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Fruits of NY's Tax Cuts
By E.J. McMahon
NEW York City in recent years has taken some important steps to begin reducing its heavy tax burden. A big part of the rationale for those tax cuts was that they would help to expand the economy and create jobs.
Sure enough, the economy expanded and jobs were created -- at a record pace.
The question is: What, if anything, did tax cuts have to do with it?
To answer that question, the Manhattan Institute asked the Beacon Hill Institute to develop a New York City variant of its econometric model, the State Tax Analysis Modeling Program (STAMP). Our model, called NYC-STAMP, measures the impact of New York tax cuts on the city's economy - especially on private-sector employment.
In particular, looking back at recent changes, we focused on $2 billion worth of cuts in income tax, sales tax, business tax and property tax. Here's what we found:
These estimates do not include at least a half-billion dollars in tax cuts that we didn't analyze in isolation because of data limitations. Moreover, other respected experts cited in our report have estimated slightly larger employment effects from tax changes in New York. So, if anything, our job-creation estimates are probably on the low side.
In addition to estimating the effects of tax cuts, our model also can be used to predict the consequences of reversing tax cuts. For example, the model also estimates that:
* Restoring the former 12.5 percent personal income tax surcharge would destroy nearly 25,000 jobs.
* Restoring both of the Dinkins-era surcharges would cost the city nearly 37,000 jobs.
* Doing away with the latest income-tax-surcharge reduction would cost more than 6,300 jobs.
What explains these effects? It's not an exotic theory, but simple textbook economics: When taxes are cut, the marginal cost of working, investing and owning property in New York is reduced. And that increases the incentive to do those things in the city. By the same token, when taxes are increased, the marginal cost of living, working, investing and owning property in New York rises - and so does the disincentive to live, work, invest and own property here.
That explains why tax cuts never cost as much, and tax increases never raise as much, as official projections would indicate. In fact, we calculate that the $2 billion in broad-based tax cuts summarized in this report actually represented a net revenue loss of $1.6 billion, once you take into account offsetting gains from the positive effects of the cuts.
Obviously, New York's record job growth in the past several years occurred at the peak of a record economic expansion and a stock-market boom. Moreover, it came after the city made huge strides in improving the quality of life for all New Yorkers, especially through reductions in crime. In other words, skeptics would say, the city was poised to grow with or without tax cuts.
In fact, our analysis does not find that tax cuts were responsible for all of the job gains, or even most of them. However (as illustrated by the chart) our findings indicate that tax cuts were the reason why New York City has managed to add private-sector jobs faster than the national average since 1997.
We find that if the city's broad-based tax cuts had not been enacted, its private-sector-employment base would have expanded by 8.2 percent over the past four years - an exceptionally strong performance, by historic standards. But jobs attributable to tax cuts pushed the city's private job growth to 10.95 percent, compared to a national growth rate of 8.4 percent.
This is truly a precedent-shattering development. In every prior economic expansion since 1950 - including a couple of roaring bull markets on Wall Street - New York City trailed annual job growth in the rest of the country. The difference, this time, has been tax cuts, according to our model.
The conclusion, we think, is clear: Tax cuts work. And in years ahead, the best way to continue building New York's job base will be to continue reducing its still-heavy tax burden - and, by all means, avoid adding to it.
©2001 New York Post
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