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Tax Relief, But Who's Relieved?

by Joshua Brustein, Jan 24, 2007
 

When in his State of the City address, Mayor Michael Bloomberg promised New Yorkers a billion dollars in "tax relief," he described it as "a broad-based package of tax cuts, designed to… make New York an even more attractive place…."

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So, should New Yorkers be rejoicing? Should they expect a windfall in their tax bills?

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"Not really," said Doug Turetsky of the Independent Budget Office, answering the second question.

"It's clear that this is largely symbolic," said James Parrott of the Fiscal Policy Institute, answering the first.

Budget experts across the political spectrum say that the average New Yorker will not see a change in their tax bill, and that the plan will not do much to spur the economy. Some say Bloomberg's plan is a positive step, but could have been stronger; others say he has "squandered" an opportunity to reform a property tax system they see as much in need of reform.

HOW TO SPEND THE SURPLUS, AGAIN

For the fifth time in the last six years, the city has a large surplus. According to the Independent Budget Office, this year's total is $2.1 billion (report in pdf format), the windfall coming from big profits on Wall Street and the continued success of the real estate industry. The surplus will carry on into the next year, says the agency, but the city will face deficits in 2009 and 2010.

Last year (fiscal 2007 started last June), Bloomberg decided to use much of the $3.3 billion surplus to pay off debt. He also squirreled away $2 billion of it in a trust fund for retiree health benefits, citing projections for future budget gaps and the possibility that uncontrollable costs would increase. This pleased fiscal experts who had criticized Bloomberg, and Giuliani before him for spreading surpluses around in the past by cutting taxes and increasing spending.

But feeling flush, Bloomberg decided to spend much of this year's surplus on a $1 billion tax cut. The plan he laid out in the State of the City essentially sets off the annual budget season. He is scheduled to present his full budget sometime during the week of January 22.

The plan consists of four parts:
• A five percent across the board reduction in the property tax, which will cost about $750 million;
• An extension of the $400 property tax rebate for homeowners;
• The complete elimination of sales tax on clothing and footwear;
• New tax credits for small businesses.

All of these measures require the approval of lawmakers in Albany, except for the property tax cut, which only the City Council must approve.

Tax cuts are almost always popular politically, and these were no exception. What criticism there has been has been mild. The New York Times questioned whether the mayor was putting political considerations ahead of careful fiscal management, but then said that the "new tax cuts are not wildly imprudent." The City Council has been supportive, with Council Speaker Christine Quinn saying that officials will "make good on [the] promise" to cut property taxes in good times. Tax cuts had been on the agenda of many city council members even before Bloomberg's speech.

By making tax cuts the focus of his State of the City address, Bloomberg has essentially defined what the centerpiece of the budget for fiscal 2008 will be, say experts. Additional uses for the surplus – paying down future debt, infrastructure investments that may lead to lower operating costs in the future, or large spending initiatives – are probably unaffordable unless the council rejects the mayor's plan.

"It certainly puts a damper on any significant ongoing spending increases," said Doug Turetsky of the Independent Budget Office.

WASTING AN OPPORTUNITY ON PROPERTY TAXES?

The centerpiece of Bloomberg's plan is his property tax break, which city officials say is the first cut in property tax rates in over twenty years.

Bloomberg has long been working to recover from the fallout from the 18.5 percent property tax increase he pushed through in 2002, arguably the least popular action of his tenure to date. For the 4th consecutive year he is looking to give homeowners $400 rebate checks; this year the mayor also wants to give all property owners a single-year five percent reduction in property taxes.

"We can't know that we'll be as fortunate in the future with our revenues and expenses so right now it would not be fiscally sensible to commit" to permanent changes, said Bloomberg.

Most New Yorkers won't see a change in their housing costs, say budget experts.

This is partially because the cuts will just about offset the higher property taxes that will come with a recent reassessment of property values in the city, which showed a sharp rise. (This also makes Bloomberg's cuts more affordable for city government, of course).

The design of the tax cut also contributes, however.

Most New Yorkers do not own real property, so they experience property tax rates only through increased rents of various ways in which commercial property owners pass on the cost of their own high taxes. Renters helped pay for the recent increase in property taxes, say economists, but they won't receive any benefit from a temporary cuts in their landlords' taxes, because property owners are unlikely to lower prices when they know their own costs are set to go right back up.

"I would argue that a one year tax cut doesn't do what a tax cut is supposed to do, which is change behavior," said Nicole Gelinas of the Manhattan Institute. "Even if [Mayor Bloomberg] had to do a smaller tax cut to make it permanent, that would be better."

Parrott suggested a tax incentive directed at renters as a better temporary measure.

Almost all experts agree that the best action would be to address the inequities in the property tax code. Estimates vary, but commercial property owners and landlords pay rates that are four to eight times as high as private property owners (with the help of their tenants). Thus, while commercial landowners in New York pay the country's highest property tax rates, individual homeowners pay less in property taxes than they would if they moved to the surrounding suburbs.

But, as Gotham Gazette explained in a recent article, property tax reform is a political dead end, since any correction would likely mean much higher property rates for homeowners who, as the mayor might recall, are quite hostile to officials who raise their taxes.

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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