Consider Tax Hikes

By James W. Wetzler

On one side of the familiar debate over taxes, self-styled spokesmen for taxpayers have seen taxes not as the price we pay for necessary and valuable public services, but rather as a penalty imposed by special interest groups. The principal impact, they say, is to redistribute income and drive economic activity out of New York. On the other side, pro-spending constituencies, such as public employee unions, city contractors and advocacy groups, whose livelihoods depend on the public dollar, have argued that public services can only be improved by spending more money, not by increasing productivity. Both arguments are misleading, and out of date.

It is ironic that, even though he was never shy about using anti-tax rhetoric, Mayor Rudy Giuliani has made it possible to change the terms of this debate. Before Giuliani, New York City was widely viewed as "ungovernable," and New Yorkers despaired of having a public sector that provided anything more than the bare minimum quality of services at very high cost. But Giuliani was able to make substantial improvements in those public services that he viewed as priorities, principally law enforcement but also administration of the welfare system, sanitation and others. Because of these successes, New York is now regarded, however temporarily, as potentially governable. One might, therefore, expect that this is the time for a rational public discussion of how to maintain Giuliani's successes, how to extend them to achieve comparable improvements in other public services, what level of spending is needed to accomplish these objectives, and whether we should raise taxes to pay for that spending. In other words, it should be possible to re-connect taxes in the public mind with the services provided by those tax dollars, and make intelligent judgments about the size of the city's public sector.

The Giuliani-era success in law enforcement resulted from an extraordinary increase in the quality of the city's law enforcement effort, led by the mayor and his police commissioners. However, it would not have been possible without both a substantial increase in the police department's budget, funded by an increase in the city's personal income tax rates enacted during the administration of Mayor David Dinkins, and a dramatic expansion of the state's prison system funded under the administration of Governor Mario Cuomo, without which the police would have had no place to put the criminals they arrested. Most New Yorkers believe these taxes and expenditures were wise, and the reduction in the city's crime rate and the perception of enhanced public safety are undoubtedly responsible in no small part for the city's economic boom during the Giuliani years. Here, at least, is a case where taxes well-spent were good for the city's economy.

Education is widely regarded as the highest priority candidate for dramatic improvement in the city's public services. There are many similarities between the processes of improving the public schools and improving law enforcement. Creating a system of "good" public schools in the city would almost certainly require an increase in per-pupil expenditures to fund the higher salaries needed to attract good teachers and to build adequate facilities. Equally important, there would have to be a significant improvement in the way tax dollars are spent on public education, which may be feasible if the school system's governance is reformed to give greater control to the mayor. Moreover, if the city had good schools, there would likely be dramatic economic benefits as families would no longer have to move out of the city to find high-quality public education for their children.

That taxpayers are willing to pay higher taxes to fund what they consider to be good public schools is routinely demonstrated in suburban school districts whose per-pupil spending is thousands of dollars higher than New York City's. One might hope that Mayor Bloomberg would forthrightly address this challenge, establish goals related to the quality of the public services to be provided and propose what level of taxation is needed to achieve those goals. However, that is not what he has done. Instead, he has defined his objective in terms of what he is not going to do -- raise taxes. Presumably he is referring to the city's broad-based taxes -- the sales tax, the property tax and the personal and business income taxes -- because he has already suggested an increase in the cigarette tax.

The commitment not to increase the city's broad-based taxes when the city faces an enormous budget gap is causing the mayor to propose sources of revenue whose economic impact would be much worse than would be that from raising the same amount of revenue from the broad-based taxes. The reason why governments around the country rely on broad-based taxes for the preponderance of their revenues is that these taxes do much less economic harm per dollar of revenue raised than would alternative revenue sources.

For example, the mayor's proposal to borrow $1.5 billion to balance his current year budget fails to address the underlying structural budget deficit and aggravates the city's budget problem in future years when the debt must be repaid. Using debt to finance day-to-day operating expenses is justified in an emergency when revenues plunge temporarily, but the city's budget problem is largely structural in nature and its economy is not expected to reach the pre-September 11 level for three or four years. The mayor's suggested increase in the cigarette tax rate from 8 cents per pack to $1.50 per pack would induce some people, especially teenagers, to quit smoking, but its principal economic impact would be to send smokers scurrying to neighboring jurisdictions or Internet sites to buy their cigarettes, driving customer traffic out of the city's Korean markets and bodegas where so many cigarettes are bought. The jury is still out on the mayor's suggestion to study imposing tolls on the East River bridges, which could be an attractive revenue source if the technology has advanced to the point where the tolls can be collected electronically without increasing traffic congestion but not otherwise.

Recent suggestions that tax increases be imposed on upper-income New Yorkers miss the point. Because the city's attractiveness as a place to reside and do business depends on the balance between taxes and services, the way to avoid economic damage from tax increases is to spread the tax burden in ways that correspond to the benefits of the additional services provided with those tax dollars. A soak-the-rich or anti-business tax policy imposes tax burdens well above the benefits the affected taxpayers can expect to receive.

Mayor Bloomberg is setting the tone for his administration with the decisions he is making in these first months of his tenure. If he does not think that he can make significant improvements in the quality of our public services in education or other areas, he is probably correct to hold the line on tax increases. He can focus his attention on working his way out of the city's budget deficit with minimal backsliding from the Giuliani-era improvements. However, if he has grander plans for our public sector, if he wants to maintain the improvements made during the Giuliani years and extend them to education and other areas, he will need additional revenue and would do well to have an open mind on the issue.

James Wetzler served as the New York State Commissioner of Taxation and Finance from 1988 to 1994. He is currently a director at the accounting and consulting firm, Deloitte and Touche. The views expressed are his own.

Read "Don't Tell New Yorkers To Take A Tax Hike" by James Oddo

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