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The Blunders of ‘66


The Blunders of ‘66

January 3, 2001
Urban PolicyNYC

Thirty-five years ago this week, New Yorkers awoke on a cold New Year's Day to find the city's bus and subway system at a standstill. The costly, two-week transit strike, which began the morning John V. Lindsay took office as mayor, inevitably was recalled among the low points of his tenure when he died last month. But if it had been the worst fiscal disaster to befall the city in 1966, New Yorkers would have gotten off lightly.

This year also marks the 35th anniversary of two other events with much worse long-run consequences for New York's economy: the creation of the city's personal income tax and the state's Medicaid program.

The income tax was part of a $521 million tax-hike package (equivalent to more than $2.3 billion in 2000 dollars) that Lindsay proposed soon after taking office to close a budget gap inherited from his predecessor, Robert Wagner.

At a time when the state income tax reached 14 percent, Lindsay originally wanted to add another 5 percent for city residents and commuters alike. That was too much even for the state Legislature, which after months of wrangling approved a 2 percent tax on residents' income and a much smaller commuter tax.

Lindsay complained that it wasn't nearly enough. But that was just the problem: There was never enough revenue to keep up with spending in "fun city."

Under Wagner, the city budget had already built up a considerable head of steam, growing by 43 percent in his last four years. In Lindsay's first year as mayor, city spending rose by another 17 percent. By the time he left office at the end of 1973, city spending had nearly doubled in real terms while population and employment were both plummeting.

One recent economic study estimated that increases in the city income tax ultimately cost New York some 492,000 jobs between 1970 and 1997.

Today, New York's total tax burden remains the heaviest imposed by any major city - including a personal income tax whose top rate is nearly twice the original Lindsay level. Medicaid - the other policy bombshell of 1966 - is a big reason why it has stayed that way.

New York state already had a relatively modest program of medical assistance for the poor when the Johnson administration and Congress created the statutory framework for federally funded Medicaid. Gov. Nelson Rockefeller saw this as an opportunity to leverage a massive expansion of the state program - leaving Washington to pay most of the bill.

The governor confidently asserted that Medicaid would cost $532 million a year - with the federal government covering about 40 percent of the cost, and the state roughly splitting the remainder with counties and New York City. What if the cost of the local share climbed much higher? "If unforeseen financial obligations press on a community," the governor said, "the state is obviously going to protect such a community from financial situations that would be intolerable or impossible to cope with."

Virtually none of Rockefeller's assurances about Medicaid came true. Within four years, the total cost of Medicaid in New York doubled. It doubled again within the next four years, and again four years after that. By 1980, New York's Medicaid program was consuming more money than the entire state budget of 1966.

Nor did the state live up to Rockefeller's promise to "protect" localities from "intolerable or impossible" costs. New York City's Medicaid costs now total nearly $2.5 billion - more than a dime out of every local tax dollar. If New York made Medicaid costs a state responsibility, the city would save enough to cut its personal-income-tax rate down to Lindsay's original 2 percent level - at least.

By today's standards, the state and city government leaders of 35 years ago had an amazingly high tolerance for taxing, spending and borrowing, and they seemed completely oblivious to the economic consequences of their actions. Yet their expansive vision of government is still prevalent in local political circles, tempered only slightly by the fiscal catastrophes of the 1970s.

Lindsay and Rockefeller are now both gone, but some of their policies will haunt New York for many years to come. As the 2001 citywide election campaigns get underway - with statewide elections just over the horizon in 2002 - taxpayers can only hope that the mistakes of 1966 will not be repeated.