To The Editor:

It is not surprising that Fred Siegel, like other economic conservatives, looks at the current economic mess in New York and concludes that government should be reined in and the retirement and health-care security of public-sector workers sacrificed [“New York on the Precipice,” May]. What is surprising is that Mr. Siegel, as someone who professes concern for the middle class, sees in a laissez-faire, small-government approach any potential for a broad-based and sustainable recovery that would benefit a significant portion of non-elites.

Nationally, sustained economic recovery will come only by increasing the number of Americans who benefit from growth. Contrary to Mr. Siegel’s defense of Wall Street bonuses and skepticism about government, financial-market regulation is sorely needed to re-establish the banking system as the provider of credit for the nonfinancial sector of our economy.

Mr. Siegel not only objects to the federal stimulus package for New York, he also incorrectly states that it requires 70 percent of the fiscal-relief component to be spent on education and health care. While much of that relief came in the form of a temporary increase in the federal share of Medicaid expenses, states were given the flexibility to use that aid for non-Medicaid purposes—as New York in fact did.

Absent such federal aid during economic down-cycles, states would have no choice but to enact tax increases and/or budget cuts, both of which would counter the stimulative effect of other federal initiatives like extended unemployment insurance.

An enlarged Medicaid program is indeed expensive for New York, but the recourse should be in a national solution for health care rather than (as Mr. Siegel recommends) in curtailing coverage. Similarly, we should explore options for improving employment-based retirement security at the national level rather than (as Mr. Siegel would have it) undercut the pensions of public-sector workers. He apparently wants to put them in the same leaky boat as private-sector workers whose 401(k)s have been decimated by the casino economy.

Mr. Siegel points out that the wealthiest 1 percent of New York taxpayers account for a very high percentage of state income-tax revenues, and that the top share has grown greatly since the mid-1990s. But he fails to acknowledge that the same top 1 percent has enjoyed the lion’s share of all income growth over the same period. In fact, even considering income declines in 2009, the top 5 percent of New York households will have twice the income they had in 2002, while the combined income of the other 95 percent will be smaller than it was in 2002.

Mr. Siegel is right that New York needs tax reform, but the reform it needs is a reduction in the property-tax burden that weighs heavily on moderate- and middle-income households. The best way to achieve this is through a circuit breaker linked to the state income tax, with property-tax reductions paid for by a slightly more progressive income tax. Would this push wealthy New Yorkers out, as Mr. Siegel suggests? Hardly. The experience of New York and other states that have increased their top marginal tax rates in recent years shows that most wealthy Americans are less hostile to progressive income taxes than are antigovernment commentators.

JAMES A. PARROTT
FRANK J. MAURO
Fiscal Policy Institute
New York City

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Fred Siegel writes:

James A. Parrott and Frank J. Mauro are defending, among others, the almost 700 former teachers and school administrators in New York State who receive $100,000 or more in pension payments. These recipients are part of a public-sector labor aristocracy, some of which has run to sunny income-tax-free Florida, and that has been held harmless in the current economic downturn.

At a time when, according to the state comptroller’s office, personal-income-tax revenues have plunged by roughly 40 percent, New York faces an avalanche of pension costs that, unless curtailed, will bury the state economy. At the current rate, New York localities already straining under some of the highest property-tax costs in the country will be forced, through constitutional provisions written by a political system dominated by public-sector unions, to triple their contributions to the state pension system over the next six years.

The “leaky boat” from which Messrs. Parrott and Mauro want to protect public-sector workers happens to be our economy, from whose planks (to take up their metaphor) public-sector benefits are drawn. What principle of fairness justifies boring holes and lifting a larger share of planks at an ever faster pace when that boat is hard up in troubled waters? The 8 percent return on pension investments that the public sector is “guaranteed” means that it can take a pass on the economic troubles of the larger populace.

As I noted in my article, the wealthiest will bear up under the present strain; it is the private-sector middle class, some of which is already heading for the exits, that will be hit the hardest. But New York State does not have to self-destruct. Some retirement benefits can be changed legislatively. The problem is that under the sway of a state government that is a wholly owned subsidiary of the public sector, New York has ceased to be accountable to its citizens.