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Institute multiyear tax cuts with care

The same argument that Gov. Pataki is making today was used in 1987 when the state enacted a five-year reduction in the state personal income tax. The first three steps of that tax cut, as implemented during 1987, 1988 and 1989, significantly reduced the yield of the personal income tax relative to total personal income, but did not stimulate the economy as promised.
During the four-year period prior to the 1987 tax cuts, employment in New York State grew at an average annual rate of 2.46 percent. The 1987-89 tax cuts, rather than accelerating that rate of job growth, marked the end of the four-year period of greatest private-sector job growth in the last 40 years. In the four years following the implementation of those tax cuts, employment in the state declined at an average annual rate of 1.59 percent.
While national and regional forces certainly played a role in this reversal, New York’s big investment in supply-side economics did not serve to stem the tide; in fact, it demonstrated quite clearly that the economy affects state and local government much more than state and local government can affect the economy. The 1987-89 tax cuts did, however, cause substantial revenue shortfalls and lay the groundwork for years of crisis budgets.
Despite the painful experience of the early 1990s, Gov. Pataki now proposes to invest more in the risky dream of supply-side economics. In his inaugural address, he succinctly stated his almost religious belief in this approach:
“As we confront our state’s fiscal crisis, let us remember a simple truth. More government means higher taxes and fewer jobs. Less government means lower taxes and more jobs.”
Given the state’s structurally unbalanced budget situation, a new round of tax cuts should not be implemented at this time. And even more importantly, any tax cut that is enacted should be for 1995 only.
The governor and the legislature currently are required to adopt a budget annually. That budget is supposed to embody a complete plan of revenues and expenditures for the fiscal year involved.
The state officials responsible for this annual priority- setting process should not put one side of the budget (the revenue side) on automatic pilot; by doing so, they abdicate responsibility for a full and thorough annual reconciliation of state needs and resources.
If, however, New York State decides to gamble once again with its economic and fiscal stability by enacting a multiyear tax-reduction program, it should at the very least establish some institutional arrangements that will serve as an objective and periodic check on the efficacy of that program. Along these lines, any law enacting a multiyear tax cut should include the following review and trigger mechanisms:
–Sufficient time should be allowed between the steps of any multiyear tax-reduction program for an objective and automatic determination of whether the program is positively affecting the economy the way the governor suggested it would.
For example, if New York State enacts a two-step tax cut with the first step to take effect in 1995, the second step should not be scheduled to take effect until 1997 or 1998. With a three-step tax cut, the steps would be scheduled for 1995, 1997 and 1999, or, alternatively, 1995, 1998 and 2001. Providing for a one- or two-year period between the steps of the program allows sufficient time to review information on the performance of the state’s economy.
–The implementation of each subsequent step of a multiyear tax-reduction program should be subject to a statutory two-fold trigger mechanism based on the results of the objective and automatic determination of the impact of the previous step.
First, each ensuing phase of a multiyear tax cut should trigger only if the state’s private-sector nonagricultural employment grew by at least 3.5 percent in the 12-month period after the year of the previous phase. Employment in New York State grew 3.52 percent in 1984 without the aid of any tax cuts. In fact, in 1983 some gap-closing tax increases were enacted. (Modest personal income tax cuts were enacted during 1985 and superseded by the 1987 tax-reduction program.)
A second check is necessary to ensure that the growth in state employment actually is attributable to the state tax-reduction program and is not simply the result of national or regional trends. Thus, in addition to being subject to the 3.5 percent year-to-year growth trigger, the ensuing phase of the tax cut should trigger only if private-sector nonagricultural employment in New York State grew at a greater rate than did the same employment in its five neighboring states combined.
In the two-step tax cut example discussed above, the second step would, as a matter of law, not take effect unless (1) private-sector nonagricultural employment in New York State during 1996 was at least 3.5 percent greater than it was during 1995; and (2) private-sector nonagricultural employment in New York State grew at a faster rate during 1996 than did private-sector non-agricultural employment in its five neighboring states.
(Frank J. Mauro is executive director of the Fiscal Policy Institute in Latham.)


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