressive-graduated-income-tax-illinois-pritzker-zorn-20200417-4ewfgrnrj5hcrif7mjwxub4m3a-story.html

States that don’t have any state income tax tend to have high local property tax states, despite low tax burdens overall.  That is certainly true of New Hampshire at $51.50 in property tax revenues per $1,000 of state residents’ personal income, but it is also true of Texas at $39.06.  To reduce school funding inequality without state taxes, the State of Texas in effect taxes the local property tax revenues of affluent school districts for redistribution to poor districts.

Despite not having a personal income tax, however, Florida’s property tax burden, at $27.78 per $1,000 of state residents’ personal income, is below the U.S. average.  Florida taxes the property of second homeowners, the “Snowbirds,” heavily, but provides generous exemptions for full time residents.  This provides an incentive for retirees to move to Florida, even if they benefit from income tax exemptions elsewhere, a fact the AARP uses to argue for property tax exemptions in other states.  In 2017 9.7% of Florida housing units were second homes. I wonder how many retired NY public employees are voting in New York, but claiming a full time property tax exemption in Florida?

New York State’s relatively low state-level general sales tax revenues, at $10.99 per $1,000 of personal income compared with $17.77 for the U.S., and its moderate corporate income tax revenues, at $3.13 per $1,000 of personal income compared with a U.S. average of $2.65, are misleading – because of high local government taxes in these categories.

New York’s general sales tax revenues at the local government level averaged $12.64 per $1,000 of personal income in FY 2017, far above the U.S. average of $5.29, with $11.40 for New York City and $13.79, on average, for other parts of the state.  The shift of sales tax taxing authority to the local level corresponds with the shift of some responsibility for funding Medicaid to the local level, as well be discussed in the next post.

New York City’s corporate income tax revenues totaled $10.63 per $1,000 of city residents’ personal income in FY 2017 – a higher share of income than any state government’s corporate income tax revenues.  New York’s taxation of business at both the state and local level is something one finds in few other places.   Some have argued that, like property taxes on second homeowners in Vermont, New Hampshire and Maine, New York City’s business tax revenues mean its residents are not as burdened by taxes as its overall tax revenues per $1,000 of personal income make it seem.  But they are mistaken.  Even subtracting the entirety of NYC corporate income tax revenues, NYC’s state and local tax burden is still $141 per $1,000 of personal income.  That is still far higher than any other state, or any other highly populated county for which I have done the calculation.

With an additional $18.95 in personal income tax revenues per $1,000 of city residents’ personal income, the City of New York has a diverse tax base reminiscent of a state.   Other states with significant local income tax revenues include Maryland, Pennsylvania and Ohio.

In other parts of New York State, on the other hand, the relatively high level of local taxes is carried primarily by very high property and general sales taxes.  (In Westchester County the City of Yonkers, my hometown, added a local income tax when it almost went bankrupt in the 1970s).   Compared with the U.S. average of $30.20 in local property tax revenues per $1,000 of personal income, New York’s property taxes are particularly high in the Downstate Suburbs on average ($53.49), and in Putnam ($65.96) and Rockland ($68.44) counties in particular.

The Upstate Urban Counties are lower at $44.73 in property tax revenue per $1,000 of area residents’ personal income, less than New Jersey at $50.45, and not much more than Connecticut at $41.82.  Property values are very low Upstate, however, and property tax rates are high as a percent of those low values.

The rural and small city counties elsewhere in New York averaged $48.04 in property tax revenues per $1,000 of permanent county residents’ personal income, but in many of the highest-tax counties second homes carry a great deal of the burden.  In the Catskills, Sullivan County’s local government property tax revenues totaled $81.82 per $1,000 of permanent residents’ personal income, but second homes account for 35.2% of the housing units.  In the Adirondacks, Essex County has a property tax burden of $72.88 per $1,000 of personal income, but 27.7% of the housing units are second homes.  One finds the same pattern in coastal New Jersey.  Cape May County has local property tax revenues equal to $103.35 per $1,000 of full time residents’ personal income, but 52.7% of the housing units are second homes.

For New York City, during most of the past few decades the added burden of local personal and business income taxes and local sales taxes was offset, to an extent, by a local property tax burden that was merely average overall. And perhaps even low for “Class 1” 1 to 3 family homes, whose annual assessment increase has been capped by a state law passed around 1980, when city property values were low.

https://larrylittlefield.wordpress.com/2015/03/06/taxes-generational-equity-new-york-state-and-new-york-city-in-2014/

Despite the city’s extensive office tax base, in FY 2007 its property revenues totaled just $31.96 per $1,000 of city residents’ personal income, little different that the U.S. average of $31.33.  But in FY 2017 NYC’s property tax burden had soared to $40.11 per $1,000 of city residents’ personal income, far above the U.S. average of $30.20.

In 2017, in exchange for voting for Donald Trump’s Obamacare repeal, Upstate Congressmen John Faso and Chris Collins got an amendment added which would have eliminated the burdensome local government contribution to New York State’s Medicaid program, everywhere in the state exceptNew York City.

Collins’ Medicaid amendment added to Obamacare replacement plan

Aides to Collins said he opted not to try to apply that provision to New York City because of the huge financial hit the state would take if it suddenly was forced to pick up the city’s $5 billion in Medicaid costs.

If Trump’s bill had passed, New York City residents would have continued to have a huge local tax burden to pay for Medicaid within New York City, but would also have been further burdened in state taxes to pay for the entire non-federal share of Medicaid in other parts of the state, where local taxpayers would pay nothing.

What if Collins-Faso included NYC?

As proposed by U.S. Reps. Chris Collins and John Faso, the mandate carves out cities with a population of 5 million or more, a description that fits only New York City. Collins and Faso have justified this exception on grounds that the city has its own income tax, which better enables it to afford a share of Medicaid expenses.

Somehow, however, no other part of New York State has sought to reduce its property tax burden by adding a local income tax, in addition to the state income tax.  The contribution to Medicaid absorbs half of New York City’s personal income tax revenues, with contributions to similar social programs that are state-funded elsewhere accounting for most of the rest.  Thirty or so years ago New York’s local governments were also opposed when former Governor Mario Cuomo proposed eliminating the state share of Medicaid in exchange for almost all sales tax revenues remaining with the state.

In addition to Washington DC, a local government that is also state government, the cities of Baltimore and Philadelphia have local income taxes and (in Philadelphia’s case) corporate income taxes.  This no doubt contributes to their high-tax, anti-business, declining central city reputations.

Local income taxes, in fact, seem to be common in Maryland. Compared with NYC’s local personal income tax revenues at $18.95 per $1,000 of city residents’ personal income, the city of Baltimore was at $11.25, suburban Baltimore County was at $14.36, and suburban Montgomery County, near DC, was at $16.84.  Philadelphia’s personal income tax equaled $21.88 per $1,000 of city residents’ personal income, more than the $18.95 for NYC, and its corporate income tax equaled $6.10, less than NYC’s $10.63.

https://www.phillymag.com/news/2019/04/17/philadelphia-taxes-high/

According to a Pew report from earlier this year, Philadelphia takes in some $3,000 in tax revenue per resident, a figure that’s only behind New York City, San Francisco, Boston, and Denver. (Keep in mind, this is in addition to the federal and state tax you already pay.)

It turns out the city has a hand in just about every one of your pockets. Indeed, Philly, New York City, and Louisville, Kentucky, are the only cities in the country to tax personal income, corporate income, property, and sales — the four main sources of governmental tax revenue.

And yet the overall tax burden of these other cities and counties is far lower than New York City, because of their relatively low property taxes. The analysis above didn’t give Philadelphia much credit for low property taxes, and rising income.

What makes Philly unique among its tax-happy peers is that nearly 50 percent of the city’s revenue comes from wage taxes — currently levied at a rate of around 3.9 percent — while only 20 percent is derived from property tax. (Sales tax, business tax, and the soda tax combine for most of the remaining 30 percent of the revenue.)…

If you’ve been following the recent uproar surrounding the city’s property tax assessments, it may be hard to believe that the property tax yields such a small proportion of Philly’s revenue. (Of big U.S. cities, Philly had only the 27th-highest commercial property tax rate in 2017, and the 33rd-highest homeowner tax rate.) But the city’s tax structure is so heavily tipped in favor of wages that even with these increases in property assessments, the resulting revenue ends up making a minimal dent compared to the relative amount of wage tax revenue.

“There’s an old saying among economists in town,” says Drexel real estate economist Kevin Gillen, “that Philly’s problem isn’t that it taxes too much — it’s that it taxes the wrong things.” Gillen would propose cutting some front-end taxes, like that of wage and sales, in exchange for a higher property tax, which he argues will yield the city more money in the long run.

Base on a comparison between the total state and local government tax burden in FY 2017 and that burden 20 years earlier, it is worth asking if some other states are in fact taxing too little.  Among states that already had below average tax burdens in FY 1997, Arizona’s fell by $14.83 per $1,000 of its residents’ personal income (by nearly 1.5%) of state residents’ income, Colorado fell $2.62, Florida fell $16.15, Georgia fell $12.92, North Carolina fell $5,90, Oklahoma plunged $19.05, Tennessee fell $7,29, and Texas fell $5.44.

In Oklahoma, former Governor “Failin” Fallin devastated public services by slashing already state low income taxes when oil tax revenues were rolling in, and keeping them low when oil tax revenues plunged.

https://www.tulsaworld.com/news/local/education/history-of-tax-cuts-catches-up-to-oklahoma-as-state/article_ec192755-9cd7-5067-a61c-79f25ed382d4.html

The situation has deteriorated to the point where highway patrol troopers have been warned not to fill their fuel tanks, and drunken drivers have been able to keep their licenses because there are not enough administrative workers to revoke their driving privileges. Nearly 100 of the state’s 513 school districts have moved to four-day weeks…

State legislators have already tried cutting the budget. Overall, last year’s inflation-adjusted budget of $6.9 billion was 11 percent less than 2009, according to a recent analysis. But the spending cuts so far have not been enough to close a projected $900 million gap. Lawmakers are weighing drastic steps such as reducing Medicaid payments, which officials say could cause hundreds of nursing homes to close.

That was before the recent oil price crash.   When I did my “Sold Out Futures By State” analysis, many of the states with low and falling combined state and local tax burdens also had taxpayer public employee pension contributions, both as a percent of the total wages of public employees and as a percent of the total income of all state residents, that were lower in FY 2016 than they had been 30 years earlier in FY 1986.  Implying that taxes have been reduced in the short run by shorting pension fund contributions.

https://larrylittlefield.wordpress.com/2018/12/16/sold-out-futures-by-state-public-employee-pensions-in-fy-2016/

Cutting (or rather deferring) taxes by not funding pensions is the very strategy that later led to a perpetual fiscal crisis in both New Jersey, following the tax cut and pension bond of Governor Christie Whitman in the mid-1990s, and Illinois, following the Edgar Ramp and its deferrals. These are two of the handful of states whose total state and local government tax revenues were higher per $1,000 of personal income in FY 2017 than they had been in FY 1997, by $8.00 for Illinois and $5.84 for New Jersey.

Connecticut’s total state and local tax burden jumped in the early 1990s when the state finally added a state income tax, and finally started funding its public employee pensions.  Nutmeg State teachers, like those in California, Illinois, Ohio, Kentucky and elsewhere are completely reliant on those pensions, as they are not in the Social Security system.  After jumping up to $116.44 per $1,000 of personal income in FY 1997, well above the U.S. average of $102.80 at the time, Connecticut reduced the overall burden by $10.79 per $1,000 of personal income from 1997 to 2007.  There was little change from 2007 to 2017, despite rising income tax rates on wage income.  State income taxes were eliminated for many seniors…

https://www.middletownpress.com/middletown/article/End-of-tax-on-retirement-income-begins-Monday-14064252.php

Nora Duncan, state director of the AARP, said retaining the benefits was a priority for the group during the recently completed legislative season… Duncan noted that as the state with the seventh-oldest population in the country, the added benefits are crucial for those making decisions on aging in the state. “ I think this bipartisan decision went a long way in preventing more out-migration to less-expensive states,” she said.

And the state is again putting off its pension contributions at the expense of the future.

House adopts $43B budget, Senate approval expected Tuesday

One of the chief methods used to reduce spending — in the short-term — involves Connecticut’s cash-starved pension funds for teachers and for state employees. Payments into the teachers’ pension would actually drop $150 million over the next two years combined, and then rise — but not as sharply as originally planned, until 2032. Taxpayers between 2033 and 2049 would have to make up billions of dollars in deferred contributions plus interest.  Proponents of the shift said Connecticut’s spiking pension costs are the product of more than seven decades of inadequate savings, and that problem can’t be solved by one generation.

The costs are being put off until the generations that benefited from putting them off are either gone to Florida, or collecting income tax-free retirement income, as in Illinois.  In Illinois all retirement income, public and private, has long been exempt from the state income tax.  That is something that despite the state’s fiscal catastrophe no politician dares to suggest changing.

Massachusetts state and local tax revenues were $7.09 lower, per $1,000 of state residents’ personal income, in FY 2017 than they had been in FY 1997, and Maine tax revenues were $8.01 lower.  The burden fell by $9.45 per $1,000 of personal income in traditionally high-tax Minnesota, and $12.04 in low-income New Mexico.  There were decreases of $2.42 in Ohio, $3.20 in Pennsylvania, a stunning $13.86 in Michigan, and fully $17.45 in Wisconsin.  These are the four states where aging voters, secure in their Social Security and Medicare benefits, flipped the Presidency to tax cutter and King Of Debt Donald Trump.

New York City has one of the most underfunded pension systems in the country despite its residents’ paying more to fund those pensions over the 20 years from FY 1987 to FY 2016 than taxpayers anywhere else in the country. It’s state and local tax burden was $12.04 higher per $1,000 of city residents’ personal income in FY 2017 than it had been in FY 1997, a bigger increase than anywhere else, from what was already a higher level than anywhere else.

The New York State pension system, which also covers local government employees in the portion of New York State outside New York City, is one of the best-funded in the country.  Overall state and local tax revenues there were $1.84 lower per $1,000 of personal income in FY 2017 than they had been in FY 1997.

For the U.S. as a whole, total state and local government tax revenues increased from $102.80 per $1,000 of personal income in FY 1997 to $106.92 per $1,000 in FY 2007, before falling back to $97.97 per $1,000 in FY 2017. All broad regions of New York, and the New Jersey state total, followed the up and then down pattern, with New York City and New Jersey ending up higher, and the Downstate Suburbs, Upstate Urban Counties and Rural/Small City NY Counties ending up lower.

Taxes had been cut during the 1990s, but then soared after the stock market bubble burst and tax revenues plunged in the early 2000s. Generation Greed politicians such as New York State Governor Pataki, New York City Mayor Rudolph Giuliani, New Jersey Governor Whitman, and Connecticut Governor Rowland claimed to be cutting taxes, but they were actually deferring taxes.  Those deferrals continue to this day.  The Massachusetts tax burden has continued to drift down, however.

And Illinois taxes continue to drift up, after having been lower than the U.S. average earlier.  California taxes ended up in about the same place.  In Oklahoma they keep cutting, though I expect incomes are going to fall enough to at some point to push those lower revenues up as a percent of the incomes of those who remain in the state.

The up-down pattern follows for most of the counties containing the central cities of the nation’s largest metro areas, but not all of them. Cook County’s (Chicago) state and local tax burden increased from FY 2007 to FY 2017, due to a series of big property tax increases for the county, the city of Chicago, and other localities, all to pay for underfunded pensions.  More such increases are coming.  Still, Cook County’s overall state and local government tax burden remains far below the level of New York City.

New York City, Chicago, Boston and Philadelphia were all highly favored by demographic and economic trends during the 2007 to 2017 period. Tens of thousands of hard working, tax paying, childless young Millennials, who required very little in the way of public services and benefits but still paid taxes, flooded in.  Seeking economic opportunity, and fleeing economic devastation elsewhere.

With devastating costs shifted from the past, and rising public expenditures, Cook County (Chicago) and New York City ended up with a higher tax burden per $1,000 of their residents’ personal income in FY 2017 than in FY 1997, despite rising income.  But the overall state and local government tax burden fell in Suffolk County (Boston) and in Philadelphia, where the reduction was $14.85 per $1,000 of personal income from FY 1997 to FY 2017, or nearly 1.5% of personal income.

While writing commercial real estate reports for metro areas around the country I had predicted that, based on its criteria, Amazon.com would choose Philadelphia for HQ2.  Instead, Amazon hired a consultant who told Jeff Bezos what his ego wanted to hear, and recommended putting half a headquarters in high-tax but “in with the in crowd” New York City.  Just sayin.

This chart and those to follow examine changes in state tax revenues, per $1,000 of personal income, by type of tax.  The changes are stark.

From FY 1997 to FY 2017, U.S. general state sales tax revenues fell by $3.03 per $1,000 of personal income.   The states blamed e-commerce, but I put the blame elsewhere.  As average worker wages and benefits fell over the past 47 years, Americans kept spending.  They had more household members enter the paid labor force, borrowed money, failed to save for retirement, and generally lived beyond their means to stay in the middle class.  That meant more sales, and more sales tax revenues, relative to incomes.  That all changed, however, starting with the financial crisis and Great Recession in 2008.

The Millennials are so much worse off than prior generations had been at the same age that they have reduced their spending.  As have earlier-born the generations approaching retirement, since the financial crisis of 2008 and Great Recession reduced their wealth, and they have approached retirement with higher debts.  In addition, generally non-taxable goods and services such as rent, health care and food have absorbed more of the spending that still does take place, leaving less money for spending on taxable businesses.

About the only place where public policy decisions, rather than economic and social trends, reduced state sales tax revenues significantly is Connecticut.  After that state’s personal income tax was introduced in the early 1990s, Connecticut started giving back revenues from its previously high general sales taxes, mostly through increased exemptions.  The Connecticut decrease from FY 1997 to FY 2017 was $7.74 per $1,000 of personal income.  But sales tax revenues fell per $1,000 of personal income just about everywhere.

For the U.S. as a whole, motor vehicle fuel and license taxes fell by $1.45 per $1,000 of personal income from FY 1997 to FY 2017.  That is a 24.9% decrease, relative to income. While electric vehicles and more income in the hands of retirees, who don’t drive as much, may explain part of this, much of it is by design.  Gasoline taxes are fixed per gallon, and unlike general sales taxes, which are a percent of sales, they don’t increase at the rate of inflation in the price of gasoline, let alone the price of road construction.

Once Baby Boomers realized that the highway system they had inherited would not collapse before they didn’t need it anymore, they became opposed to funding it, let alone funding the mass transit that Millennials prefer. Gas taxes have been frozen at the federal and state level for much of the time since the Boomers gained political ascendance in the 1990s, leading to decreases in revenues relative to personal income in most places.  There were long-term toll freezes and removals in the first decade of Baby Boomer rule, in the 1990s, as well.

By accident or design, state corporate income tax revenues have fallen as well.  By $1.69 per $1,000 of personal income from FY 1997 to FY 2017 nationally, or 39.0%, and by $2.23 per $1,000 of personal income for New York State, or 41.5%.  On a percentage basis no state tax has seen a bigger decrease in revenues relative to personal income.

The accident is that despite soaring stock prices and executive pay, businesses just aren’t making as much money as they once did.  Executives have been relying on leverage and financial engineering, not innovation and investment, to increase stock prices and the amount of money they can suck out of the firms.  Lower profits, in New York particularly in the financial sector, mean lower corporate income tax revenues.  Ascendant information technology and new media companies often do not actually make money, and are adept at shifting profits to tax havens even when they are profitable.

The design is that states throughout the country have been throwing special tax deals at large existing firms.  That includes New York State, which exempted manufacturing firms located Upstate (but not Downstate) from state corporate income taxes, in an attempt to revive the Upstate economy and reduce its welfare-state drain on New York City.

https://www.tax.ny.gov/bus/ct/reduced_9a.htm

It is something I might have tried myself had I been Governor, but it didn’t work.   I’ve become convinced that business executives actually have no idea about their taxes and other costs, and other economic factors, and make location decisions based on their personal and political preferences, and the extent to which their asses are kissed.  Which despite “Amazon Cuomo” is usually less in New York than elsewhere.

So state general sales tax revenues, motor vehicle fuel and license tax revenues, and corporate income tax revenues are falling.  The question is whether states offset these decreases by increasing rates for these and other taxes.  In New York State, New Jersey, and Connecticut these decreases were offset by increases in the state income tax.  In Massachusetts and Pennsylvania they were not.

Similarly, California kept its overall tax revenues stable from FY 1997 to FY 2017 by increasing its personal income tax revenues per $1,000 of personal income, to offset other losses.  Illinois also did, to an extent, while also increasing sales tax rates. Michigan, Oklahoma, Colorado, North Carolina and Florida (which has no state income tax) did not, leading to big decreases it state tax revenues per $1,000 of personal income overall.

Michigan went through the equivalent of a Great Depression from 2000 to 2010, and the Great Recession saw North Carolina suffer a significant economic setback for the first time in decades.  Both responded by doubling down on pandering to business and the better off.  In addition to the falling tax revenues shown here, each drastically cut unemployment insurance benefits – from the customary 26 weeks to as few as 12.

Unemployment Insurance Revenues

The Census Bureau classifies state unemployment insurance taxes as “insurance trust revenue,” code Y01, and they are not included as taxes in this analysis.  Nationally, state unemployment insurance “contributions” fell from $4.34 per $1,000 of personal income in FY 1997 to just $2.33 per $1,000 in FY 2017, a decrease of 46.3%. The decrease was from $5.94 to $3.35 (43.5% decrease) in Michigan and from just $1.45 to just $1.28 (down 11.4% from a low level) in North Carolina.  Pennsylvania slashed the premiums it charges businesses by 81.6%, compared with the personal income of all state residents.

But New York State, which never puts aside enough money and is always paying off unemployment insurance debt to the federal government, had no significant decrease, despite rock-bottom unemployment in 2017. I just read that New York is about to run out of unemployment insurance money. Again.  And will clobber any new businesses to pay off debts and offset the benefit of prior businesses that closed down or moved out.  Again.

Chart4a

At the local government level, the national average trend for property taxes was up per $1,000 of personal income from FY 1997 to FY 2017, if only slightly.  Property taxes were $0.78 higher per $1,000 of personal income in FY 2017 than they were in FY 1997, and increase of 2.7%.  There was a decrease from FY 2007 to FY 2017, however.  Local governments, on average, have been adding local sales taxes, raising rates, and broadening bases, with an increase of $0.86 per $1,000 of personal income for the general sales tax (in contrast with the state-level decrease), and $1.10 per $1,000 of personal income for local selective sales taxes.  Too bad that thanks to the coronavirus, all those sports stadium are empty.

Within New York State the change in property tax revenues, per $1,000 of personal income, shows Governor Andrew Cuomo’s biggest success, and also shows where all the money NYC Mayor Bill DeBlasio has been able to hand out has come from. Cuomo’s property tax cap limited the annual increase in total local government property tax collections to 2.0% or the rate of inflation, whichever was lower, unless a higher amount was agreed in a taxpayer referendum.  Despite limited income gains in the wake of the Great Recession, total local government property taxes in the portion of New York State outside New York City fell from $50.11 per $1,000 of area residents’ personal income (on average) in FY 2007 to $47.99 in FY 2017, a decrease of 4.2%.

But the property tax cap did not apply to New York City, where total property tax collections increased from $31.96 per $1,000 of personal income in FY 2007 to $40.11 in FY 2017, an increase of 25.5%.    Rising property taxes account for more than the entirely of the higher local government revenues, relative to personal income, that the City of New York has received over 20 years.  These are the revenues that have paid for pension increases, and wage increases in excess of inflation, for unionized public employees, other city workers, and even contractors.  Even as the average wages and benefits of most private sector workers in the city fell behind inflation.

Those city residents, if they don’t have special housing deals (rent regulated apartments, owner-occupied housing purchased long ago at lower prices, public housing, Mitchell Lama and other subsidized middle income housing) have also been squeezed harder and harder on the housing cost side, as another housing bubble has inflated market-rate rents and for-sale housing prices in the city to unimaginable heights.  And small businesses have faced higher rents in retail and office space, compared with their business income and the pay of their owners and employees, driving many out of business.   Mayor DeBlasio, the City Council, and the city’s state legislators have publicly decried these trends, but their in-the-room amd in-on-the-deal supporters have benefitted from the higher property tax revenues those higher property values provided.

There are other factors, however, which may have restrained New York City’s property tax revenues in the past, but have allowed them to rise recently, and may also stabilize them going forward.

In large parts of the city, to entice real estate investors after its 1970s collapse, NYC exempted from property taxes the increase in property values due to new construction and renovation, for years, under the 421a, 421b and J51 programs.  After a long lull, extensive previously-exempt property may be hitting the tax rolls.  If anything this will accelerate in the next decade or two, although the new 421a rules will exempt many new buildings from property taxes for even longer – with reductions for up to 45 years in the future from what I read.

At the same time, the annual limitation on property tax assessment increases for 1-3 family homes in NYC means that their property taxes are far below their proportional share.  The assessed value of these properties will continue rising at the prescribed rate, unless and until they catch up, even if actual market values plunge, as they did during the 1987 to 1995 period.

While I believe that both the 421a, 421b and J51 tax breaks, and the assessment increase limits for 1-3 family homes, are unfair given the way the city’s economy and demographics have evolved, they at least have had the beneficial effect of reducing the extent to which today’s politicians permanently ramped up spending with revenues from temporary real estate bubbles, by deferring those revenue increases to a future when they will be sorely needed.

Rising property taxes, relative to income, seem to be common throughout the country for the FY 1997 to FY 2017 period, as two housing bubbles were inflated by rock-bottom interest rates.  Local governments, receiving less intergovernmental revenues from state governments, have gladly sucked up the revenues.

The exception is Florida, where property tax revenues plunged from $36.89 per $1,000 of state residents’ personal income in FY 2007 to just $27.78 in FY 2017.   Property values in that state were hit harder by the bursting of the housing bubble in 2008, and helped less by the renewed bubble after 2010, than was the case elsewhere.  Florida politicians refused to make up those lost revenues with offsetting increases in other taxes, and the states already low state and local tax revenues fell further.

This review of state and local government taxes will conclude with a quick trip around the country, based on line charts showing the total state and local government tax burden, as a percent of personal income, for all available years.

New York City’s state and local tax revenues jumped to a record to 17.1% of personal income in FY 1977, as income earners fled the city and the cost of the public employee pension increases and debts of the Mayor Lindsay years soared.  That was fully 60.1% higher than the U.S. average at the time.  Unlike many parts of the country, NYC has been here before.

The NYC state and local tax burden fell to a low of 13.1% of personal income in FY 2002.  That was still 32.2% higher than the U.S. average, however, and it was a false low as public employee pensions were once again increased, increases in pension funding were once again deferred, and debts were once again run up, by Generation Greed politicians.  They re-Lindsayed even before Bill DeBlasio, the man most often compared with Lindsay, took office.

Despite an economic boom that led to soaring income, NYC’s state and local tax revenues increased to 16.4% of personal income in FY 2015, fully 64.9% higher than the U.S. average.  It remains to be seen if the drop to 15.2% of personal income in FY 2017, still 55.1% higher than the U.S. average, is more than a blip.  In the wake of the coronavirus, however, it is likely that New Yorkers will have less income from which to pay taxes, even as the cost of past debts and pension increases soars.  When it comes to taxes, there really is only one New York.

The Rest of New York State comes closest to NYC’s high tax burden, something that has been true since the early 1970s.  The rest of the state has matched the ups and downs of NYC’s state and local tax revenues as a percent of personal income, while always remaining lower.  From a peak of 14.2% of income in FY 1977 (33.6% above the U.S. average), the rest of the state fell to 12.1% of income in FY 2002 (22.5%) above average, before rising to 14.1% of personal income in 2009 (32.8% above average) and 13.6% above average in 2014 (36.7% above average).  Subsequent decreases, modest though they are, explain Governor Cuomo’s popularity in the Rest of New York State.  He has concentrated the increase in the tax burden in New York City where, based on the statements of its elected officials, people really want to pay even more.

New Jersey and Connecticut had below average state and local tax burdens as a percent of state residents’ personal income through the 1980s, the decade when the suburbanization trend that had favored them peaked.  They were forced to raise taxes during the deep early 1990s recession, worse in the Northeast than any recession since, and the first to affect college graduates and the suburbs significantly.  Connecticut added a state income tax in 1991, the worst year of that recession.

Republican politicians then found a winning formula in these otherwise Blue States.  Cut taxes, freeze tolls, cut infrastructure maintenance, cut pension funding, but get public union acquiescence by increasing pension benefits.   The result is the maladies these states have today.  Even so, after peaking at 11.3% of personal income in FY 2013, identically matching the level of 1994, both of these states saw their state and local tax revenues fall as a percent of income thereafter, with 2017 levels of 10.7% in New Jersey and 10.6% in Connecticut.  That is not much higher than the U.S. average, and far below New York.

The state and local government tax burden in Massachusetts peaked at 13.1% of state residents’ personal income in FY 1977, and at 25.7% above the U.S. average in FY 1979.

https://scholars.unh.edu/cgi/viewcontent.cgi?article=1308&context=unh_lr

Massachusetts voters approved a strict property tax cap, Proposition 2 1⁄2, in 1980. Proposition 2 1⁄2 provides that communities may increase taxes on real and personal property annually by no more than 2.5% of the total fair cash value of such property. Further, it states that the total annual property tax revenue raised by municipalities cannot surpass 2.5% of the assessed value of all taxable property in each community.

In the three-and-a-half decades since Proposition 2 1⁄2 was adopted, many cities and towns have found that they cannot raise sufficient revenue to meet their communities’ needs because of the restrictions imposed by the cap. However, the statute does contain a side-step maneuver: a community can override its levy limit with a majority vote.

The overall state and local tax burden in Massachusetts fell below the U.S. average in 1988, and it has been slightly below average most years since.

The most costly local government service is public elementary and secondary schools, and since the passage of Proposition 2 ½ Massachusetts localities have done all they can to zone out new housing for additional families with children, unless those houses were big enough, and families therefore rich enough, to cover the costs of educating the kids.  To offset this, the state has Chapter 40B, which allows developers to bypass local zoning laws to build affordable housing.

https://www.wickedlocal.com/news/20190212/breakdown-of-40b-affordable-housing

Similar battles have played out in New Jersey, under the “Mount Laurel” court decision and related legislation.

Pennsylvania’s overall state and local tax burden has been very close to the U.S. average for nearly 50 years, neither high nor low.

All these line charts use the same scale, to allow a comparison with what the data shows for New York.

Illinois had a state and local government tax burden that was below the U.S. average as a percent of state residents’ personal income, often far below, almost every year from FY 1977 to FY 2009.  This despite the state’s extensive public services, and a level of corruption that has sent multiple Governors to jail.  How was this accomplished?  By advancing revenues from, and deferring costs to, the future.  Selling of all future revenues from Chicago’s parking meters and the Chicago tollway, enriching but drastically underfunding pensions, running up bonded debt, and un-bonded debt in the form of not paying suppliers, including social service non-profits, for services rendered.

The generations that benefitted from those low taxes and high spending aren’t being made to pay the price.  All retirement income is exempt from state income taxes in Illinois, and many of that state’s Baby Boomers head off the low-tax Arizona as soon as they can, leaving their debts behind.  Meanwhile the Illinois state and local government tax burden jumped to 11.8% of personal income in FY 2013 was still above average at 10.7% of income in FY 2017 – still not close to New York.

Ohio’s state and local tax burden was also below the U.S. average until the year 2000.  Meanwhile its public employee pensions are among the most underfunded in the nation, even though no retired public employees receive Social Security there, saving taxpayers 6.2% of wages.  Since 2000 Ohio’s state and local tax burden has been at or above the U.S. average.  Many young people have gotten the hint about what their elders have done to them, and left the state.  Some went to New York City.  It wasn’t to pay lower taxes.

Michigan and Wisconsin had above average state and local tax burdens until a decade ago, but their tax revenues have fallen relative to income since. In Wisconsin’s case, this could be the payoff for decades of higher taxes, and responsible pension funding. Minnesota’s state and local tax burden has remained above the U.S. average, though it has not even been close to New York.  Despite this, it was the most economically prosperous and dynamic Midwestern state over the past decade, particularly in metro Minneapolis-St. Paul.

The booming Sunbelt states of the Southeast have always had total state and local government tax burdens that were lower than the U.S. average, often far below.  Maryland, a sort of hybrid state on the Northeast Corridor, is now above average, but only because the U.S. average has fallen.

Over the decades from 1980 to 2000, a large part of the U.S. auto industry relocated from Michigan, which had an above average tax burden, to Tennessee, which consistently has had among the lowest state and local tax burdens in the country.  Part of that gap could be explained by federal policies that redistributed substantial resources from once affluent Midwestern states such as Michigan to once poor southern states such as Tennessee.  Notably the share of state Medicaid expenditures that the federal government covered, which had been much higher in Tennessee and throughout the Southeast (Florida excepted) than it was in Michigan and throughout the Midwest.

The Northeast and California have, for now, survived that burden, but the Midwest broke under it.  Now that the Midwest is relatively poorer, however, the federal government is sucking less money out of the region.

Federal Medical Assistance Percentage (FMAP) for Medicaid and Multiplier

In FY 2021, the federal share of Medicaid expenditures was 64.08% for Michigan, 63.63% for Ohio, and 59.37% for Wisconsin, still lower than the 66.1% for Tennessee, the 67.03% for Georgia, and the 67.4% for North Carolina, but not by as much.  The federal Medicaid matching share is just 61.96% for Florida – it had been 50.0% until the 2010s.  Maryland and Virginia are still at 50.0%.

Given the historically low tax burdens of the Southeast, one might have expected there were no reason for those burdens to fall farther.  But they have.

California’s state & local tax burden was slightly over 12.0% of its residents’ personal income during the 1970s, and perhaps before that. This was at the high end of the 9.0% to 12.0% range virtually all states have been in until recently, in part due to the state’s low federal matching share for Medicaid, but it was not even close to the tax burden in New York.  This was a time when California had a reputation for high quality public services, and new and up-to-date infrastructure.

Click to access Prop13.pdf

On June 6th, 1978, nearly two-thirds of California’s voters passed Proposition 13, reducing property tax rates on homes, businesses and farms by about 57%… Under Proposition 13 tax reform, property tax value was rolled back and frozen at the 1976 assessed value level. Property tax increases on any given property were limited to no more than 2% per year as long as the property was not sold. Once sold, the property was reassessed at 1% of the sale price, and the 2% yearly cap became applicable to future years.

California’s overall state and local government tax burden fell to 9.6% of personal income, below the U.S. average, the very next year in 1979. Over time state income tax increases have offset some of that property decrease, particularly in years when the IT industry in the Bay Area was booming and throwing off massive tax revenues on capital gains.  The overall state and local government tax burden peaked at 11.4% of personal income in 2007, before the Great Recession, then fell as low as 9.9% of personal income in 2012, matching the U.S. average at the time.  A fiscal crisis resulted.

Today no one associates California with quality public services and good infrastructure.  Based on my long-term analysis of infrastructure construction expenditures by state, per $1,000 of personal income, from 1982 to 2016, California ranked 37thwith a cumulative deficiency of $220 billion.  As for the benefit of lower taxes, these accrue almost entirely to long-time property owners, thanks to reassessment on sale. Today’s seniors in particular – the same generations that allowed the state’s schools and infrastructure to fall into decline.

Once doesn’t hear the same tale of woe with regard to the state of Washington’s public services and benefits, at least not in New York, but its overall state and local tax burden, after tracking the U.S. average until around the year 2000, has fallen well below average since. Texas, which (like California) has long had a low federal Medicaid share of 50.0%, has nonetheless been a consistently low-tax state.  But its overall tax burden is now higher than nearby Oklahoma, which is one reason many of Oklahoma’s best teachers are relocating to Texas.

New Jersey, Connecticut, Massachusetts, California and Illinois are states were many affluent people, and business executives, complain about taxes.   But they have little to complain about when compared with New York.

New York is a state where the leaders of public employee unions, government contractor organizations, and their astro-turf lobbying organizations are always complaining that New Yorkers don’t pay enough in taxes, and are cheating them out of $billions.  At the very moment represented by the FY2017 data, in fact, advocates for even more education spending were suing other New Yorkers for another $1.9 billion.

https://www.newsday.com/long-island/education/court-to-weigh-dismissal-motion-for-school-funding-lawsuit-1.13688464

And in the latest state budget, many lawmakers demanded that the Governor accept yet another $millionaire’s tax on top of the one that already still exists.

https://spectrumlocalnews.com/nys/central-ny/news/2020/03/25/cuomo-faces-some-pressure-to-tax-the-wealthy

It didn’t pass, but is sure to come back as a fiscal crisis deepens.

I can’t help but think that the coronavirus, by accelerating a deep recession and financial crisis that were always in the cards in any event, will expand on some of the trends shown in this post.

Americans, much poorer and faced with higher health care costs, will have even less money to spend on goods and services that are subject to state and local sales taxes.  If the federal government does not succeed in bailing out the rich again by re-inflating asset prices, taxable capital gains may disappear for New York and California, two states that depend on them for state (and NYC) income taxes. The richest generations in U.S. history are now age 62 and over, and to the extent that they want to buy property in Florida, they have probably already done so.  Later-born generations are poorer, and Florida property values will have to reflect that eventually, if people in those generations even decide to go to Florida at all.

For much of the country, I have an easy answer to such a fiscal crisis. Start paying higher state and local taxes you selfish greedy people, in particular by eliminating special retirement income and property tax breaks that favor Generation Greed, the generation that decided to stop paying for things to begin with.

What, however, is going to be the answer for New York?