Do CA and NY Get the ALEC–Laffer Message? Is the Message Believeable?

Do CA and NY Get the ALEC–Laffer Message? Is the Message Believeable?

In the first full week in December, "wealthy" New Yorkers and Californians found themselves to be a step closer to seeing their income tax liabilities (state, not federal) rise.  This trend appears to be counterintuitive to anyone that respects the merits of theory advanced by the American Legislative Exchange Council.  The 2011 ALEC-Laffer survey ranks California 47th and 46th in its state economic outlook rankings and state economic performance rankings, respectively.  New York's standings are dead last (50th) and 40th in the same rankings, respectively. See 4th Edition, Rich States, Poor States: ALEC - Laffer State Economic Competitiveness Index.

It is recognized that many dismiss ALEC-Laffer free market principles out of hand.  That said, state rankings in annual ALEC-Laffer surveys are consistent , by and large, from one year to the next.  The 2011 survey was released earlier this year.  But if it had instead been released in the last few days, ALEC-Laffer would be sure to point to the most recent activities as illustrations of what is wrong with New York and California. Whatever the merits, ALEC-Laffer  theory attributes the status of "poor" states as "poor" (e.g. NY and CA) to their political-socio-economic culture.

The New York State Legislature's offering to Gov. Andrew Cuomo (D) is a tax plan to generate almost $2 billion by imposing a temporary tax rate of 8.82 percent on single filers and joint filers with annual earnings that exceed $1million and $2 million, respectively. See "New York Legislature Passes Income Tax Rate Restructuring Plan" (TaxAnalysts® State Tax Today, December 9 2011). Cuomo has mixed emotions about the plan, concluding that the state's gaping $3.5 billion budget deficit is too difficult to balance relying only on budget cuts.

Meanwhile, California Gov. Jerry Brown (D) and a state teachers union have filed separate ballot initiatives that would impose higher income taxes on high earners.  See California Governor, Teachers' Union File Ballot Measures (TaxAnalysts® State Tax Today, December 6, 2011). Brown would increase the marginal income tax rate from 9.3 percent to 10.3 or 10.8 percent, depending on earnings.  The floor for affected single filers in Brown's plan is $250,000, which is a healthy income - but is it fair to assign the "wealthy" moniker to all such taxpayers?

Not to be outdone, the California Federation of Teachers wants a 3 or 5 percentage point increase imposed on incomes between $1 and $2 million or on incomes that exceed $2 million, respectively.

With proposals like these, is it any wonder that New York experiences a steady migration of citizens out of the state?  Or that California faces increasingly intensified economic competition from neighboring states?

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