Last week, Governor Cuomo, in the midst of developing an economic growth plan and staring at surprise budget gaps of $350 million this fiscal year and $3.5 billion next year, told the Post that “some people on the tax code say you should increase taxes; some people say you should decrease taxes. We’re open to all the best thinking.”
If the governor sticks to his campaign convictions to spur economic growth and create jobs, rather than give into Occuppy Wall Street demands to raise taxes, he will rewrite our tax code to create a more business-friendly environment, starting with the way New York treats capital gains.
New York is one of a minority of states that subjects capital gains to the state’s personal income tax. That the world’s financial capital taxes long-term capital gains as ordinary income, thereby chasing away some of our most productive citizens, perhaps explains in part the present revenue gaps.
The historical record, best exemplified by the Reagan tax cuts, repeatedly demonstrates that federal tax revenues rise as capital gains tax rates are cut. Since it is easier to move among states (to Florida which has no income tax may come to mind for New Yorkers) than among nations, this historical fact is even more applicable to the states.
John F. Kennedy remarked that the “tax on capital gains directly affects investment decisions, the mobility and flow of risk capital … the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.”
He was right: as the Kennedy tax cuts were phased in from 1962 to 1965, not only did revenues grow by more than a five percent yearly average, GDP surged at a five and a half percent average annual rate.
According to the New York State Department of Tax and Finance, in 2007, New Yorkers earned $639 billion in taxable income, $105.6 billion of which was from capital gains, some 16.5%. Following the financial crisis of 2008, total income from capital gains fell 55.8% to $46.6 billion, just 8% of the New Yorkers’ accumulated income.
If capital gains were exempt from New York’s personal income tax, it would cost the state about $5 billion. That’s a big hit for the state’s coffers, especially on top of the projected budget deficits.
The right approach would be a phase-out of the tax on long term capital gains. Phasing out the tax, even gradually, will produce more jobs by spurring investment.
As a candidate, Cuomo pledged not to raise taxes, and in his inaugural address, Governor Cuomo rightfully declared that “New York has no future as the tax capital of the nation.” The best way for the Governor to use the tax code to create jobs could be summed up as “addition by subtraction” – removing onerous taxes to make New York a more attractive place to do business.
ABC's Charlie Gibson famously summed up the benefits of cutting capital gains taxes when he asked Obama in the 2008 primary debates why he wouldn’t take such an approach when “history shows that when you drop the capital gains tax, the revenues go up.”
Obama's answer, "“Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness," is the wrong answer for a New York that is hemmoraging jobs and is hungry for capital investment.
President Obama is now paying a well-deserved political price for sacrificing job creating policies to "fairness." Governor Cuomo may pay a similar price if he lacks the courage of his campaign convictions.