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An Alternative to Suicide By Budget

by Bonnie Brower, Apr 14, 2003
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With Mayor Michael Bloomberg preparing to release his worst-case scenario executive budget this week, possibly containing as much as $1 billion in additional service cuts and thousands of layoffs to close the city's budget gap, the Budget for a Livable NYC Coalition -- a new, growing citywide coalition of dozens of community, civic, labor and religious organizations -- is instead urging a far-reaching revenue proposal.

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"Follow the money," they are telling the mayor, just as Deep Throat advised cub reporters Woodward and Bernstein to do in the beginning of their investigation into Watergate. And that money is mostly right here in New York City, not in the closed pockets of Albany or Washington, DC.

The city's continued reliance on additional aid from New York State to close its $3.5 billion gaping budget hole is beginning to feel like suicide by budget. The New York State Financial Control Board recently warned against it, and the New York City Council estimated that $1.9 billion of the city's budget gap -- just under 60 percent -- is the result of harmful actions that the governor has proposed in his state budget! Even though the city sends Albany at least $3.5 billion more in revenue each year than we receive in state aid, this year we will get even less such aid - at least hundreds of millions of dollars less.

Unlike the governor, who sailed through his re-election campaign vigorously denying any coming state fiscal distress, Mayor Bloomberg spent his first year in office seriously addressing the city's economic downturn and the budget crisis he inherited. He and the City Council have already made over $2.6 billion in cuts; enacted the highest property tax rate increase in city history; imposed a staggering number of "user fees" for various public services as well as higher fines for various infractions. Unfortunately, most of these revenue increases and service cuts were regressive, hitting hardest the New Yorkers with the least resources and greatest needs.

But the city is still confronted with at least a $3.5 billion hole in the Fiscal 2004 budget, which begins July 1. And although the mayor has stated his commitment to raising broad-based, recurring revenues to protect essential public services and revitalize the economy, his current gap-closing strategy falls far short of this. He continues to rely on significant additional aid from the state and federal governments that, other than increased homeland security funding, is highly unlikely to materialize. He is also now calling for $1.2 billion in municipal labor givebacks and "productivity savings," which are both unfair and unrealistic; they entail negotiations with multiple unions in a very short period of time, as well as deep cuts in individual workers' benefits. Where is the comparable demand for business assistance and givebacks?

Mayor Bloomberg's only significant proposal for new revenue -- a "reform" of the city's personal income tax that combines a new commuter tax six times higher than the repealed version, with a tax cut of 38 percent for city residents -- has been declared "dead on arrival" by the governor and the majority leader of the State Senate leader, who must approve it. It is, moreover, a thoroughly perplexing proposal, since in just three years, the added revenue from commuters would be canceled out by the tax cuts for residents.

Despite the starkly compelling post-9/11 case for additional state and federal aid, the sad truth is that while we continue to seek it, New York City must prepare to rely primarily on itself, as usual, to balance its budget and begin our economic recovery. Almost two-thirds of the city's annual revenues are raised from city taxes, fees and fines, and we will have to reform these to find additional ongoing revenues to grow, not cut, our way out of our fiscal crisis.

And this is exactly the recipe for survival being pressed by the Budget for a Livable NYC Coalition, which was convened and is being staffed by City Project. It is proposing a progressive revenue package which, if enacted, would generate $3.5 billion in additional recurring revenues for the city, avoid the need for further painful and destructive service cuts, and spread the pain and burdens of the fiscal crisis more evenly and fairly.

The coalition's revenue recommendations "follow the money" to wealthy city residents and profitable businesses, which have so far been insulated from contributing to the city's recovery.

We propose to capture a small portion of the federal income tax windfall, by enacting a one percent income tax increase for residents with incomes above $250,000, which would raise $595 million in new revenue. Our recommended commuter tax is a simple one percent tax, which would, by itself, generate $950 million, almost as much as the mayor's complicated personal income tax reform proposal, but in ongoing revenues.

Of equal importance, the coalition calls on the city's business community to shoulder a fairer portion of the fiscal burden, through revising and restructuring business taxes.

New York City's three major business taxes, enacted in 1966, have undergone only minor changes since then, despite sea changes in corporate ownership structures and business practices. They are outmoded, deeply inequitable, and filled with irrationalities. Unlike the city's personal income tax, whose revenues rise and fall with people's incomes during boom and bust times, revenues from the business taxes together contribute only about 12 percent of city revenues, a share that has remained essentially flat over the past twenty-five years, regardless of whether the local economy was sizzling hot or ice cold.

To remedy this situation, the coalition has made three business tax reform proposals that together would generate $1.19 billion in additional revenue for the city, and ensure that the most profitable businesses contribute a larger share of revenues.

Our most lucrative proposed change affects businesses that form as limited liability partnerships and companies, so-called "LPs" and "LCs." Since the mid-1990s, these businesses have been subject to the city's unincorporated business tax. Originally enacted to apply to small partnerships and sole proprietorships, which were not incorporated and exposed their owners to full personal liability if anything went wrong in their businesses, this tax was set at a very low rate - four percent -- which has never been increased. By contrast, the city's general corporate tax, which applies to over 240,000 regularly incorporated businesses, has an 8.85 percent tax rate.

The coalition is proposing that the city's 6,800 large limited liability partnerships and limited liability companies, which include Bloomberg, LP, and the largest and wealthiest law firms and financial service companies in the city, and which are structured to shield their owners from personal legal liability, have their tax rate equalized to 8.85 percent, the same as the general corporate tax. Doing this would raise $881 million in new city revenues and level the business playing field, where these companies now pay 55 percent lower taxes than comparable businesses because of the fluke of their ownership structure, rather than the level of their profitability.

The coalition also proposes that New York City-based insurance businesses, which were exempted from paying corporate income taxes in 1974, be restored to the tax rolls, and shoulder their fair share of business tax, which would generate at least $200 million in city revenues. Putting them back into the tax pool would also remove the unfair competitive edge their exemption gives them in their non-insurance business ventures, including real estate and financial services, which have become an ever-larger portion of their businesses.

Then there is the matter of the $300 minimum general corporate tax, charged to corporations that, because of tax deductions, exemptions, loopholes or lack of income, do not qualify to pay the 8.85 percent tax rate. This fee, which is paid by over half the city's 240,000 plus corporations, was established in 1966 and never increased; can you think of any of your expenses that haven't gone up since the 1960's? The coalition proposes to increase this minimum fee to $1,000, an increase of just over $58 a month, and still substantially lower than if it merely had been adjusted for inflation since its enactment. (By comparison, a family of four struggling to survive in New York City on $30,000 now pays the city nearly twice the current minimum corporate tax in personal income taxes.) This rate change would net the city $107 million in new revenue.

Finally, the coalition is calling for a reinstated stock transfer tax, which was in effect for decades until the state effectively repealed it. This is a tax on individual and institutional stock transactions, not on the stock market or stockbrokers, and it exists in virtually every major stock market throughout the world. The proposal is to reinstate it at a mere penny-a-share, or 80 percent lower than the original tax. If passed, and if the revenues were split with the state, as the coalition proposes, each jurisdiction would be enriched by approximately $760 million a year.

Some would argue that the coalition's proposals could lead to the wholesale exodus of businesses from the city. This is the standard claim of the no-taxes/no-government crowd. It is an unsupported assertion. Not only are the changes fair and reasonable, but more important, they will help guarantee continued funding for public services, resulting in streets that are free of crime and filth, an educated workforce, and good public transportation - all of which recent studies show businesses consider far more crucial factors than the level of taxes in their decision where to locate. Or, as our businessman-mayor put it, "Any company that makes a decision as to where they are going to be based on the tax rate won't be around very long." In addition, since the mid-1990s, New York State has slashed business taxes so many times and so deeply, that the state dropped from ninth to 25th place among all states in terms of corporate income tax rates, with city businesses receiving the full benefit of these enormous tax savings. It is time for them to give a little back.

All the coalition's measures must also, unfortunately, be approved by the state legislature, because the city has direct control only over its property tax rate. But all except the commuter tax and stock transfer tax apply exclusively to city residents and businesses, which should significantly increase their likelihood of passage. If passed, these proposals would not only close the city's budget gap, but broaden its tax base, increase long-term, recurring revenues to maintain vital public services, and make our tax policies fairer and more progressive by spreading tax burdens to those best able to shoulder them. Not a bad way to turn a huge fiscal crisis into an unparalleled opportunity to create a more solidly funded, livable and compassionate city.

Bonnie Brower is the executive director of City Project, a "progressive, nonpartisan public policy organization."

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