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The Tough Budget Choices Ahead

by Glenn Pasanen, Mar 12, 2008
 

The Independent Budget Office's annual report, http://www.ibo.nyc.ny.us "Budget Options for New York City," comes along at a useful time. With a near or actual recession unfolding and tax revenues declining, it's pretty clear that big budget troubles lie ahead.

But how far ahead? The good news is that there is time to anticipate the worst scenarios. Revenues will be higher than anticipated, according to Independent Budget Office director Ronnie Lowenstein's recent testimony before City Council. This, she said, not only assures a balanced budget for next year, fiscal 2009, but reduces the estimated 2010 budget deficit to a "relatively modest $2.1 billion," far less than the $4.2 billion deficit projected in the mayor's January financial plan.

This gives Mayor Michael Bloomberg another 21 months to establish his fiscal legacy and, unlike his predecessor, Rudolph Giuliani, leave his successor with a structurally sound financial plan.

So it's the 2011 and 2012 deficits -- estimated by the office to be $4.8 billion and $5.1 billion, respectively -- that remain cause for alarm. The state deputy comptroller for New York City's March report, in fact, says the 2011 and 2012 deficits could be as high as $6.6 billion and $6.1 billion. The big problem, as the city comptroller's March report notes, is that in those years the city will no longer have huge annual budget surpluses from previous years to help balance the next year's budget.

Courses of Action

To confront this, the Independent Budget Office offers a range of options that would save or raise $100 million or more. They fall into three general categories: workforce changes, raising revenues and shifts of fiscal burden from city to state.

Each brings its own political problems: Workforce savings generally mean lower worker wages and/or benefits, as well as more work for public employees; shifting fiscal burdens from city to state requires approval by the state; and tax changes hit influential, higher-income taxpayers. The report takes no position on any of the options; rather, it simply provides arguments for and against each one.

Longer Hours, Lower Pay

Extending work hours and cutting benefits for the city workforce would save nearly $1.1 billion a year in 2011 and 2012. Having city employees work 40 hours a week instead of the 35 or 37.5 hours they're currently on the job, would eliminate 7,000 positions and save $456 million. Requiring workers to pay 10 percent of their health insurance premiums - they now pay nothing - would slash $508 million. A 10 percent reduction in supplemental services (dental, vision, prescription drugs, etc.) would cut another $100 million. All these "savings" would have to be negotiated by the city with the public-sector unions.

These plans might win favor with taxpayers-but would no doubt be strongly opposed by the unions. Two additional options, though, might get many taxpayers angry.

One, estimated at saving $300 million, would institute "pay-as-you-throw" trash collection. Owners and renters would be charged by the volume of their trash, much as they now pay for water and sewer services. Adding two students to all general education classes in city public schools would save $177 million.

Raising the Income Tax

With the exception of the post-9/11 2002 fiscal crisis, which prompted a $3 billion tax increase package, the trend in the city and state for the past decade has been to reduce taxes. So one key option in the report would simply raise the income tax rate on higher income New Yorkers, while still keeping it somewhat below rates in effect from 2003 to 2005 and in most of the 1990s.

The budget office lays out a series of interesting progressive options for the income tax, highlighting how un-progressive it has become. (In a progressive income tax, the higher one's income, the higher the tax rate.) Establishing two new rates above the current top rate of 3.65 percent would raise $619 million in 2012.

The new top rate, for joint filers with $225,000 or more in taxable income, would be 3.92 percent; the second top rate, for joint filers' taxable income over $450,000, would be 4.20 percent. Only 7.8 percent of all city taxpayers would pay more personal income tax under this option.

An alternative would lower rates for those in the lower-income levels as well as raise rates for high earners, with a top rate at 4.20 percent. With this option, which would raise $470 million in 2012, 76.8 percent of all tax filers would get a tax cut in calendar 2009. Both of these options would require state approval.

Then there is the commuter tax, eliminated in 1999 by a Republican governor, a Republican State Senate and a Democratic State Assembly. If restored, that 0.45 percent tax on wages and salaries earned in the city would raise an estimated $835 million in 2012.

The Independent Budget Office report offers a second, more progressive commuter tax option that would raise $470 million in 2012. It would tax commuters' wages in the city at a rate from 0.97 percent to 1.22 percent.

Any commuter tax would require state approval.

Looking at Other Taxes

Several other tax revenue and tax reform ideas would also require state approval. Three property tax options would not only raise up to $400 million a year, but would make the city's property tax system more equitable. One would raise the cap on assessments of houses, which currently gives people who have houses a tax break denied those who live in condos or co-ops.

A second takes away a break for co-op owners. Unlike house and condo owners, they currently do not have to pay a mortgage recording tax when the property changes hands. And a third measure would revise the city's co-op and condo property tax abatement program, which currently favors many owners of high-end apartments.

Compared to personal and property tax options, the options for business contributions to revenue enhancement are quite modest. The three biggest ones would raise a total of about $650 million. These are: imposing the sales tax on capital improvements that are now exempt from it; eliminating the insurance industry's current exemption from the city general corporation tax; and doing away with a cap in the general corporation tax that affects about 44 corporations.

Political Pitfalls

If restoring the commuter tax seems a political stretch, two other options in the report could prove even more problematic.

One would shift city funding of Medicaid to New York State. New York City's share - about $5.8 billion in 2008 -- of Medicaid funding is by far the largest share of any local government in the country. In most states the state covers the non-federal share of Medicaid. Under the plan laid out by the budget office, to offset some of the state's new Medicaid costs, New York City would shift half its sales tax revenue to the state. But the city would still come out ahead, reaping a net savings of over $2 billion a year.

There is some recent precedent for such a swap. The state now picks up any increase beyond 3 percent in annual city Medicaid expenditures and recently assumed the local share of the Family Health Care program. According to the state deputy comptroller's March report, this has saved the city $937 million in 2008 and 2009.

The other hot issue in the report calls for tolling of the East River and Harlem River bridges. To help understand the technical and political questions surrounding this, the Independent Budget Office has a separate "Bridge Tolls: Who Would Pay? And How Much." It envisions one-way-only tolls of $8.30 on the East River bridges, and $3.80 on the Harlem River bridges. If city residents were exempt from paying the tolls, the annual revenue from the fees would dip from $830 million to $376 million. This has been floated in the past but could gain more traction with the mayor's congestion-pricing transportation plan on the political table.

The big-money options in report are not all-inclusive. There are other large tax and workforce actions available, including dropping the current 7 percent property tax cut in the January financial plan, further across-the-board cuts or laying off city workers. That usually is the last step in city fiscal crises, but to take only one example, eliminating 8,000 city jobs with an average $60,000 in wages and benefits would save the city about $500 million a year.

Those are the hard political choices ahead. In real budget decision time, the mayor has less than 15 months to tackle them, not only to keep the city on sound fiscal ground but, not incidentally, to set the Bloomberg fiscal legacy.

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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