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The New York Sun


Room for Tax Cuts

July 27, 2006

By Nicole Gelinas

New York ended the last fiscal year June 30 with $3.8 billion more than it had expected to spend. But this record surplus isn't because Mayor Bloomberg has been frugal with the taxpayers' money. During his administration, city-funded spending is up about 40%, to about $40.5 billion annually, including a projected 6.7 increase for the new fiscal year. Instead, the wild surplus is a symptom of New York's dysfunctional tax structure—and Mayor Bloomberg would do his city much good if he were to take this opportunity to fix it.

New York boasts its current surplus because tax revenues exceeded previous expectations last year by nearly $4 billion. Why the wild forecasting mistake?

It's not because New York's economy is growing at a torrid pace; growth was about 3.2% last year. Nor is it due to new tax increases; temporary income—and sales-tax hikes enacted in Bloomberg's first term expired as promised.

Rather, the surplus is a hazard of New York's cyclical tax structure. Unlike most cities, which rely mostly on stable property and sales taxes for their budgets, New York reaps a huge share of its tax revenue—about 20%—from a municipal personal-income tax, and reaps another 12% from three economically sensitive business taxes on companies and partnerships. (Of course, New York has the property and sales taxes, too.)

Plus, two once-minor and stable sources of tax revenue—a mortgage-recording tax and a property-transfer tax—have behaved like cyclical taxes over the past few years, due to the city's torrid real-estate market.

These six taxes exceeded projections last year by more than 32%,or nearly $3.3 billion, last year. By contrast, property-tax collections exceeded projections by less than 1%.

The personal-income tax, in particular, is subject to wild swings from year to year, because taxpayers reporting income above $1 million—only half a percent of tax filers—pay about one-third of city income taxes.

Year-to-year fluctuations in things like Wall Street bonuses often mean the difference between surplus and deficit for New York.And because Gotham must balance its budget every year, bad years for Wall Street often mean tax hikes for all New Yorkers.

Mr. Bloomberg can fix this—by reforming the city's punitive income-sensitive taxes. In doing so, he won't just put the city on a firmer fiscal footing; he'll unleash a cheaper New York to compete with other cities for tomorrow's best jobs.

Consider: New York City is already at a disadvantage because it's in New York State, which consistently ranks dead last (or first) in terms of business taxes. But hobbling New York further are those city business taxes. Besides Gotham, of the top ten cities in terms of population, only three have an urban business tax, and of the ten fastest growing cities, none does.

But it gets worse: much of the city's future job growth won't be through growth at large corporations, but through entrepreneurial growth: that is, individuals and partnerships deciding to stay in or come to New York City and start their own companies.

In this kind of economy, New York City's personal-income tax looms ever larger as an obstacle to growth, because mobile people can take their jobs with them when it is too expensive to live—or employ people—here.

And they have plenty of choice of where to go: of ten largest American cities, seven have no personal income taxes, while of the top ten fastest-growing cities, none do. Plus, some competing cites are in states that do not levy personal-income taxes, either, including Florida, Nevada, and Texas.

New York can't grow unless Mayor Bloomberg works with Albany and the City Council to cut these job-killing taxes.

The mayor could start with the personal income tax: he could push for the repeal of a "temporary" 14% surcharge, which has been on the books for 16 years. A full repeal of would "cost" the city nearly $1 billion a year—easily affordable, if the mayor cuts back spending.

New York has ample room to do that. Again, of the ten largest cities, New York spends nearly twice as much per-capita as the average of the nine runner-ups, and about two thirds more than the second-largest city, Los Angeles. Of the ten fast-growing cities—the cities against which New York competes for new growth—New York eclipses the per-capita spending average by a similar margin.

Of course, to cut taxes and spending and unleash Gotham's economy, Mayor Bloomberg must tackle the city's intractable big-ticket items, including municipal pensions and healthcare benefits as well as a burdensome city debt load.

This won't be easy—but if Mayor Bloomberg doesn't try (perhaps by using his own money to convince Albany in the only way it understands), New York will lose ground—against cities that offer entrepreneurs the low tax environment they need to start small businesses and grow them into big ones.



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