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The Tax Whose Time Has Gone

by E.J. McMahon, Aug 12, 2002
 

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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Reinstating the tax repealed by the state Legislature in 1999 would close about one-tenth of a budget gap estimated to be well over $4 billion for fiscal 2004.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.

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

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