How high taxes and regulation are killing one of the most prosperous states in the nation
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Upstate New York is becoming Detroit with grass.
Binghamton, New York — once a powerhouse of industry — is now approaching Detroit in many economic measures, according to the U.S. Census. In Binghamton, more than 31 percent of city residents are at or below the federal poverty level compared to 38 percent in Detroit. Average household income in Binghamton at $30,179 in 2012 barely outpaces Detroit’s $26,955. By some metrics, Binghamton is behind Detroit. Some 45 percent of Binghamton residents own their dwellings while more than 52 percent of Detroit residents are homeowners. Both “Rust Belt” cities have lost more than 2 percent of their populations.
Binghamton is not alone. Upstate New York — that vast 50,000-square mile region north of New York City — seems to be in an economic death spiral.
The fate of the area is a small scene in a larger story playing out across rural America. As the balance of population shifts from farms to cities, urban elites are increasingly favoring laws and regulations that benefit urban voters over those who live in small towns or out in the country. The implications are more than just economic: it's a trend that fuels the intense populism and angry politics that has shattered the post-World War II consensus and divided the nation.
Upstate New York, the portion that lies beyond the New York metropolitan area, has become “The Land That Time Forgot,” a broad swath of depressed cities and low-profit farmlands that stretches from Newburgh and Poughkeepsie in the Hudson Valley through the old manufacturing centers of Schenectady and Troy, across the Allegheny Plateau to Syracuse, Rochester and Buffalo, all the way west to Jamestown, the city with the lowest percentage of college graduates in America.
For more than half a century, this huge region — once the nation’s breadbasket and a manufacturing capital — has been losing jobs, dollars and people. “It all began in 1959 when the interstate highway system was completed,” says Carl Schramm, professor of innovation and entrepreneurship at Syracuse University. “That was also the year commercial jets went into service and half the homes in Florida were air-conditioned.”
Weather was certainly a contributing factor. Of the country’s 12 medium- and large-sized cities with the heaviest annual snowfall, nine are in upstate New York, with Syracuse on top of the list at 115 inches. Not for nothing is the 363-mile long corridor of the old Erie Canal called the “Snow Belt.”
But other states — New Hampshire, Minnesota, North and South Dakota, Colorado — have similar weather and have not seen mass evacuation. The difference is that upstate New York is tethered to New York City, whose residents overwhelmingly support higher taxes, stricter regulation and bigger spending than the national averages. Those policies are blamed for upstate’s economic woes by many in the region.
“Basically what you’ve got in New York is a state tax code and regulatory regimen written for New York City,” says Joseph Henchman, vice president for state projects at the Tax Foundation in Washington. “Legislators say, `Look, New York is a center of world commerce. Businesses have to be here. It doesn’t matter how high we tax them.’ I hear that a lot. But when you apply that same logic to upstate, the impact is devastating.”
The lives of Bill and Janet Sauter, brother and sister, sum up the sad story of upstate New York. They grew up in the Long Island suburbs. He went to Clarkson College in Potsdam, N.Y., near the Canadian border, studied software and enjoyed a highly successful career in Texas’ oil industry.
Janet went upstate too, marrying a minister and settling in rural East Chatham, 30 miles south of Albany. In 1999, she and her husband wanted to move to Texas to be closer to their daughter. But they couldn’t sell their home. Months passed without a single inquiry. For Janet, there was no escape from New York. Her neighbors had similar experiences, she said.
Bill is now retired and living in Steamboat Springs, Colo., where he skis at every opportunity — while Janet and her husband Bob are trying to eke out a living in what has become one of the poorest regions in the country. “There just isn’t much work around here,” says Janet, who supplements her husband’s income by working all night in a home for the elderly. “I’m lucky to have this job.”
Industry has fled upstate New York. “In 1988, Kodak employed 62,000 people in Rochester,” says Sandra Parker, president of the Rochester Business Alliance. “Today it employs 4,000. Xerox has moved most of its people out while Bosch & Lomb, which was founded in Rochester in 1858, has left entirely.”
As a result, Rochester is now the fifth poorest city in the country, with 31 percent of the population living in poverty. Buffalo is right behind at No. 6 (30 percent).
Syracuse was devastated when Carrier, the nation’s largest manufacturer of air conditioners, General Electric and auto-parts manufacturer Magna International shuttered their last manufacturing plants in Onandago County. A Wall Street Journal survey of the nation’s 2,737 counties, shows that only nine other counties have suffered greater job losses per capita than Onandago County since 2009.
Bob and Janet Sauter were not alone in their desire to leave New York for more prosperous parts of the country. New York state has lost 350,000 people in the past three years, according to the Empire Center for New York State Policy, an Albany-based research group. This is the largest out-migration of any state.
New York was the most populous state in the union in 1960, with 45 representatives in Congress. By 2012, New York fell to third place and its congressional delegation plummeted to 28. The 2020 Census will likely cost New York even more congressional seats. Without the hundreds of thousands of immigrants moving into New York City, the state’s depopulation would be even greater. A remarkable 36 percent of New York City is foreign born — twice the percentage in 1970.
The cost of tax and spend
The economic woes of the Empire State trace back to Albany, and a state government that is legendary for its ability to tax and spend. Strict election laws insulate incumbents of both parties, making the state legislature the longest-tenured in the nation. Petitions to put insurgent candidates on the ballot require tens of thousands of signatures and are regularly rebuffed by the courts on technical grounds. Ballot initiatives that have led to tax reform in other states are not permitted. Politicians are protected from voters and have built a spending machine unmatched in virtually any other state. New York, despite its shrinking population, spends more money than all but a handful of states.
The primary example is Medicaid. New York is the only state that forces its cities and counties to help finance Medicaid. As a result, for every dollar appropriated by Albany, Washington contributes two — and New York’s local governments must kick in a fourth.
“New York spends $53 billion to serve 5.6 million people, which is twice the national average,” finds a 2012 report from the New York State Department of Health. That is $9,800 per recipient in a state where 40 percent of the population under 65 is on Medicaid. Meanwhile, California, with double the population, spends only $47 billion while serving 11.5 million people. That is $4,100 per recipient — less than half the New York rate.
Even so, New York’s Health Department admits that California’s Medicaid program, Medi-Cal, provides far superior service.
Governments in New York’s hinterland groan under this unique taxing burden. “A little more than half our $23 million property tax revenues go to Medicaid,” says R.C. Woodruff, clerk to the board of supervisors in rural Chenango County. “That money goes directly to Albany. We have absolutely no control over how it’s spent.”
The city of Buffalo tried to disincorporate itself in 2004, so it could shift its Medicaid burden onto surrounding Erie County. The state wouldn’t allow it. It’s probably just as well, say county officials. “Our entire property tax goes to supporting Medicaid,” says Erie County executive Mark Poloncarz.
States generally have three potential sources of revenue: the income tax, the sales tax and the property tax. “Usually a state will concentrate on one and go low on the other two,” says Joseph Henchman of the Tax Foundation. “New York is in the top six states for all three.”
The Tax Foundation rated New York dead last among the 50 states for business climate in 2013.
Does anyone make out well in New York’s dysfunctional economy? Well, yes, Indian tribes. New York has eight officially recognized Indian reservations and for years they have prospered by selling cigarettes without paying New York’s outsized $4.35-per-pack cigarette tax (not to mention the $1.50 New York City adds).
Enjoying an exemption from many state laws and taxes, New York tribes have built eight casinos and a string of SaveOn gas station/convenience stores that dot the western portion of the state. One SaveOn complex at the western entrance to the Thruway is the busiest gas station in New York. At the Turning Stone resort and casino, 20 miles east of Syracuse, the Oneida Indians employ 4,500 people even though there are only 1,000 members of the tribe.
The issue of whether the tribes must pay state taxes is still not settled and probably won’t be for years to come.
Their success indicates the kind of energies that could be unleashed if others could get out from under New York’s tax-and-regulatory system, says Manhattan Institute scholar Fred Siegel. “There is a huge entrepreneurial spirit in this state. We just have to find a way to unleash it.”
William Tucker is a contributor to the American Media Institute and has written for Harper’s, Reader’s Digest, The Wall Street Journal and The New York Times Magazine. He is the author of “Terrestrial Energy.”