Relying on the rich uncle

July 6, 2011

State and local governments earn their “wages” primarily by collecting taxes, although states get significant “flow-throughs” from the federal government for Medicaid and other social entitlements. Every state varies in where they draw tax revenues from. For example, states that are highly dependent on tourism will see substantial revenues from hotel and sales taxes.

New York and New Jersey are two well-to do states that have historically relied on sharing in the largesse of their rich uncle from Wall Street. The Federal Reserve Bank of New York published an interesting paper last year that talked about how these two states were heavily reliant on tax revenues from the financial sector and were especially affected by the financial crisis of 2007-2009. Wall Street revenues rebounded sharply in 2009 and 2010 but are now sputtering and projected to decline going forward due to financial reform and the slow pace of recovery.

One recommendation of the Federal Reserve’s research staff was to have a reduced reliance on personal-income taxes, which fluctuate with the economy, and a greater reliance on sales taxes, which tend to be more stable. Unfortunately, sales taxes tend to be regressive and place a heavier burden on the poor, who spend the bulk of their income on consumption.

Here is a comparison of quarterly tax revenues for New Jersey and New York from the U.S. Census Bureau. As you can see, New Jersey already relies more heavily on the sales tax:

New Jersey New York New Jersey New York
Total Taxes $ 6.0B $ 19.7B – – – – – –
Individual income taxes $ 2.5B $ 11.7B 41.6% 59.7%
General sales tax $ 1.8B $ 2.9B 29.0% 14.8%
Corporation income taxes $ 0.25B $ 1.3B 4.2% 6.7%
Insurance $ o.22B $ 0.48B 3.6% 2.4%

It’s likely that revenues for states will continue to decline and cuts will become harder and harder to make. Every state is unique and the discussions will be tough, but more data is needed to understand what can be done. I applaud the Federal Reserve Bank of New York for addressing this issue. I encourage all creative minds and research groups to come up with solutions. The old approach of tossing verbal bombs across the political aisle should be left behind. We have enough resources to care for everyone but they must be gathered and distributed judiciously.  The rich uncle that many states relied on may be gone for good.

Further: National totals of state and local government tax revenues by quarter

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