Let Them Eat Tax Breaks, Bill Weld Tells New York

April 7 (Bloomberg) — There is such a thing as a bad tax cut, as William Weld has just reminded us.

The Republican candidate for New York governor is talking about exempting state income tax for those earning less than $75,000. The idea sounds wonderful, but it is wonderful only in its cynicism.

Weld, born to Long Island wealth, has made a career of trying to prove he can serve the average man. But in the name of reducing class differences, the former governor of Massachusetts would, this time, reinforce them.

Think of the American tax experience as a trip up the great staircase of progressivity, with the New York experience being especially painful. State and federal taxes combine to create the effective marginal rates, or steps.

Low earners may have it easy, but as they begin to earn more they must negotiate steeper increases — New York couples confront a state income tax rate of 6.85 percent once their taxable income exceeds $40,000. High housing prices, especially around New York City, make a new home prohibitive. Earlier this year, the Tax Foundation of Washington ranked New York last of 50 states in its business tax-climate index. Entrepreneurs and professionals flee to less-taxed or warmer states rather than endure the climb.

At the Top

At the top of the progressivity staircase, the increases cease. After catching their breath at that landing, Empire State residents do one of two things: They join their peers in lower-tax states, or stay and survey the strugglers below, often with a combination of guilt and smugness.

Over the years, that emotional mix has prompted them, and the politicians whom they support, to try timid bits of carpentry on the New York component of the staircase: flattening the stairs at the bottom through tax relief, for example. Washington has the same impulse, providing breaks for lower and medium earners.

To pay for this hammering at the low end, however, governments have had to keep the steps in the middle steeper than they otherwise might have been. New Yorkers who get raises still find themselves short of cash. This experience, technically known as "real bracket creep," has made matters worse. So has the Alternative Minimum Tax, a tax designed for the rich that now snares many in the middle class.

The result in any case is that the lowest-earning New Yorkers have become accustomed to paying little or no income tax and have tended to squint up at Wall Streeters as if they really were feudal lords. As for middle-income earners, from police to computer programmers, they are furious.

Feeling Stuck

Instead of feeling as though they are on one great hike together, New Yorkers have come to feel stuck on their own step.

Now along comes Weld, focusing on the pain of those earning $50,000 to $75,000 a year. "I wanted to design an incentive that would appeal to people in that bracket," he told Brian Lehrer of WNYC this week. Weld has insisted that flattening the stairs down low will not hurt the earners higher up. He says that there are plenty of ways to pay through spending cuts and freezes.

This is the cynical part. There is an action that would promote sufficient growth to reduce deficit concerns. It is to recognize that the staircase itself is the problem. One could dismantle the New York part of the staircase by ending the state's income tax, or adopting a single low rate. Another possibility is to make rate cuts that reduce the steepness of the progressive stairs uniformly from top to bottom.

Then New York really might become more like Florida. It might find more revenues than it expected rolling in and more businesses starting.

One odd but true fact: if you really want to help the man earning $74,000, you cut the taxes of the man who earns $84,000. This benefits them both. The higher earner works harder than before. So does the lower earner, who now has incentive to move up.

Weld's proposal, however, is too narrow to pull revenue into state coffers. It truly would cost billions, just as the fiscal watchdogs say. To pay for such cuts lower down, New York's next governor may well find he has to increase taxes on the upper part of the staircase.

And even if there is no rate increase, the Weld plan would seem to create a new disincentive for strivers. It suggests that someone earning $75,001 will pay lots of taxes, while someone earning two dollars less will pay none. That's some stair-step.

There is a final problem with the Weld proposal. Paying taxes is like voting, or sitting on a jury. It is one of the few ways that Americans serve their government. To eliminate the duty is to move a state closer to the old dual system of the fancy guys on top and the people they baby-sit beneath.

Weld may reconsider. His spokesperson Andrea Tantaros says we can expect Weld to roll out more tax proposals shortly, and that it is wrong to view this cut in isolation. That's good news. If a Republican is going to have a shot at beating the Democrat, Attorney General Eliot Spitzer, he needs a bigger plan. A $75,000 break sounds good, but it's not enough to help a state's economy. For that, you have to think about smashing the staircase.

(Amity Shlaes is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2006 Bloomberg

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