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City On The Brink


City On The Brink

October 30, 2001
Urban PolicyNYC

In the months preceding the bombing of the World Trade Center, New Yorkers largely seemed unconcerned about who was going to follow Rudy Giuliani in Gracie Mansion, perhaps because the sense of crisis that had gripped the city eight years earlier, when Giuliani took office, had disappeared.

But the events of Sept. 11 have dramatically changed that picture. After nearly eight years of unprecedented growth, New York suddenly faces a future that even the most pessimistic forecasters could not have envisioned just a few months ago. Now, many of the costly programs and big-government prescriptions debated during the mayoral campaign seem irrelevant at best, and wrongheaded at worst. New York needs another kind of agenda now, one that must include a commitment to restraining government spending, eschewing tax increases and instead cutting some of the city's most uncompetitive levies to energize the economy.

The terrorists hit a city whose economy had been on a supercharged seven-year run that was only just beginning to cool along with the weakening national economy. The expansion, which produced 430,000 new jobs, transformed New York. Wall Street firms re-committed to the city as the world's financial capital—expanding by 55,000 positions in the 1990s—and significant new players crowded in, including technology entrepreneurs who came here with daring ideas and the capital to pursue them. Well-chronicled declines in crime sparked a tourism boom. Safer streets also ignited business activity in neighborhoods. The number of residents with jobs was at an all-time high.

Although the city's economy was slowing prior to the attack, as Wall Street and technology industries had begun shedding workers, construction companies, hotels and restaurants, among others, continued to grow. The city was poised for new rounds of growth when the national economy rebounded.

Now, however, virtually every major industry in New York is slumping. Tourism, which has nearly doubled in size in New York since the Gulf War, attracting a staggering 16 million more visitors last year than it did 10 years ago, is facing a sharp falloff that could cost thousands of jobs at airlines, hotels, restaurants and entertainment businesses in the city. Wall Street's decline is growing deeper.

In addition, something larger is at stake: the city's reputation as a good place to do business, burnished in the last eight years, is again at risk. Commuting into the city, and especially to downtown, has become much more difficult. The region's airports, never among the most welcoming for business travelers, are now subject to even longer delays. The city's status as America's safest metropolis—which helped encourage businesses to start-up and expand here—is threatened not by street crime but by international terrorism.

The next mayor must work to restore confidence in the city as a good place to do businesses. In a budget briefing after the Sept. 11 bombing, Mayor Giuliani argued that fiscal prudence and tax cuts can help do that. "When businesses think about whether they should stay here, or come here, we want them to know that we have a government that understands how a city economy works, rather than a government that's going to oppress its economy," said Giuliani.

The next administration needs to pick up on Giuliani's theme. One way to do that is to focus on is real-estate taxes, especially the commercial rent tax, which exists nowhere else in America and adds to the cost of companies doing business in Manhattan at a time when the city faces a corporate exodus. This tax, which inflates the cost of renting space in midtown and downtown by 3.5 percent, or several million dollars a year for big corporations, needs to be abolished completely.

Tourism, a major local industry hit hard by the slump in travelers, needs the next mayor to cut taxes on visitors. Giuliani demonstrated to great effect the benefit of cutting hotel taxes: In 1992, the city collected just $110 million from its hotel tax; last year, with Giuliani's lower rates helping to attract more out-of-town visitors, the hotel tax collected $235 million. New York's politicos have trouble understanding the underlying logic of such tax cutting, which is why the state Assembly refused Giuliani's latest requests to further cut the hotel tax.

The sales tax on clothing should drop into the ragbag of history, a move that Giuliani proposed and Albany rejected. Twenty months ago, after Giuliani lobbied long and hard, the state eliminated that tax on purchases of up to $110. In the year following the cut, the city's sales tax revenues jumped by $52 million, or nearly 4 percent, as New Yorkers stayed in town to shop for taxable as well as untaxed items, instead of shopping in New Jersey. As a result, employment at stores that sell apparel in New York City has increased by about 7,000 jobs, or 12 percent, a far bigger gain than during any comparable period. Those results should encourage lawmakers to finish the job of eliminating the sales tax on clothing.

How to pay for such cuts? Ideally, the next mayor would use the present crisis to press for money-saving reforms that the city should have undertaken long ago. New York needs to drive down its labor costs by shrinking its municipal work force and winning the kinds of productivity gains that transformed private industry decades ago. Giuliani won hundreds of millions of dollars in labor concessions during the first year of his tenure, when he inherited a $2.3 billion budget gap, and the Citizens Budget Commission, a fiscal watchdog group, has identified more than $1 billion in future potential savings from productivity gains, changes in worker benefits and other contract changes.

If the next mayor fails to display fiscal prudence and drives the budget into deficit, Gov. Pataki should not hesitate to allow the Financial Control Board, a legacy of the 1970s fiscal crisis that has oversight of the city's budget, to take charge of the city's finances.

If the next administration fails to administer this tough medicine, it risks a repeat of the early 1990s, when the Dinkins administration, fresh from signing a rich new teachers' contract, enacted $833 million in new taxes and Albany heaped on $1.4 billion more in a massive budget bill dubbed "The Big Ugly." Just weeks after most of the additional taxes went into effect, Saddam Hussein's troops stormed into Kuwait. As the world went to war, and the New York economy plunged into a deep recession from the accompanying business slowdown, the talk at Gracie Mansion and in Albany was of how to raise even more revenues through still higher taxes.

Mayor Dinkins even proposed hundreds of millions of dollars in higher property taxes while Operation Desert Storm was in full swing—and when he enacted them, Gotham lost 283,000 jobs in 1991 and 1992, unprecedented for an American city. "In the early 1990s," says Marc Goloven, a J.P. Morgan Chase regional economist, "the overarching philosophy of government in New York was that the private sector was there to fund the public sector at all costs—even if the cost was horrendous in terms of job losses."

Giuliani administered a far different tonic when he took office in 1994, and his tax cuts generated a boom in employment—including some 80,000 to 100,000 jobs attributable to state and city tax cuts, according to a Manhattan Institute study by E. J. McMahon.

Let's hope the new mayor can learn from New York's recent history instead of condemning the city to repeat it.