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Creative Ways to Tax and Cut

Gotham Gazette

The Place for New York Policy and politics

Citizens Union
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Creative Ways to Tax and Cut
Gotham Gazette image by Ya-Hsuan Huang

The Independent Budget Office's new Budget Options for New York City is a timely reminder of the many ways a city can balance its budget. As a slumping economy and declining city tax revenues threaten a fiscal crisis in New York, the IBO's eighth edition of its publication is a rich resource for a public debate about how to raise revenues, make spending more productive and set priorities for spending and cutting. Its analyses are comprehensive, impartial and non-ideological.

Budget Options also offers a useful contrast to the more crabbed style of budget presentation in Mayor Michael Bloomberg's recent financial plans. For the past year in particular, the mayor's Office of Management and Budget has provided few budget options, and many of those have been ephemeral. The OMB options, in fact, often look like mere placeholders -- general options with big numbers that are likely to change or be abandoned altogether.

For instance, the mayor's Financial Plan for Fiscal Years 2009-2013 offers only four broad components to fill next year's $4.4 billion deficit, three of which are likely to change dramatically. Yes, some $900 million in savings will come from agency cuts already well under way. But $900 million in sales tax increases, a projected $1 billion savings from labor concessions, additional state aid and a projected $1 billion from federal Medicaid relief represent, at best, fluid estimates.

In contrast, the IBO's Budget Options analyzes 70 ways the city could save money or raise revenues. The range is from the small -- eliminating grass clippings from trash collecting would save $2.1 million a year -- to the very large and controversial -- tolling the East River and Harlem River bridges, an idea once championed by Bloomberg that would raise $830 million a year.

The political range of the IBO's options goes from conservative, such as increasing the work week for city employees by five hours save $129 million, to liberal, such as making the city's personal income tax more progressive, which could raise as much as $455 million. In all cases, the IBO offers arguments both for and against each option.

Another Way to Cut

Because Bloomberg has been making across-the-board agency cuts regularly since fall 2007, usually in mid-year budget modifications rather than during the public spring budget process, the total cuts over that period may surprise many New Yorkers. Since the January 2008 budget modification, the mayor has cut a total of $3.1 billion, or 14.7 percent, from the fiscal year 2010 budget.

The police department has seen an aggregate $391 million cut, or 10.2 percent reduction, since January 2008, and the Department of Education's budget, a $944 million cut or 11.9 percent. Social services, health, youth, aging, parks and homeless services, as well as libraries and cultural institutions, will have taken cuts of 18 to 20 percent over the same period.

The IBO report presents some alternative budget savings. As part of its budget cutback, the police department, for example, planned to delay hiring 1,000 cops, saving approximately $50 million a year.

To avoid cutting the force, one of the IBO options would have police officers work fewer but longer tours, while eliminating 20 minutes of paid "wash up" time and so saving $55 million.

The Department of Education, by far the biggest city agency, will be cut by an additional $306 million (4.1 percent) in 2010 alone. Yet the IBO notes several ways the city could save nearly $300 million. Eliminating public funding for private school student transportation would save $57 million. Increasing the average class size by two students would save $187 million. A four-day workweek for pproximately 40,000 employees would save $33 million

One of the mayor's big budget proposals is the $1 billion savings from restructured contracts with employee unions. As part of that, city workers would pay 10 percent of their health insurance premiums. Most currently pay nothing.

The IBO gives the pros and cons to the proposal. On one hand, proponents argue that it would save the city considerable money every year and reflects current practice in the private sector and increasingly in the public sector. Opponents argue it would burden lower-income employees, with little chance of saving actual health costs.

Raising Revenue

Since the January 2008 Financial Plan, revenue proposals to fill the gap of the 2010 budget deficit have been changing. In January 2008, OMB, looking ahead, projected eliminating the 7 percent property tax rate cut then in place for 2010, while keeping it for fiscal 2009. OMB was warning, 18 months in advance, that there would probably be a tax increase.

As the economy slowed, the mayor shifted gears, and in the November 2008 budget modification proposed eliminating the 7 percent property tax cut earlier -- halfway through the fiscal year, on Jan. 1, 2009. After a brief fight with the City Council, the mayor got his way, although the council refused the mayor's request to cancel the $400 property tax rebate for homeowners.

Moreover, the mayor not only got nearly $600 million of new revenues for fiscal 2009, but the modification eliminated the 7 percent rate cut for the rest of the four-year plan -- as well as eliminating the $400 rebate in future years. That went a long way to fill the 2010 budget deficit -- over $1.2 billion of it. The mid-year tax increases also avoided raising an unpopular tax during the spring of an election year.

The November 2008 budget modification listed two other major revenue options for 2010: increasing sales tax revenues and raising personal income tax rates by either 7.5 or 15 percent. The January 2009 plan drops the income tax option but increases the size of the sales tax option to over $900 million by raising the sales tax rate by a quarter of a percent, extending the tax to more services and items, and dropping the current tax exemption on clothing sales.

In other words, the city's most regressive tax, the sales tax, has become OMB's primary new tax option and somehow increasing the city's most progressive tax, the income tax, gets shelved.

The IBO provides analyses on both options. For instance, extending the sales tax to laundering, dry cleaning and similar services would raise $35 million. Extending it to cosmetic surgical and non-surgical medical procedures would raise $60 million, and imposing the sales tax on capital improvements would raise $200 million.

The sales tax is regressive, of course, because everybody pays the same rate, so the sales tax poses a greater burden on lower-income residents than high-income ones. The city's personal income tax, on the other hand, is at least modestly progressive, with rates ranging from 2.91 percent to 3.65 percent. (The top rate starts at $90,000 of taxable income for joint filers.)

The IBO analyses of income tax options include two versions of a commuter tax. The most familiar is the proposed restoration of the small tax -- 0.45 percent for wages and salaries and 0.65 percent for self-employment, earned in the city -- that existed between 1971 and 1999 until it was eliminated without city input in 1999 by a Republican governor, Republican State Senate and a Democratic State Assembly (controlled by Democrats from the city). Restoration would bring in $715 million.

An alternative, progressive commuter tax, with a rate one third the city's resident income tax rates, would bring in nearly $1.4 billion in 2010. Either of these would have to muster support with the governor's office, State Senate and State Assembly, a questionable proposition.

The mayor's November 2008 reference to income tax options -- since dropped -- included only an across-the-board rate increase of either 7.5 percent or 15 percent. Neither would be progressive, although they would raise a lot of money: $660 million and $1.32 billion, respectively.

The IBO sets out two other options, both of which would increase rates progressively.

The first option is similar to the structure of tax rates in effect during an earlier fiscal crisis, from 2003 to 2005. It would add two new rates to the current four rates. They would range from 2.91 percent to 4.2 percent, with the highest rate starting at $450,000 for joint filers. (The top rate from 2003 to 2005 was 4.45 percent, as it was for much of the 1990s.) That would raise $455 million in 2010. Proponents say this would affect only 4.5 percent of all city resident taxpayers; opponents argue city dwellers are heavily taxed already and those affected might leave the city.

A more progressive option would lower the lowest income tax rates, creating six brackets. They would range from 2.68 percent to a 4.2 percent top rate that, as above, kicks in at $450,000 for joint filers. Proponents argue this makes the rates more progressive and gives a majority of taxpayers a tax cut, while raising an additional $342 million in 2010 because of the two higher rates. Opponents say this would cause some taxpayers with incomes about $1 million, whose average tax increase would be $144,000, to leave the city, thus reducing new revenues.

Poetry, Prose and 'Graphatas'

Along with its 70 budget options, The IBO offers clear, independent, and comprehensive analyses. It seems reasonable to expect the mayor and OMB to do the same. Readers of city budget documents expect to find little poetry. But they do expect prose.

What OMB writes, however, could be called "tablese/graphese." Tables and graphs are the lifeblood of budgeteers, but they generally get an interpreter. (Former Mayor Rudy Giuliani used his electronic pointer at budget briefings with skill and evident joy.) OMB currently gives us numbers, hundreds of pages of numbers. But little else.

The summary to the mayor's January 2009 financial plan -- presumably intended for the City Council and the general reader has in its 63 pages exactly 36 bulleted sentences. Not a single paragraph. What we're left with is tables and graphs, with often opaque headings. ("If the Current 30% Loss in Asset Value Continues, NYC Retirement Systems' Employer Contributions Will Increase by $10.9 billion Through FY 2016 to Cover the Loss in Corpus Value" is typical.) The 19 pages of the summary's Economic Update offer not one sentence of explanation.

The city may catch a big break through the economic stimulus plan that has just been signed by President Barack Obama. Apparently $87 billion of the $789 billion plan will go to states as Medicaid spending relief. Assuming New York State shares those savings equitably with the city, Bloomberg's $1 billion projected federal revenues in the January financial plan may turn out to be an underestimate.

But whatever happens with federal aid, at a time of national and local economic/fiscal uncertainty it would be good to have a dialogue with our elected officials in this city. The effectiveness of any such dialogue begins with the quality of the city's budget reports. More plain English and more usable information - as in the IBO's report -- would be a good start. This is a time for gravatas, not "graphatas."



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Gotham Gazette

The Place for New York Policy and politics

Gotham Gazette is published by Citizens Union Foundation and is made possible by support from the Robert Sterling Clark Foundation, the John S. and James L. Knight Foundation, the Altman Foundation,the Fund for the City of New York and donors to Citizens Union Foundation. Please consider supporting Citizens Union Foundation's public education programs. Critical early support to Gotham Gazette was provided by the Charles H. Revson Foundation, Rockefeller Brothers Fund and the Alfred P. Sloan Foundation.

The Tax Whose Time Has Gone

By E.J. McMahon

12 August 02

As New York's budget gap grows larger, calls for a renewed tax on the city's roughly 1 million daily commuters are growing louder and more insistent than ever in some quarters -- especially in the City Council.

Reinstating the tax repealed by the state Legislature in 1999 would close about one-tenth of a budget gap estimated to be well over $4 billion for fiscal 2004. Proponents insist it isn't just a matter of revenues, but of basic fairness.

The Daily News recently editorialized, "Every day that they come here, commuters avail themselves of city services, utilize the infrastructure, know that, if necessary, city hospitals are there to treat them, and depend on the security afforded by New York's Finest and Bravest. It's only fair that they help pay for some of what the city spends on all this."

The notion that non-resident workers are a bunch of well-paid freeloaders has long been treated as the truest of truisms in New York and other financially strapped cities. There's just one problem: it's a fallacy.

Many of the middle- and upper-echelon jobs in corporate offices, brokerage houses and law firms in lower Manhattan are held by people who live in the suburbs. Ask yourself: If these jobs are so costly to New York, why does everyone get so worked up about the possibility of losing them to New Jersey?

Would the city be better off with no commuters? Of course not.

That is because the workers who flow into New York every day from surrounding suburbs are an indispensable source of economic prosperity for the entire city. (If you want to get an idea of what happens to small service businesses when thousands of commuters suddenly vanish, talk to a coffee-and-sandwich vendor in Lower Manhattan.)

As for budget revenues, everyone who works in New York contributes to the city treasury -- both directly, through sales taxes on purchases in the city, and indirectly, through an exceptionally wide array of heavy city corporate and property taxes paid by the firms that employ commuters and profit from their productivity. To the very limited extent that commuters actually "avail themselves of city services" (to use the News' phrase), the cost is easily covered by the tax revenues they generate.

Moreover, commuters from neighboring states already pay a tax premium to work in Manhattan -- because they are subject to the New York State income tax, no matter where they live.

In recent years, New Jersey and Connecticut residents who work in New York have generated nearly 10 percent of the Empire State's total income tax collections, equal to $2.5 billion this year. And at least a third of that money (plus a similar share of state taxes on business income attributable to their labor) flows back to the city in the form of state aid or direct spending.

WHAT IT COSTS NEW YORK CITY

Unlike the regular income tax (with its graduated rate schedule for different income brackets), the commuter tax was a flat rate applied to a worker's entire city income. This meant it could raise a commuter's New York income tax bill by 10 percent or more, depending on his or her level of income. As a result, the commuter tax represented a proportionately bigger add-on for lower-income workers than for high-income workers.

Many supporters of the reinstatement argue that the commuter-tax rates are too small to affect the number of jobs created or retained in the city. But this overlooks what might be called the final-straw factor, especially post-9/11.

Suppose you are a junior investment adviser with a Manhattan-based securities firm, earning $100,000 a year. Married, with two kids and a house in the North Jersey suburbs, you are already effectively paying a $2,000 commuter tax -- the difference between what you would owe on the same salary in New York and New Jersey state income tax. Assuming your employer will not make up the difference, an added city commuter tax at the former rate would cost you another $450 a year.

That $450 might not look like much. But combined with other factors -- such as commutes two to four times as long as before 9/11, and general anxiety about returning to an area stigmatized by death and destruction -- a few hundred more dollars in taxes per commuting employee certainly will not strengthen the case for staying in New York. That is especially true at a time when many firms are pondering relocation decisions.

To be sure, the 1999 repeal of the commuter tax was not Albany's finest hour.

By all accounts, it had nothing to do with the substance of tax policy and everything to do with the politics of a hotly contested special state Senate election in Rockland County, with leaders of both parties eager to pose as champions of suburban interests. The move was angrily condemned by Mayor Rudolph Giuliani, Council Speaker Peter Vallone and the editorial pages of the city's newspapers, all to no avail.

Nonetheless, it is safe to say that the repeal of the commuter tax made virtually no difference in New York City's bottom-line. That's because Giuliani and the City Council were already planning a different set of tax cuts and spending hikes for the same amount of money before the commuter tax was repealed. When the commuter tax disappeared, those other programs were pushed aside.

The loss of commuter tax revenue is not the reason New York finds itself in a new fiscal crisis. However, the restoration of the tax would pose a very real threat to the city's recovery.

In this shaky economy, the city desperately needs to attract and retain more commuters -- a goal that will not be served by slapping them with what amounts to a wage toll.

E.J. McMahon is a senior fellow for tax and budget studies at the Manhattan Institute's Center for Civic Innovation.

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For the opposite view, see "Bringing Back The Commuter Tax," by Glenn Pasanen

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Gotham Gazette is published by Citizens Union Foundation and is made possible by support from the Robert Sterling Clark Foundation, the John S. and James L. Knight Foundation, the Altman Foundation,the Fund for the City of New York and donors to Citizens Union Foundation. Please consider supporting Citizens Union Foundation's public education programs. Critical early support to Gotham Gazette was provided by the Charles H. Revson Foundation, Rockefeller Brothers Fund and the Alfred P. Sloan Foundation.

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