Why We Suck

The Two Left Coasts
Cuomo and Brown decide to 'occupy' taxpayers

WSJ Editorial, December 7, 2011

New York and California were once America's economic growth engines, but their political leaders seem determined to keep them sputtering. Their Democratic Governors are now pushing big new tax increases in the name of soaking the rich and balancing their budgets, as if that same strategy hadn't put them in their current fiscal straits.

In New York, Andrew Cuomo announced yesterday that he's agreed with legislative leaders to rewrite the state's tax code to create four new tax brackets and rates. Mr. Cuomo is pitching this as "tax reform," but that's a ruse to disguise the fact that he's repudiating his 2010 campaign pledge not to raise taxes on anyone while letting a previous income-tax surcharge expire on schedule at the end of this month.

This is the same Governor who said as recently as October 17 that "You are kidding yourself if you think you can be one of the highest-taxed states in the nation, have a reputation for being antibusiness—and have a rosy economic future." The people who were really kidding themselves are voters who thought Mr. Cuomo believed what he said. With the "occupiers" in the streets of New York, perhaps this is Mr. Cuomo's first left turn in his campaign for the Democratic Party's 2016 nomination.

Equally worthy of scorn are the Republicans who run the state Senate who buckled under union pressure because they don't have many millionaires in their rural districts. New York's GOP is essentially worthless. Blame, too, goes to the Partnership for New York City, the big business grandees who supported a tax increase and for whom higher taxes are a rounding error. They're sticking it to small business owners with narrow profit margins.

Mr. Cuomo is also tossing out the most desirable part of New York's tax code, which is its relative flatness, with a top income tax rate that would have been 6.85% next year (after the previous surcharge expires). The new code will include a "progressive" ladder: 6.45% for couples earning between $40,000 and $150,000, 6.65% from $150,000 to $300,000, 6.85% from $300,000 to $2 million, and 8.82% above $2 million ($1 million for individuals).

Such a progressive code will make the state fisc even more dependent on millionaire incomes, which soar on capital gains and bonuses during good times but crash during recessions. This is the same progressive trap that has made California's budget hostage to economic boom and bust.

The good times create an unsustainable revenue boom, which the politicians spend, only to find that the budget goes quickly and steeply into red when the economy slows. Then the politicians cry poverty and raise taxes again, driving more of the wealthy taxpayers the politicians need out of the state. This is why the highest-taxed states are always under fiscal duress.

And speaking of California, Governor Jerry Brown announced Monday that he'll put a huge new tax increase on the ballot for voter approval next November. The income tax rate would rise by one percentage point to 10.3% for individuals making between $250,000 and $300,000, to 10.8% for those up to $500,000, and two percentage points to 11.3% for anyone making more than $500,000. All retroactive to Jan. 1, 2012.

Lest you think Mr. Brown and Democrats let the middle-class off the hook, he also wants to raise the state sales tax by half a penny on the dollar to 7.75%.

Unlike Albany, where the insiders rule without cavil, California voters have imposed a two-thirds vote requirement for the legislature to raise taxes. Republicans in Sacramento won't agree to a tax hike unless Mr. Brown pushes aggressive pension reform, but the Governor's recent pension proposal is merely a baby step to solving that problem.

So now he's resorting to the ballot box, and to what will no doubt be a year-long campaign to scare voters into believing that if they don't raise taxes their children will go uneducated, their roads will decay, and the middle class will go without health care. Hollywood and the unions will be his financiers.

The larger lesson here is the difficulty of changing the politics of union-enforced entitlement. Both states are dominated by public unions that refuse to allow serious reforms in pensions or state welfare spending and whose default policy is always higher taxes. Like Greece or Italy, the illusion is that you can chase revenue by raising taxes without regard to economic growth and the mobility of people and capital.

Mr. Cuomo claimed to be different when he ran in 2010, but his resistance didn't even last a year in office. So two states are now taking one more whack at the people who create wealth, in order to redistribute more of it. For how that story ends, look to Europe.