“I am deeply depressed,” Mayor Bloomberg said Monday in respect of the governor’s proposed budget. We feel bad for him. But even more depressed than the mayor is the economy of New York State – at least compared with its potential. Mr. Bloomberg’s suggestion that the state retain its personal income tax surcharge won’t help matters in that regard.

The extra tax, passed in 2003, applies to earnings of more than $100,000 for individuals or $150,000 for families. It raised the state income tax rate to 7.5% from 6.85% for those affected. Governor Pataki’s budget would end the surcharge, effective retroactively on December 31, 2004. But the mayor wants to retain the surcharge. “Rather than accelerating the sunset of the PIT surcharge, I urge instead ending the sales tax on clothing and shoes to expire on June 1, as originally scheduled,” the mayor told lawmakers in Albany.

We know from Mr. Bloomberg’s eagerness to loot the pockets of smokers who purchase cigarettes online that the mayor is keen on recouping lost sales tax revenue for the city – and he knows that the sales tax on clothing purchases represents, in the mayor’s words, “an economic disincentive that drives shoppers and jobs to New Jersey and Connecticut.”

But even if the sales tax on clothing purchases under $110 is also driving jobs to New Jersey, the income tax has a greater effect. New York shoppers at least have the option of making their clothing purchases outside the state or during one of New York’s periodic sales tax holidays. But no such holiday or out-of-state dodge can be applied to income for those residing in New York. According to an economic policy official in the Reagan White House, Bruce Bartlett, this is one reason why getting rid of the income tax surcharge would have a bigger economic impact than getting rid of the sales tax on clothing.

The personal income tax surcharge is a disincentive for wealthy individuals to live and invest in New York. The mayor’s testimony about the proposed West Side stadium focused on the need to get private developers to invest in the area, but the personal income tax surcharge makes New York an unattractive place for precisely those most likely to invest in its future.

Rich people like to live near their businesses, and when high tax rates prompt them to move to another state, they take their businesses with them. It’s pretty easy to relocate offices these days, and the personal income tax rate is a leading factor in deciding where to put them. So there’s a multiplier effect to the personal income tax surcharge because it’s driving out those who provide jobs to other New Yorkers. Just last month, a report by the Public Policy Institute of the Business Council of New York State found that New York’s high tax burden hampers its ability to create and retain jobs.

While a New Yorker who decides to shop at the Palisades Mall will return at the end of the day, it’s much harder to get entrepreneurs who have already moved themselves and their businesses out of state to move back. Maybe if New York were a more attractive place to start a business, the city wouldn’t have to continue supporting the rest of the state, as Mr. Bloomberg complained the other day. Upstate New York certainly needs the help.

We realize that Mr. Bloomberg doesn’t like it when New Yorkers can avoid paying taxes – as they can on sales but not on income – but it’s for that reason that New York would be better off in the long run to listen to Mr. Pataki instead. “I have made it very plain that I will oppose and fight any job-killing tax, such as a personal income tax surcharge, that I believe would really hurt this state’s economic competitiveness and drive jobs out,” the governor said in 2003, before the tax was imposed. It’s good for New York that he’s still fighting it.