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Wall Street Journal.

Save Our City
Mike Bloomberg tries to tax his way out of hard times.
May 9, 2003

By Hugh Carey, Richard Gilder, H. Dale Hemmerdinger, Roger Hertog,
Felix G. Rohatyn and Walter B. Wriston

Last week, Mayor Michael Bloomberg stood on the steps of the New York state capitol and thanked legislators for "coming through" for his city, by giving him permission to impose $700 million in new taxes on Gotham, bringing to nearly $3 billion the total tax increases enacted by the city since the mayor took office.

Any longtime New Yorker knows that a strategy of trying to tax your way out of hard times has been tried twice before -- in the late 1960s and early 1990s -- with disastrous consequences. Now, as then, tax increases will not only not solve the budget crisis but will exacerbate the economic downturn. In the early 1990s crisis, as taxes went up two years in a row, the economy contracted by more than 10% while deficits persisted.

When taxes are already as high as they are in New York, new or increased levies fail to generate the level of revenues that city officials project. A 1997 study of tax rates in New York and other cities by a team of economists concluded that raising New York's property tax, for instance, would produce "little or no additional net revenues," because every dollar increase in tax rates drives away a dollar of the city's tax base.

The current tax increases are likely to do short- and long-term economic harm. The city is raising its sales tax, for instance, despite the fact that the combined state and city rate is already more than two percentage points higher than neighboring New Jersey's. City officials maintain that the one-quarter percentage point increase will have little effect. They don't seem to understand that New York is already losing over $700 million of business annually to less taxing locales. The city's tax increases will put local businesses further at a disadvantage when they can least afford it.

Long-term, the damage to the city's economy could be profound. Over the last four decades, New York City has become the most heavily taxed city in America. And as a result, Gotham has not added a single net new private-sector job over that period of time, while local government jobs have grown by more than 20% -- 90,000 positions.

The private sector in New York has stagnated because high taxes have driven both businesses and individuals out of town. The city perpetually has a net outflow of residents -- more people leave the city to live elsewhere in the U.S. than come here from somewhere else in America. The outflow is especially intense among families earning more than $100,000 a year. Yet the city is again increasing the tax rates on these individuals, arguing that they are most able to bear the added costs of higher taxes.

The effect of tax increases on businesses is likely to be still more profound than on individuals. The rise in personal income taxes will immediately impair local small businesses, most of which are organized in such a way that their profits are taxed not at the corporate rate but as if they were the personal income of the owner. Since most small businesses grow by drawing on profits and the personal savings of their owners, the plan will leave even less money for new small-business investment.

Big corporations, meanwhile, will get hit especially hard by the steep rise in property taxes. New York already has among the highest commercial property tax rates in the country, collecting nearly $10 a square foot in taxes for leases in prime Manhattan locations, compared with just $3 and $4 a square foot in places like Los Angeles and Atlanta, and less than that in suburban locales that perennially seek to lure corporate tenants. Big businesses -- those renting 500,000 or more square feet of space -- could see their space costs go up by $1 million a year. Fifty years ago, New York was home to 140 Fortune 500 companies. Today that number is down to 33.

What's most troubling is that all this is so unnecessary. The facts suggest that there is enormous room to cut the city's budget without severely damaging services or laying off crucial workers. New York City already spends on many things that other city governments don't. The city boasts a plethora of committees, boards, and commissions that overlap other government functions or are largely symbolic -- and costly. New York's five borough president offices, along with the public advocate's office, are largely ceremonial, but the city spends $30 million a year to maintain their staffs. The city even has its own human-rights commission, duplicating federal and state efforts, which costs $7.5 million a year.

New York spends more money, and employs more public workers per capita than most American cities. Yet the city has taken few steps to rein in costs and reduce expenditures. It is proceeding as if the private economy existed solely to preserve as many government jobs as possible, and as if 100 layoffs in the private sector economy were preferable to the layoff of a single government worker. Bolstered by projected revenues from the new tax increases, the city is only seeking minimal new job cuts, amounting to less than 2% of what is the largest municipal work force in America.

The city has also failed to win any significant concessions from its unions on such issues as health and retirement benefits, even though workers enjoy much more generous benefits than similar private-sector workers. At a time when most workers in the private sector pay at least a portion of their health-care insurance, the city has refused to ask its work force for even a modest contribution to premiums.

The city has also rejected, or simply not explored, a host of potential cost savings advocated by budget watchdogs, such as private contracting of services, from filling potholes to providing school lunches. Privatizing trash services alone could save at least $50 million a year. Requiring city employees to work a 40-hour week (not just 35 hours) could eliminate 8,500 jobs and save $500 million a year, according to the Citizen's Budget Commission.

On top of it all, the city has recently borrowed more than $2 billion to finance its deficit, and the state legislature has allowed the city to stretch out repayment of the bonds that financed the 1970s bailout. All the while, Mr. Bloomberg has taken no significant structural steps to eliminate the deficit.

* * *

As an immediate fiscal strategy, Gov. Pataki and Mayor Bloomberg should call for a special meeting of the Financial Control Board (created to oversee New York City's finances during the '70s troubles) and map out a common strategy that would begin with an immediate two-year freeze on city hiring, wages and benefits. The FCB should go on to hammer out long-term solutions to the city's fiscal problems -- above all, a blueprint for reducing the size of the municipal workforce so that it is more in line with other well-run American cities.

Cooperation is the key. This is no time for a budget brawl, in which the mayor joins with Albany legislators to support significantly higher state spending that will inevitably entail higher state taxes, half of which will have to be paid by New York city residents and businesses. The goal should be a government that provides basic services at reasonable tax rates, but that does not heap unnecessary costs on businesses or residents. New York made its name as the vibrant gleaming metropolis with jobs for all comers. We need to return to the vision of New York as a city of opportunity -- the vision that inspired so many generations.

The authors are, respectively, former governor of New York; co-chairman of the Club for Growth; CEO of Atco Properties and Manhattan Institute trustee; chairman of the Manhattan Institute; former chairman of the Municipal Assistance Corp.; and former CEO of Citibank and Manhattan Institute trustee.

©2003 Wall Street Journal

 

 


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