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May 28, 2015
Pataki's Tax Cuts: Did the Shine Come Off?
by Paul C. Barton

Full Text Published by Tax Analysts®

During his last year in office in 2006, former New York Gov. George Pataki said at a press conference, "I've never met a tax cut I don't like."

The statement embodied the tax cutting zeal with which Pataki, now 69, had entered office 11 years before, wasting little time seeking -- and getting -- reductions in individual and business taxes that turned heads in New York political and financial circles and won him favorable national attention as well.

And it was a tax cutting agenda the nation will likely hear plenty about if Pataki, as expected, enters the race for the 2016 Republican presidential nomination on May 28.

Various Pataki websites already shout the totals: 19 different taxes cut, saving New Yorkers a cumulative total of $140 billion over his 12 years in office (1995-2006). But the effects of his tax cuts, and his overall fiscal policy, still stir debate.

Pataki and Legislators Enter 'Bidding War'

Pataki hit the ground running his first year, getting the State Assembly to go along with a 25 percent reduction in income taxes for most New Yorkers that dropped the top rate from 7.875 percent to 6.85 percent for the wealthiest. He followed with an attack on business taxes that reduced the corporate tax rate from 9 percent to 7.5 percent. He also eliminated gross receipts taxes for businesses that agreed to buy power from New York utilities and established tax-free "Empire Zones" to encourage economic development.

But it didn't stop there. Pataki soon found himself competing with legislators to see who could propose the most tax cuts during the latter part of the 1990s, James Parrott, deputy director and chief economist at the Fiscal Policy Institute in New York, told Tax Analysts.

Besides the income tax, levies cut or eliminated during his tenure included sales taxes, school property taxes, beer taxes, motor fuel taxes, estate taxes, real property gains taxes, gift taxes, corporation franchise taxes, highway use taxes, bank taxes, petroleum business taxes, real estate transfer taxes, beverage container taxes, bank taxes, insurance taxes, and parimutuel taxes.

And in 1999, Pataki angered New York City officials by signing a bill that ended the city's $350-million-a-year commuter tax. But because it still applied to commuters from other states, such as New Jersey and Connecticut, the bill ran into constitutional challenges.

"He set in motion a [tax cut] bidding war to see who could be the most irresponsible," Parrott said of Pataki's early years in office.

Others saw it differently. "He did not go overboard," E.J. McMahon, a former Pataki adviser, told Tax Analysts. McMahon is now president of the Empire Center for Public Policy in Albany, New York, a think tank that advocates free-market principles.

In fact, McMahon wrote in his own review of those years: "Pataki wanted to jump-start the economy with lower taxes -- but he also had inherited a $5 billion state budget shortfall from [former Democratic Gov.] Mario Cuomo. Could the new governor somehow balance the budget while simultaneously keeping his campaign promise to reduce taxes? Critics said it couldn't be done. Pataki proved them wrong."

In total, Pataki initiated and joined with legislators in enacting more tax reductions "with broader effects and more significant revenue savings than any other governor of New York," McMahon said in an interview.

Parrott, while not condoning the cuts, went even further. "He cut more state taxes than any governor of any state in history," he said.

Aftermath of Tax Cuts Debated

But given that New York has a long history of having its state and local tax burden rank at or near the top of the nation, "it's tough to budge that [rankings] needle," said Donald Boyd of the Rockefeller Institute in Albany. And so it was. When Pataki left office at the end of 2006, the state was still number one in that category, according to the Tax Foundation's rankings.

But examining state taxes in isolation shows Pataki eased burdens some, even if the relief didn't last long. In state taxes as a percentage of personal income, New York ranked 22nd highest when Pataki first entered office and fell to 34th by 1997, according to rankings compiled by the Rockefeller Institute. Afterward, however, the state started creeping upward, ranking 21st highest by 2006.

One of the reasons the state tax bite got bigger in the 2000s was that in 2003, powerful state lawmakers, over Pataki's veto, pushed through a temporary income tax surcharge on families earning more than $150,000 a year and individuals making more than $100,000. The surcharge was a reaction to a state budget gap that opened in the wake of the national recession of the early 2000s, as well as the economic effects specific to New York from the 9/11 terrorist attacks.

Meanwhile, a statistic Pataki supporters cite is that despite the income tax cuts, state revenue from the income tax increased 17 percent. They cite it as proof that his tax cutting yielded economic growth. "By the end of the decade [1990s], private-sector job growth in New York actually exceeded the national average," McMahon said in his written analysis.

Both Boyd and Parrott, however, said the increases in income tax revenue were more a testament to the run-up in the stock market during those years -- yielding sharp gains in investment income for the wealthy especially -- than any evidence of supply-side economics taking hold.

As the years went by, Pataki's fiscal policies drew criticism from many directions. McMahon said he became "too willing to relax his initially tight lid on spending once the state's fiscal condition began to improve near the end of his first term." After seeing state spending decline his first two years in office, Pataki started to propose spending increases, including one of 8.5 percent in his 1999 budget.

By the end of his governorship, he was proposing state spending of $75 billion annually, compared with $43 billion when he first took office in 1995. "He didn't exactly starve the beast," McMahon added.

Parrott, meanwhile, decries what he viewed as a boomerang effect on Empire State residents from the tax cutting frenzy of the late 1990s. The cuts, he said, "clearly reduced state aid to schools and local governments, with the result that it put upward pressure on local property taxes."

Parrott added that Pataki "largely ignored the local side of the question."

Slipping Grades at the End

Pataki tried to burnish his tax cutting credentials in 2006 with his last proposed state budget. He proposed a variety of individual and business cuts -- including elimination of the marriage penalty and taxes on estates under state law -- but most of the cuts wouldn't have taken effect until he left office.

As if to sum it all up, Pataki's grades from the libertarian Cato Institute, which issues annual fiscal policy report cards on governors, went steadily downhill. The institute was thrilled by his first two years in office, saying, "No other state has improved its fiscal condition over the past two years more than New York has -- but then no other state had such a giant hole to climb out of." The group deemed Pataki worthy of an A for those early efforts.

But by 2007, when Pataki was toying with the idea of running for the White House in 2008, the group was talking about "the fall of a rising star" and giving the New York chief executive a score of D for his last year in office and an overall grade of C for his 12-year reign. It commented:

    George Pataki started out as a tax-cutting, small-government governor. He ended up as a big spender seemingly hell-bent on overturning anything good he had done in his first term. . . . Meanwhile, general fund spending has ballooned by more than 25 percent in the Empire State during Pataki's final term. If he runs for the Republican presidential nomination on a record like that, it's going to be very hard for him to convince the small-government advocates who vote in the GOP presidential primaries that he's still one of them.

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