Taxes and the Price of Success

With a deal in process about state taxes amid shouts about which state’s taxes are highest, let me point out some basic facts. New York is expensive. My employers had to pay me well when I worked in New York City so that I could afford to live and work there. Same when I worked in Boston. Why? Taxes? Actually that’s not the big issue which is real estate.

New York and Boston are expensive because homes are expensive, expensive to buy, and expensive to rent. Given the cost of New York and Boston real estate, businesses have to charge more to cover the costs. There’s a never ending battle between businesses and the owners of the realty – the better your business, the more your landlord thinks he or she should get. It isn’t solved by buying the property – that just turns it into the cost of carrying the mortgage or what economists call the opportunity cost of not selling at a good price.

Realty is expensive because places like New York, Boston and San Francisco are happening places, alive in the many ways that make them attractive. There’s plenty to do, and specialists in everything you’d ever want from doctors to watchmakers. There’s high brow, low brow and all sorts of middle brows. There are opportunities to work and play with like-minded people and organizations, and jobs with big time opportunities. There are business opportunities because so many of the people that businesses want to deal with are already there – customers, employees, suppliers, consultants, shippers, traders – all there.

Lively places draw people, people jack up the price of space, and high priced space drives up the cost of everything else. That includes government workers. Years ago when I left St. Louis for a public service job in New York City, my boss and I had to figure out how much more expensive that would be. It didn’t matter that the job was in the public sector. I still had to be able to take care of my family and myself. And that cost money, a good deal more than I earned a thousand miles to the west.

Of course if government employees have to be paid more, and if all the services that government has to buy in New York and Boston cost more, that also means higher taxes.

In other words, although we keep fussing about it, high New York taxes are partly an index of success. If we provided the same services that, say, Mississippi provided, save only cost of living adjustments, we would be much more expensive than they. But of course if we only provided the same services as Mississippi, New York would hardly be the destination that it is now for so many Americans from all over the country. And they wouldn’t make the large contributions to our economy that they do.

In other words, we could lower our taxes and our services, but we’d all be poorer. The really important issue isn’t whether we pay more in taxes than some other state, most of which are much less successful than New York or Massachusetts, for example. The real issue is the wisdom of the investments we make here, and the wisdom of the investments we don’t make. Are we selling ourselves short? Or are we building a state that will be attractive to people and business for years to come? There’s a lot more than taxes in that calculation. Think about it.

— This commentary was broadcast on WAMC Northeast Report, December 13, 2011.

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