States, cities and tribal nations across the country are facing massive budget shortfalls due to the economic fallout of the COVID-19 pandemic, which has emptied public coffers through a combination of depleted tax revenues and surges in emergency spending.
These governments are jointly expected to lack between $490 and $620 billion of the revenue they need to fund existing levels of public services through 2022, according to an analysis conducted by the Center on Budget and Policy Priorities, a liberal think tank.
State and local governments have already begun responding by furloughing and laying off government employees, employing 1.4 million fewer people than they did in February. One million of those employees worked in schools or universities.
Progressive lawmakers and activists worry that whether federal aid arrives or not, state and local governments risk making the same mistakes as they made after the 2008 financial crisis, when the decision to choose spending cuts over graduated tax increases hurt the economic recovery and left a lasting mark on schools and other public services.
“Policymakers have choices,” said Cortney Sanders, a policy analyst for the Center on Budget’s state fiscal policy division. “They can make choices that exacerbate inequalities or they can make choices to move us toward an anti-racist and equitable future.”
And while the leaders of Republican-run states like Texas and Georgia have sometimes been more eager to respond to their budget woes with spending cuts, leaders of Democratic-run states are at odds over how best to proceed. In several deep blue states, liberal lawmakers and advocates are struggling to persuade centrist executives ― and voters ― of the need for the wealthiest residents to shoulder their share of the budget gap in the form of higher taxes.
In that way, the fight over how to address the coming fiscal crunch is shaping up to be the latest test of the relative strength of the Democratic Party’s reigning business-friendly wing, as opposed to a rising left wing aligned with organized labor.
“The challenge for Democrats is to do something that will make a difference in the lives of regular people,” said Michael Kink, executive director of the union-backed Strong Economy for All coalition, which is pushing for a host of higher taxes in New York. “The only way to do that is with real money. You can’t fake it.”
The three biggest states in the country with unified Democratic control of government are California, New York and Illinois. How this trio balances its budgets affects the largest numbers of people and sets the tone for Democratic governance in the country.
Thus far, progressive calls for increasing taxes on the rich in these three states are facing significant headwinds.
This November, voters in California and Illinois voted down ballot measures designed to make their taxation systems more progressive.
In Illinois, billionaire Gov. J.B. Pritzker (D) bankrolled a Constitutional amendment ballot initiative that would have allowed the adoption of a progressive income tax, replacing the current system, which only permits a single, flat income tax rate. By its very nature, levying the same tax rate ― currently 4.95% ― on all state residents disproportionately affects low- and middle-income people, for whom the sum is more onerous. And the system has forced Illinois to rely more heavily on property taxes, which wealthy residents have often evaded by hiring politically connected property tax appeals lawyers.
But conservative billionaire Ken Griffin and other big business executives went dollar for dollar with Pritzker to defeat the initiative, arguing that, among other things, higher income taxes provided no guarantee of property tax relief. The amendment, which required 60% support to pass, failed 53% to 47%.
“We’re actually in a moment of abundance in terms of our ability to fill many of our budget gaps, but it’s an abundance that must be coupled with political will to balance the budget not on the backs of those who have already been at the front lines.”
In California, public-sector labor unions joined with the Chan-Zuckerberg Initiative in an effort to pass Proposition 15, which would have closed a massive property tax loophole for big businesses. The ballot measure was a response to the unusual property tax system California adopted in 1978 tying property taxes to the property’s value at the time of the sale, rather than a rolling system of tax assessment of the kind used in other states. As a result, many homeowners and big businesses like Disneyland pay property taxes based on values assessed decades in the past, leading to major shortfalls for local services like schools and county hospitals. Despite its progressive reputation, California ranks 42nd in the country in per-pupil education spending when adjusted for cost of living, according to the California Budget and Policy Center, a liberal think tank.
Prop 15 would have created a separate property tax collection system for commercial properties worth more than $3 million, generating as much as $12.5 billion in new revenue. But some of California’s biggest corporations and property investors, such as the private equity giant Blackstone, spent $53 million ― nearly as much as Prop 15’s backers ― trying to convince Californians that the proposal would raise taxes on ordinary people and prices for consumers. State voters voted the referendum down, 52 to 48%.
“California is a more conservative state than a lot of people think,” said Alex Stack, a former spokesman for the Yes on Prop 15 coalition.
“But I wouldn’t say taxes are a third rail in California anymore,” he added. “Opponents of reform are hanging on by a thread.”
With the most ambitious progressive tax reforms off the table in California and Illinois, New York stands out as the biggest blue-state laboratory for progressive solutions to COVID-19 budget woes.
The Invest in Our New York campaign, led by labor unions, community groups and progressive powerhouses like the Working Families Party, is calling for the state’s looming $15 billion budget deficit to be closed, and then some, through a suite of progressive taxes projected to raise $50 billion.
The initiative, which includes Kink’s Strong Economy for All coalition, proposes higher state income tax brackets on earnings over $300,000; imposing a tax on capital gains to offset the disparity between federal taxes on capital gains and those on ordinary income; a 2.5% tax on inheritances of more than $250,000; taxing billionaires’ asset appreciations as ordinary income; a “small” financial transactions tax; and a surtax on corporate incomes to offset the Trump administration’s corporate tax cuts.
Proponents of the tax increases see them as the appropriate antidote to an uneven, or “K-shaped,” recovery from the economic fallout of the pandemic. Working-class people, including Black and Latino communities already harder hit by COVID-19, have been much more likely than upper-middle-class professionals to lose their jobs or otherwise have their lives upended since March. Food pantries are seeing unprecedented demand and the plight of the state’s 725,000 undocumented immigrants, who have not been eligible for previous rounds of aid, has been especially acute.
At the same time, thanks to a rollicking stock market, New York’s 120 billionaires grew their wealth by more than $77 billion between mid-March and mid-June, according to the liberal group Americans for Tax Fairness’ analysis of Forbes data.
“We’re actually in a moment of abundance in terms of our ability to fill many of our budget gaps, but it’s an abundance that must be coupled with political will to balance the budget not on the backs of those who have already been at the front lines,” said Sochie Nnaemeka, director of the New York Working Families Party.
New York progressives already have a policy template from across the Hudson River in New Jersey, where Gov. Phil Murphy (D) finally succeeded in cutting a deal with the Democratic-run legislature in September to raise income taxes on earnings of $1 million to 5 million from 8.97% to 10.75%. The state also raised its surtax on corporate income from 1.5% to 2.5%. At the same time, he expanded the earned-income tax credit to 60,000 more low-income state residents.
“If you’re wondering how to raise revenue in the middle of a recession and in a way to combat an economic downturn, those were some good examples,” Sanders of the Center on Budget said of New Jersey’s tax changes.
“Legalizing sports betting and marijuana are just going to be other regressive taxes.”
The Working Families Party also has high hopes of pressuring lawmakers in Connecticut and Rhode Island, where Democrats enjoy control of the legislature and governorships, to enact a similarly progressive course of action. President-elect Joe Biden has tapped Rhode Island Gov. Gina Raimondo (D), a centrist fiscal hawk, to serve as his Commerce Secretary. Her departure and a series of progressive primary wins in the state legislature in September are already generating more momentum to address the state’s $513 million budget shortfall through tax increases that target the state’s wealthiest residents, rather than spending cuts.
Meanwhile, in New York, political will for higher taxes on the state’s wealthiest residents is materializing among some key players. New York’s state Senate, which was effectively controlled by Republicans until 2018, now has a Democratic supermajority fueled by progressive and even socialist victories across two election cycles. And the state Assembly, where Democrats already had a veto-proof majority, has seen some of its more moderate members ousted by younger left-wing challengers.
At the same time, New York Gov. Andrew Cuomo, who began his first term in 2011 by coupling tax cuts with reductions in social spending, has proven resistant to any tax increases targeted at the super-rich. He has at once argued that it would provoke multi-millionaires and billionaires ― with whom he claimed to speak “all day long” ― to flee the state in pursuit of lower taxes, and wielded the threat of higher taxes as part of an appeal for federal aid.
The Invest in Our New York campaign has marshaled the research of scholars who have found that there is no evidence that a substantial number of rich people leave states in response to tax increases. And they note that federal aid in the aftermath of the Great Recession both fell short of New York’s needs and came with cumbersome conditions on how it would be spent.
For Nicole Gelinas, a senior fellow at the conservative Manhattan Institute, conditions on federal aid would be a welcome dose of fiscal medicine to New York and other blue states that she believes have ratified public-sector union contracts with unnecessarily generous early retirement health benefits. Those benefits could be easier to scale back because they are not statutorily protected from cuts the way many state pension plans are.
“Why not tie congressional aid to states and cities to reform of these retiree health care plans?” she asked.
In his state of the state address on Monday, Cuomo, who retains a Republican budget director, said that if New York raised the state income tax rate on earnings over $1 million from 8.8% to California’s top rate of 13.3%, it would “only” generate $1.5 billion in new revenue.
He instead hammered home the need for help from Washington, including through the reinstatement of the full federal income tax deduction for state and local taxes, and proposed an array of spending cuts and revenue raisers.
Once a weed critic, he is now calling for the full legalization and taxation of both recreational marijuana and sports betting on mobile devices. He has embraced these fees despite estimates that the combined revenue from marijuana and sports betting taxes would fall short of $1 billion in annual revenue ― a sum smaller than the amount generated by the millionaire tax he has sniffed at.
Notwithstanding their divergent ideologies, Gelinas joined Kink and Nnaemeka in panning the latter measures as tax increases that would fall disproportionately on people of modest means.
“Legalizing sports betting and marijuana are just going to be other regressive taxes,” Gelinas said, noting that New York already has high regressive sales taxes. “We tax pretty much everyone pretty heavily already and it’s still not enough” to balance the budget. Gelinas instead favors, among other changes, demanding voluntary pay freezes from public-sector unions as a first step to avoid layoffs.
A spokesperson for Cuomo did not respond to a series of questions about the marijuana and sports betting taxes, as well as his other budget priorities.
In theory, Democratic lawmakers do not need to wait for Cuomo’s approval. They have the power to pass laws raising taxes and to override Cuomo’s veto if he chooses to block them. And both New York Assembly Speaker Carl Heastie and state Senate Majority Leader Andrea Stewart-Cousins have expressed support for higher taxes on the wealthy.
But having the power is one thing, and using it is another ― especially in New York’s lopsided system of state government. In the Empire State, the governor has uniquely centralized power relative to other state executives, because he or she alone can introduce the state’s budget.
In order to negotiate their priorities with the governor in a closed process that he controls, Stewart-Cousins and Heastie have a strong incentive not to defy him on other priorities.
That’s why the Invest in New York coalition is so committed to pressuring Cuomo directly, including by appealing to the progressive image he has sought to burnish in the wake of the pandemic and the revival of the Black Lives Matter movement this past spring.
“Gov. Cuomo has a lot of beautiful, soaring rhetoric, but the history of his time in office is that he hasn’t been able to deliver on the reality,” Kink said.