For those following state and local economies, it should be no surprise that New York City and State’s economic edge has dulled in recent years, especially compared with fast-growing states in the Sun Belt. According to a new report from the Economic Innovation Group, however, New York’s decline in economic competitiveness is steep relative to both red and blue states. In the report’s combined ranking of eight indicators, New York ranks 46th in the nation for economic dynamism, well behind 11th-ranked California, its big-blue sister. In particular, a lack of new housing permits and a rapid drop in the rate of new startups have slowed New York City’s growth, turning the Empire State into a laggard. Governor Kathy Hochul and Mayor Eric Adams should use their upcoming Fiscal Year 2025 executive budgets to promote entrepreneurialism and thereby organically spur new tax receipts.
Unlike the nearly $9 billion surplus Hochul enjoyed a year ago, the Fiscal Year 2025 budget gap will total at least $4.3 billion. Tax revenues have remained durable even as New York’s economic recovery has lagged the national average, but only thanks to the robust stock market and federal pandemic stimulus funds. Though Hochul has recently reaffirmed her commitment not to raise income-tax rates, progressive legislators and interest groups are pressuring her to backtrack. The leftist, public-union-dominated Working Families Party is asking candidates seeking its endorsement to support a $40 billion tax hike on the highest-earning New Yorkers, including through marginal income tax increases and experimental wealth taxes.
A few weeks ago, a report by the Fiscal Policy Institute, another labor-backed group, found “no statistically significant evidence of tax migration in New York,” or, in other words, nothing to indicate that wealthy New Yorkers are moving to low-tax jurisdictions in response to marginal tax hikes. As the Empire Center’s Ken Girardin points out, however, the report draws from self-reported American Community Survey data that are unlikely to capture a large enough sample of the highest-earning New York taxpayers. (More reliable IRS and state tax department data for the comparable period are not yet available.) Meantime, as E. J. McMahon has emphasized, between 2010 and 2020, New York’s share of taxpayers who earn more than $1 million declined from 12.7 percent to a record low of 8.9 percent.
Even if we were to assume, for argument’s sake, that the finding in the Fiscal Policy Institute’s report was right during the period studied, accepting its conclusion—that marginal tax rates don’t matter to high earners—would be reckless. In 2021, the top 1 percent of New York City residents paid 48 percent of city income taxes; statewide, the 0.8 percent of millionaire earners who filed likewise paid 48 percent of state income taxes. Losing only a small slice of these payers could destabilize city and state budgets. Hochul and Adams know this, and New York state comptroller Thomas DiNapoli recently warned against tax hikes. However, that doesn’t mean New York’s chief executives are immune from immense interest-group pressure to fund things like reparations and limitless public school spending.
Too often, arguments over taxation devolve into one side accusing another of wanting to help the wealthy for their sake, not for the broader array of social benefits their taxes fund. As a principled matter, leaders in a rule-of-law society should not disfavor individuals or groups of law-abiding citizens. But this ideal fails to account for the reality that high earners—and their extraordinarily disproportionate share of tax liability—are instrumental in providing a better quality of life for the poor and middle class.
The emphasis on boosting revenue by raising marginal tax rates has disinclined New York from raising tax collections through organic economic growth, which has further stalled the state’s economic engine, as the Economic Innovation Group report reveals. Not only does a nation-leading tax burden contribute to higher living costs for working professionals in prohibitively expensive New York City; it also signals to firms and employees that the state is closed for business, unwilling to change course, and ungrateful for its high-earning taxpayers.
New York’s heavy tax burden also effectively makes the state more dependent on the stock market’s fortunes. Instead of prioritizing the sustainable creation of innovative new firms, the state is increasingly relying on “paper” capital gains, which don’t come from real economic activity in New York.
Though good arguments exist to justify creating conditions that would bring businesses, their owners, and their employees to New York, lifting the top-line alone would represent only a partial victory. What really matters are the services those taxes purchase, the quality of life they enable, and the economic activity they spark. New York’s rate of outmigration shows that policymakers are not delivering on these services.
Instead, New York is reaping the economic rewards of its policymakers’ unwise decisions. New York’s counties, for instance, are the only ones in the nation required to contribute heavily to the state’s Medicaid program, which consumes a considerable share of county property-tax levies. New York also spends $12 billion annually—nearly more than all other states combined—on Medicaid-reimbursed personal-care assistants and other nonmedical, at-home care. These assistants doubtless provide valuable services to elderly and infirm individuals and their families, but they do not earn enough to pay substantial personal income taxes or spur robust new economic growth.
As New York’s leaders approach a new year and new budget seasons, they should focus on growing the Empire State. Otherwise, it will join the countless examples of places that rose and then fell so far that they never recovered.
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