The Futility of American State Budget Politics

New York Governor Andrew Cuomo celebrated a significant political victory this week when he reached a compromise with the legislature on a $132.5 billion budget deal. The Governor deserves credit for leading a careful and brilliantly orchestrated political process that resulted in an on-time balanced budget. The Governor skillfully led the legislative leaders to a compromise. The political theater surrounding this victory will boost Cuomo's approval ratings and start the media mentions of his Presidential prospects in 2016.

The end of the federal stimulus package and the impact of the great recession on New York's tax receipts forced the state government's hand. Raising revenues has become the third rail of American politics, and for the foreseeable future, we will need to solve our social and economic problems without additional resources. An income tax surcharge on the wealthiest New Yorkers was eliminated, despite the size of the state's budget gap. It is amazing how the notion of paying one's fair share into a fund that builds community institutions has been completely de-legitimized. Everyone assumes that all government does is waste money and that all taxes are bad. It's gotten to the point that tax avoidance is barely an issue. Recently the New York Times reported that General Electric, the largest corporation in the United States, pays no taxes. According to a stunning story by N.Y. Times reporter David Kocieniewski:

"The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion. That may be hard to fathom for the millions of American business owners and households now preparing their own returns, but low taxes are nothing new for G.E. The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies."

The company justifies this socially irresponsible behavior by arguing that its tax avoidance strategy is completely legal. The argument reminds me of the argument made by New York City political boss Tweed's henchman, the legendary George Washington Plunkitt, when he explained the difference between "honest graft and dishonest graft" in William L. Riordon's political classic, Plunkitt of Tammany Hall:

"I've not gone in for dishonest graft--blackmailin' gamblers, saloonkeepers, disorderly people, etc.--and neither has any of the men who have made big fortunes in politics. There's an honest graft, and I'm an example of how it works. I might sum up the whole thing by sayin': "I seen my opportunities and I took 'em." Just let me explain by examples. My party's in power in the city, and it's goin' to undertake a lot of public improvements. Well, I'm tipped off, say, that they're going to lay out a new park at a certain place. I see my opportunity and I take it. I go to that place and I buy up all the land I can in the neighborhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particular for before. Ain't it perfectly honest to charge a good price and make a profit on my investment and foresight? Of course, it is. Well, that's honest graft."

Just as Tweed evidenced no shame for his unprincipled actions, GE and similar corporations have no problem with "seeing opportunities and taking them." And that fact conditions the political reality that elected leaders like Andrew Cuomo must confront in state capitals all over America. Here is the problem: GE and all of the corporations in the global economy can locate their operations anywhere in the world. Once they settle in, they can always move if they get a better deal somewhere else. Modern communications, information and transportation technology make businesses highly mobile. Nations, states and localities must compete with each other to attract businesses.

One of the ways in which they compete is with tax policy for corporations and their executives. If New York's taxes are too high, businesses will move to Texas. If Texas raises taxes, the businesses might move to Mexico or China. If GE and similar companies don't push governments to help keep their costs down and their competition gets a better deal from another government, then GE loses its competitive edge. Of course the problem with all of this is if we don't have quality schools, a clean environment or safe roadways, our own society crumbles. Moreover, if we don't have a large middle class, then there is no one to buy the stuff that these global companies want to sell.

Anyone attuned to political reality is forced to accept the fact that for the near term, government will not be able to generate much additional revenue. If the economy picks up, some increased tax receipts will follow, but other than that, government will need to do more with less. That seems to be the conclusion reached by Governor Cuomo and his closest advisors. Undoubtedly there is waste in many government operations, but budget politics is not the same thing as management analysis. The agencies that get cut are not the most wasteful, but the ones least able to mount an effective political defense of their funding. In fact, if the government agency's work is particularly critical, inefficiency itself is rewarded as government "throws money at the problem."

While Governor Cuomo and his staff are celebrating their political victory over the state budget, it might be a good idea for them and for the rest of us to give some deep thought to the financial and political corner we have managed to paint ourselves into. It is true that New York's taxpayers need to get more value for the money we spend -- especially on education, health care and government pensions. It is also true that New York is more generous to its people than governments in many other states. But after we cut the fat out of government, the logic of the global economy will require that we cut into government's muscle as well. Then the collective services that the middle class depends on will erode. Education, transportation, health care and environmental protection will only be available to the rich. That will be the end of the middle class and the end of our political stability.

The only way out of this descending spiral is for the image of government to turn around and for people to once again believe that their tax money is well spent. While there certainly is waste in government, most government operations take place at the local level and most are efficient and effective. As for the global economy, the cost of doing business is not the only factor that influences business location decisions. An area's safety, entertainment, food, culture, natural beauty and talented workers are also part of the calculus. If price was the only factor, no one would live in New York City, Hong Kong, Bogota, London or Paris. While the self-regarding, anti-community mantra of the moment sometimes seems permanent, it will not last forever. I hope.