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Using City Tax Policy To Help The Working Poor

by Glenn Pasanen, Oct 17, 2006
 

When Mayor Michael Bloomberg’s commission on poverty issued its report in September, it made many broad recommendations, but it was only during the press conference surrounding the release of the report that the mayor suggested two specific plans he would be pursuing. One is to seek $24 million in private funds to be used, as the New York Times put it, as “cash rewards to encourage poor people to stay in school and receive preventive medical care.”

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The other plan is to use $42 million of city budget funds as a refundable child care tax credit to low-income families. This means, these families would get credit against income tax due the city, or cash from the city if they don’t owe any tax.

The $42 million tax credit is the only sign thus far of any new public funding for anti-poverty programs.

But it could be just a start. There are other ways in which City Hall could change tax policy to enhance opportunities for working New Yorkers.

MORE POOR, AND POORER

Both the report by the mayor’s poverty commission, and the most recent annual report on poverty by the Community Service Society, reveal the difficulties facing the working poor – some 340,000 individuals who have jobs but do not earn enough to rise above the poverty level. (For a discussion on how poverty is assessed in New York City, see The Poverty Commission: Measuring Up?)

A “massive expansion” of the service sector has meant more jobs, but with low wages and a lack of health benefits. The effect is particularly harsh on families; almost one third of all children in the city live in poverty.

The Community Service Society’s report describes a growing crisis, with “a sharp decline in annual earnings and a resultant rise in working poverty for families with children.” It also finds “a recent decline in employment and increase in poverty among single mother families.”

CHANGING TAX POLICY

1. Child Care Tax Credit

Reaction to the mayor’s proposed child care tax credit was largely enthusiastic, such as in an editorial in the Daily News: “The mayor would give parents earning $25,000 to $30,000 annually up to $1,000 per year per child to cover certified day care for kids up to age 3. An estimated 50,000 families would benefit. That’s a ‘hand up, not a ‘hand out.’…Get it done.”

This is not a new idea. The City Council was quick to point out that it proposed something similar in four separate years, going back to the year 2000. In fact, in 2002 Mayor Bloomberg joined with the council in backing a child care proposal, but it didn’t pass the state legislature, which must approve such tax changes.

Still, Mayor Bloomberg’s initial attempt to use the city’s complex tax system to help at least a few of the working poor and other low-income workers could lead to a much more comprehensive and fairer tax plan.

Such a plan could consider three more tax changes that would help the working poor and near-poor:

2. Earned Income Tax Credit

More than 700,000 New Yorkers (most of whom live in households that earn less than $20,000 per year) receive Earned Income Tax Credits (EITC), which is a kind of tax refund for poor families.

The Earned Income Tax Credit is funded by the federal, state and city governments, though City Hall’s share is only five percent. Many believe that an expansion of the city’s share of this tax refund would have a much more substantial impact on working families in or near poverty than the child care tax credit. The city council proposed increasing the city’s share to ten percent. This was estimated to cost the city $62 million and would increase the benefit for individual families by as much as $430.

3. Revamping City’s Personal Income Tax

Expanding the Earned Income Tax Credit helps New Yorkers of low income at relatively low cost. It is in sharp contrast to the actual city tax breaks currently on the city books, which help high-income New Yorkers. Indeed, putting them all together, the tax relief for higher income New Yorkers adds up to over $1.5 billion a year – nearly 40 times the $42 million the mayor is proposing for a child care tax credit.

About a third of that $1.5 billion comes from a reduction in the city’s personal income tax for the wealthiest New Yorkers. In fiscal year 2006, the top rate of personal income tax for New Yorkers with the highest incomes was reduced from about 4.5 percent to 3.65 percent. This cost the city government some $550 million in lost revenue. Yet, at the low end, heads of households with net incomes of as little as $14,400 pay 2.9 percent.

The Independent Budget Office has suggested a more progressive personal income tax by reducing tax rates for lower-income households and restoring the top rates for higher-income New Yorkers.

4. Expanding Property Tax Relief To Renters

A lot of money each year is forfeited in city tax revenue in order to fund the mayor’s $400 property tax rebate to homeowners, and a property tax abatement for coop and condo owners.

The city’s Tax Expenditure Report for Fiscal Year 2005 , for instance, shows the scope of property tax cuts that primarily benefit middle- and upper-income New Yorkers:

  • The $400 rebate benefited 645,436 house, condo, and co-op owners, and cost the city $256.6 million in lost revenues.
  • The co-op and condo abatement, benefited 329,322 condo and co-op owners, an average of $783 per owner, and cost the city $257.8 million.

The $400 rebate, now in its third year -- and promised for the next three years (although it needs new state approval) -- softens the 18.5 percent property tax rate increase imposed on all property taxpayers in November 2002 in order to help solve the huge budget deficit at the time.

But neither rental landlords nor renters – who pay a significant share of their landlord ’s property tax through their rent -- receive a rebate.

The abatement was, in 1997 when introduced, supposed to be a temporary tax break for co-op and condo owners, who pay a higher effective property tax rate than house owners, until a more comprehensive reform of the city’s inequitable property tax system could be devised. Ten years later, the abatement continues and neither the mayor nor council talk of a reformed property tax system.

The relevance of these large property tax benefits to the mayor’s anti-poverty plans is that they do little for lower-income New Yorkers, who are twice as likely to be renters rather than owners. According to the 2005 NYC Housing and Vacancy Survey, median income for the two million renter households in the city in 2005 was $32,000; for the one million homeowners, it was $65,000.

It would make sense to create some tax relief in the property tax system for renters as well.

OUTREACH

It would not be enough just to institute these benefits. As it is, there are existing public benefit programs that are not reaching all the people who are eligible. Over one million New Yorkers receive federally-funded food stampsm, but that represents only 72 percent of those eligible. The more than 700,000 who receive Earned Income Tax Credits are only about 80 percent of those eligible. Public health insurance goes to 2.6 million New Yorkers, but 11 percent of those eligible don’t have it. This is why the report of the mayor’s poverty commission had another suggestion – sign up more of the poor for these programs. The mayor has promised to do so.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 
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