What Cuomo Doesn't Understand About Taxes and Prosperity

Earlier this year, Governor Andrew Cuomo pushed a budget through Albany that lowered taxes on the rich while imposing major cuts on education spending, among other things. This week, though, Cuomo came out in favor of President Obama's plan to raise taxes on high earners.

Cuomo has explained this contradiction by saying that taxes on the wealthy should be imposed at the federal level, not the state level. As reported Tuesday:

The governor says while he's against "raising taxes in general", if taxes need to be increased on the wealthy in order to balance the federal budget, reduce the debt and fund jobs programs, then they should be raised at the federal, not the state level.

"We have competitors," Cuomo said.

Cuomo says New York remains one of the highest taxed states in the nation, and he says increasing taxes on the rich even more could lead them to move to neighboring states with lower taxes like Connecticut or New Jersey.

In imagining wealthy New Yorkers fleeing the state, the governor is repeating one of the right's favorite talking points about taxes. But it's an argument that doesn't track with either the data or common sense.

Let's start with the data. The most recent study on this subject looked at New Jersey, which imposed a special surtax on residents making over $500,000 in 2004 -- raising their top tax rate to 8.97 percent from 6.37 percent. Robert Frank explains the results of the study in a Wall Street Journal column:

The study found that the overall population of millionaires increased during the tax period. Some millionaires moved out, of course. But they were more than offset by the creation of new millionaires.

The study dug deeper to figure out whether the millionaires who were moving out did so because of the tax. As a control group, they used New Jersey residents who earned $200,000 to $500,000–in other words, high-earners who weren’t subject to the tax. They found that the rate of out-migration among millionaires was in line with and rate of out-migration of submillionaires.  The tax rate, they concluded, had no measurable impact.

“This suggests that the policy effect is close to zero,” the study says.

The study found that retirees made up most of the tiny number of people who were likely to leave because of tax rates. That makes sense, and I've heard my own older in-laws talking about tax rates in choosing where to live. But business owners -- the job creators that Cuomo is so worried about -- were among the least likely to leave. 

You would think that Cuomo would have looked at what happened just across the Hudson before jumping to the conclusion that high taxes would scare off the richies.

Or just used common sense. There are obvious reasons why a few percentage points in the top tax bracket doesn't result in much population change. People often have deep roots where they live -- relatives nearby, kids in school, jobs that aren't portable. Nobody cuts those ties casually. Also, people live and work near economic opportunity, even when the costs are much higher in those places. Wealthy Manhattanites could reduce their housing costs overnight by moving out of the city, but instead more people keep piling into the same overpriced neighborhoods. Why? Because there are economic benefits to living in New York -- never mind the night life.

If people will put up with paying $3 million for a two-bedroom coop, a higher tax tab is not going to scare them off.

But Cuomo's statements show an even bigger blind spot, which is that he doesn't seem to appreciate how, ever since George Pataki inaugerated lower tax rates on the affluent, New York has badly shortchanging its public structures -- the structures need to sustain prosperity in the state. Just today there was a story about how overcrowding in New York City classrooms was at a ten-year high.

Yet in order to allow New York's surtax on the rich to expire, the budget Cuomo rammed through earlier this year cut education spending by $1.3 billion -- cuts that will result in over 10,000 teacher layoffs. The state university system is also taking a huge hit, on top of budget downsizing that has been going on for years.

Now, last I checked, an educated work force was one of the top things that businesses looked for in deciding where to locate. Lots of studies on this point, too. Too bad it's not clear that the governor of New York cares about the facts.