March 2003

Time for a Reality Check

It doesn’t take a rocket scientist to see the cause-and-effect connections be-tween our shaky stock markets, wobbly economy, increased unemployment, and fiscal crunches for both the state and federal governments. By virtue of being the center of the financial world, the state of New York has always had a large tax base, both individual and corporate. When times were good in the past, the state government could afford to build major educational and economic programs at the same time it was lowering taxes, because New York’s economy is driven by the financial markets and the people who profit from them, directly or indirectly.

When financial markets decline, so does the state’s tax base. Add the impact of September 11 and an entire country anxious over war and threats of terrorism, and the economy significantly slows down despite leaders that encourage us to try to lead normal lives. In a weak economy, tax revenues quickly dry up.

Taxing Decisions

In New York’s case, declining revenues are complicated by the tax structure: According to a recent report by Governing magazine, New York’s business sector has received a lot of incentives and breaks that have eroded the tax base. The report also points out that, in general, New York funds fewer local services than most state governments. The state’s share of funding for schools is low, and New York has the largest disparity in the United States in per-pupil spending between high-income and low-income districts. The state has historically denied New York City its fair share of funding based on the number of children enrolled in schools. Where property taxes are concerned, the aforementioned study describes New York’s system as arcane, complicated, and inequitable.

Overall, New York is facing a shortfall in the 2004 fiscal year estimated at $5 to $10 billion on a budget of about $90 billion. As the debate over the state’s budget crisis begins, we hear State Assembly Speaker Sheldon Silver saying we have to increase taxes, Governor George Pataki saying we don’t, and endless debate about which tax rates to raise or lower and which services may have their budgets slashed in order to cut the deficit. We hear speculation about reinstating the controversial New York City commuter tax (which had taxed nonresidents on their New York City earnings, under the rationale that they benefit from the city services funded by taxes), which was recently repealed when the state’s tax coffers were full.

At the federal level, although the advocates for a complete overhaul of the tax code are getting louder, somehow, every year, in the name of making the tax code simpler we make it more complicated. And the near-term national economy remains grim enough that even Federal Reserve Chairman Alan Greenspan was openly skeptical about whether President Bush’s tax cuts would have their hoped-for positive effect.

CPAs’ Role

This is an ideal time for the NYSSCPA to provide the state of New York with a much-needed reality check on its tax system. The Society’s leadership has spoken with Stephen Valenti, Chair of our Tax Division Oversight Committee, and he wholeheartedly agrees with this approach and supports the participation of our tax committees in developing thoughtful, detailed positions about whatever tax proposals the state and federal governments consider.

This is a tremendous opportunity for the Society to be a positive force outside of the accounting community. Many people would correctly point out that the Society accomplishes this every day through its myriad of activities that protect the public with respect to the practice of accountancy. In addition, our technical committees have become more active and vocal in commenting on proposed regulations and legislation that involve accounting and auditing. By inserting ourselves into the discussion and presenting positions on tax proposals in the same way, we can move to a new level in serving the
public interest.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA

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