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Manhattan Institute

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An Obvious Novice


An Obvious Novice

January 19, 2003
Urban PolicyNYC

The voters who elected businessman Michael Bloomberg as New York's mayor in November 2001 selected a man whose political philosophy was a mystery to them. Many were really just voting against his Democratic opponent, unreconstructed liberal Mark Green.

A year later, it's now clear what the city has gotten with Bloomberg: a political neophyte behaving as if New York were once again ungovernable.

Proclaiming that forces beyond his control are compelling him, he has instituted the largest tax increase in the city's history, apologized for even the smallest cuts in government services, declared that everything New York City's massive government does is vitally necessary and confidently announced that tax increases won't drive out citizens or businesses. In contrast to his policies in education, where Bloomberg is emerging as an innovator willing to shake things up, his fiscal and budget policies seemed aimed at protecting the status quo.

The mayor is making four catastrophic errors. The first, and worst, is that he believes that raising taxes will work to solve the city's budget deficit and that businesses and residents will willingly pay the increases. Bloomberg seems utterly unaware that Gotham tried this tactic before.

Just consider the experience of Mayor David Dinkins a decade ago. His efforts to solve his budget problems with a succession of tax increases only produced steep job losses and even worse deficits. By the time Mayor Giuliani took office the city still faced a $2.3 billion gap. In other words, four years after Dinkins began raising taxes to solve a deficit, the city's gap was not only still around, but it had grown.

By analyzing 25 years' worth of data on the effect that previous tax increases have had on the city's economy, the Manhattan Institute's E.J. McMahon estimates that the mayor's 18 percent property-tax increase is likely to cost the city some 62,000 jobs—beyond what 9/11 and the national slowdown have cost. Moreover, the Bloomberg administration is seeking about $1 billion more in additional taxes that will cost additional jobs.

More significantly, by depressing economic activity, these tax increases are unlikely to generate the revenues that the Bloomberg administration is counting on. A 1997 study of tax rates in four cities by a team of economists, including the Wharton School's Robert Inman and the University of Houston's Steven Craig, found that New York has little room to raise taxes, especially property taxes, because they are already so high. The study noted that because capital, labor and people are mobile, they can simply flee a jurisdiction where taxes are excessive.

The city will face the same situation should Bloomberg try to raise its inordinately high personal income tax, as the City Council is urging. Households earning more than $100,000 a year already pay two-thirds of the personal income taxes collected by the city, even though they account for a mere 11 percent of all those who file. These are the most mobile New Yorkers. Census Bureau figures show that the city is continually losing more of these upper-income families than it attracts.

Bloomberg's second significant error is that he naively believes that New York's government is the optimal size and can't be cut. Therefore, he reasons, the crushing tax load that New York imposes to support that government is necessary.

But even before Bloomberg's new levies, New York already taxed its citizens and businesses far more heavily than most American cities. After about $3 billion in tax cuts during the Giuliani years, the city's tax rates were on average 75 percent higher than those of other large American cities, and more than double the rate of many surrounding suburbs, with which New York is now competing for jobs, especially the financial-services jobs chased out by 9/11.

The city's commercial property tax, which Bloomberg has raised by 18 percent, is especially out of whack, and a common-sense look at the numbers shows why taxes matter so crucially to businesses. The average commercial lease in Manhattan contains about $9.91 per square foot in annual property taxes, while in cities like Los Angeles, Atlanta, and Dallas, commercial property taxes average between $2.50 and $4 per square foot.

Even before the Bloomberg tax increases, a company employing 2,000 people and renting 500,000 square feet of space, or about 15 floors in a large modern midtown Manhattan skyscraper, might pay at least $6 million a year more just in property taxes in New York than in Jersey or other major U.S. cities.

Despite those numbers, in a statement that defies the reality of the Fortune 500 out-migration from New York City, Bloomberg said when he announced his tax increases: "This is still the city where you want to have your company if you want to be successful."

Despite New York City's sky-high taxes, Bloomberg is making no significant efforts to save money, to reorder the city's spending priorities or to re-engineer government and operate it more efficiently. "I can't tell you there's a lot of waste in this city. Sure there are some things that we shouldn't be doing that we do, but they tend to be very small . . . This city has been fundamentally well-run."

That's a perplexing statement for the mayor of a city that employs about 300,000 full-time and full-time-equivalent workers, about 50 percent more than it did in the early 1980s, though the city's population has grown by just 12 percent since then. The city's workforce is one-seventh the size of the federal government's, yet serves a population that is less than 3 percent of the U.S. population.

Still, in two successive budgets now, Bloomberg has asked virtually nothing of the city's workforce.

One problem is that Gotham operates more like a mini- nation than a city, spending millions of dollars performing functions that other cities don't. For instance, New York runs its own system of colleges, and although the state bears much of the cost of CUNY's senior colleges, the city pays about $280 million a year to support the community colleges.

Similarly, Gotham has many government offices that duplicate state and federal functions or that are largely ceremonial. The city's office of the public advocate, which just churns out audit reports that duplicate other city and state auditing functions, spends $2.5 million a year. The borough presidents' offices, largely ceremonial since the new city charter went into effect in 1990, spend nearly $27 million a year, while the community boards, which have no function except advisory, spend another $12 million a year.

One big area of potential savings is personnel costs. About 67,000 city employees only work a 35-hour workweek with many more vacation days than the private-sector grants. Having them work 40 hours would enable the city to eliminate more than 8,500 workers, saving more than $500 million, according to a study by the Citizens Budget Commission.

The mayor's third major error is that, despite a lifetime in the private sector, he views government as the employer of last resort, and so he is going out of his way to protect municipal jobs at the cost of the private sector.

When discussing the budget of the city's Board of Education, the mayor grudgingly admitted that it was bloated and top-heavy. But to Bloomberg, that was not reason enough to cut its workforce. "Unfortunately in the case of education," the mayor said, "there are a lot of bureaucrats that we don't have a need for. We will try to find them other jobs."

Like someone stuck in a New Deal time warp, the businessman mayor believes that public-sector spending and employment is the key to reviving the private economy.

The new mayor's fourth major error is that, rather than approach the city's problems boldly and imaginatively, he consistently portrays himself and the city as subject to vast forces beyond his control. Perhaps the most important change that Rudy Giuliani brought to New York, beyond any of his individual policy successes, was a sense that the city was governable, that it was not simply spiraling out of control or buffeted by forces beyond its powers.

By contrast, Bloomberg is sounding more like a victim than a leader. In tackling the budget, for instance, Bloomberg has repeatedly argued that his own options for controlling city spending are limited, using phrases like "forces beyond our control" and "it has to be done by law" to justify continued spending growth.

At times, he has claimed that he controls only about $15 billion of the city's $42 billion budget. In one briefing, he went further, arguing that he had command over less than one-tenth of the city's budget.

What is startling about this is the degree to which this mayor is simply abdicating responsibility for governing the city. Invoking one of his favorite phrases, the mayor argued, for instance, that the sanitation department budget could not be cut because "the amount of resources we have to devote are dictated by forces beyond our control. We have to pick up however much garbage is out there."

Never mind that Rudy Giuliani got more than $300 million in productivity savings out of the sanitation department with work-rule changes, or that cities across America are contracting out sanitation services to save money.

After Sept. 11, 2001, New York garnered enormous goodwill from those who wanted to see it revive after the devastating terrorist attack. But as New York reverts to type as a tax-and-spend capital, as if it had learned nothing from the last decade's reinvention of urban government, it is starting to squander that goodwill.

Steven Malanga is a contributing editor at The Manhattan Institute's City Journal. From CJ's Winter issue.