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Manhattan Institute

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Why the Long Face?


Why the Long Face?

November 4, 2004
Urban PolicyNYC

You wouldn’t know it from all the long faces around Manhattan yesterday, but President Bush’s re-election and the strengthening of Republican majorities in Congress was great news for New York City.

Over the past three decades, the city’s economy has done best when Washington was most dedicated to a supply-side agenda. Gotham’s recovery from the fiscal crisis and economic crash of the 1970s was enormously aided by the Reagan boom of the 1980s. New York then lost hundreds of thousands of jobs in the wake of the Bush I and Clinton tax hikes of 1990 and 1993, which were compounded by near-simultaneous increases in state and city taxes.

The city’s last economic recovery picked up steam only after the Republican congressional majority made its influence felt, starting in 1995. The economic highlight of the Clinton-Gingrich era was the 1998 federal capital-gains tax cut, which added fuel to skyrocketing market indexes while encouraging a level of investment that contributed to New York’s fastest economic growth in a half-century.

But an even bigger boost came when New York needed it most – in the form of Mr. Bush’s 2001 and 2003 tax cut packages, which have returned $14 billion to New Yorkers during four tumultuous years rocked by a recession, a bear market, and the September 11 attack. Tuesday’s election results mean tens of billions more in savings will flow over the next few years to New Yorkers in every tax bracket, including middle-class breadwinners who would considered “wealthy”in less expensive living environments,and tens of thousands of wealth-creating entrepreneurs and small business owners.

The 2003 reduction in federal taxes on dividends and capital gains also were a tonic for the city’s securities industry, which accounts for an estimated one-quarter of New York’s economic activity and nearly one-fifth of its wage income. City Council Speaker Gifford Miller unintentionally underscored this point in a recent radio debate, when he complained that a tax cut was wasted on the wealthy because “they’re just going to redistribute it around their portfolio.” (Memo to the Speaker: Uh—where are those portfolios managed?)

Ironically, Mr. Bush also shielded Mr. Miller and other New York politicians from the full consequences of their own bad decisions over the past two years. His 2003 tax cuts were signed into law just two weeks after the State Legislature in Albany, overriding Governor Pataki’s vetoes, enacted significant temporary increases in both state and city income taxes. The positive effect of the lower federal rates momentarily swamped the negative effects of higher state and city tax rates.

By the same token, just as supply-side theory would predict, lower federal taxes on dividends and long-term capital gains have prompted many more New Yorkers to earn income in these categories, which Albany and City Hall continue to tax at the same rates as wage income.The predictable result: state and city revenues grew sharply above projections in 2003-04.

Looking ahead,Mr.Bush has set his sights on more fundamental reform and simplification of the federal tax code.While details of what he has in mind have yet to emerge, he clearly wants to complete the job of removing disincentives to savings and investment.

The “ownership society” that is the centerpiece of Mr.Bush’s domestic program,including private Social Security accounts, represents a tremendous potential boon to millions of striving New York workers and their families. It’s also a tremendous business opportunity for Manhattan’s talented financial entrepreneurs.

Of course, New York’s economy doesn’t begin or end with the stock market.The city badly needs to grow more diversified, to retain and attract more well-paying jobs while stopping the continuing steady leakage of market share in securities industry and related jobs. That won’t happen unless much more is done to reduce the enormous cost burden imposed on the local economy by city and state governments.

While the national trend is obviously the single most important factor, New York’s longterm economic fate remains largely in its own hands. Four more years of Mr. Bush will at least ensure the federal government is a help, not a hindrance, to New York’s prospects for growth.