New York City is facing some tough economic times.
Everyone knows the basics by now: Foreclosures are way up; Wall Street has already begun layoffs, with more to come; and the debt crisis is not only roiling the financial markets, but is starting to affect the city's cost of borrowing. Virtually all economic analysts agree that in the near and medium-term, current forecasts for growth and revenue are likely to prove optimistic -- all the risk is on the downside.
Mayor Michael Bloomberg's preliminary budget issued in January reflects these realities and prudently begins to adjust for the slump. But the real task for those of us who lead the city government is to take our current difficulties as an opportunity for much deeper rethinking of our budget policies.
There are many avenues to pursue, but I want to highlight five priorities: rooting out wasteful spending, eliminating corporate welfare, reforming the budget process, diversifying the city's economy and making our tax code fairer.
We must be far more aggressive in reducing spending on programs that don't achieve their stated goals or that do so inefficiently. For example, I recently went after a poorly designed affordable housing program called "HomeWorks/StoreWorks," which cost the city more than $500,000 per apartment. After publicity exposed this boondoggle, the department of housing preservation and development terminated the program.
Sometimes government costs are inflated not just by inefficiency, but by actual fraud. To crack down on this, the City Council in 2005 passed a bill I authored called the "False Claims Act" that allows whistleblowers to initiate suits against contractors who have been ripping off the government. The bill was modeled on a successful federal statute that has been used to recoup funds from fraudulent defense contractors and health maintenance organizations. Unfortunately, the city's Law Department insisted on watering down the bill with a provision allowing the department to block the whistle blower suits-and the department has abused this authority by blocking every single suit initiated so far. The City Council's Finance Division estimates that, if properly implemented, the bill would save taxpayers $30 million a year. We should go back and reinstate the original, stronger bill.
We should also eliminate corporate welfare. Last year, I joined with Councilmembers Annabel Palma, Letitia James and others to repeal a loophole that allowed developers to put up new luxury buildings and pay no property taxes on them - the so called "421-a" law. That reform will bring in at least $500 million dollars over the next five years. The next step is to reform the Industrial and Commercial Incentive Program, a similar loophole for commercial development.
Of course, the single biggest example of corporate welfare is the proposed Atlantic Yards development. The Bloomberg administration has agreed to give the project's developer at least $100 million in direct subsidies, plus another $400 million to $500 million in tax breaks. In the current financial climate, this handout is impossible to justify.
Beyond tightening spending and eliminating unnecessary tax handouts, we should also reform the budget process itself. City Council Speaker Christine Quinn has made great strides toward a more transparent budget, and we can build on her accomplishments.
We must break down the budget into specific spending items for each individual program, rather than grouping things in big lump sums, called initiatives. We should also end the practice of negotiating budgets behind the scenes and then simply holding an up-or-down-vote at the end of the day. Instead, each City Council committee should vote on the budget for the agency in its jurisdiction-and the committees should be permitted to add new spending only if they find offsetting cuts.
We need to renew our focus on diversifying the city's economy. Turmoil in the financial markets only underscores how dependent we are on banks and investment firms. The financial sector will and should remain the heart of our economy, but city policy should be directed at helping other sectors grow as well. Our highly successful film production tax credit is a good example of an initiative that has created good-paying jobs for skilled and semi-skilled workers outside of Wall Street.
Another, similar opportunity is shipping. Instead of trying to squeeze out the city's remaining container ports, as the Port Authority of New York and New Jersey has misguidedly done, we should help them expand.
Another urgent priority is to make the city's income tax fairer. The current downturn is hitting low-income families the hardest, and our first impulse should be to ease the pain. One concrete and immensely useful step would be to give tax relief to the city's working poor.
Astonishingly, more than 600,000 New Yorkers live in households that are too poor to pay any federal or state income taxes - but are nonetheless required to pay the New York City income tax. This is mostly due to the fact that the federal and state tax laws provide a far more robust Earned Income Tax Credit than does the city tax code. The Earned Income Tax Credit is one of the best innovations of progressive government - it rewards those who, in President Bill Clinton's words, "work hard and play by the rules." We should beef up the city's tax credit to put much-needed dollars into the hands of the city's working families.
The boom of the past few years has been good for the city, and we all wish it had continued. But it also allowed us to defer some difficult choices. In this, more challenging period we will have no option but to confront our structural budget problems.
With innovative and decisive leadership, we cannot just slog through the fiscal slump, but we can thrive despite it.
David Yassky, a Brooklyn Democrat, has served on City Council since 2002 and chairs the Small Business Committee.
Â
City Council Speaker Christine Quinn endorsed the creation of a citywide ferry service and an expansion of a small business insurance program in her State of the City address last week. Now advocates and stakeholders are weighing in, and - for the most part - appear to be praising the proposals.
At Cartridge World, a downtown Brooklyn firm that sells new and refurbished cartridges for photocopiers, printers and fax machines, the cost of health insurance for owner Geoff Wood’s three employees seemed sure t empty his pockets. When Wood initially looked into comprehensive health insurance plans, they exceeded $500 per employee per month.
Thanks to a health insurance program created for Kings County businesses by the Brooklyn Chamber of Commerce, Wood was able to get more affordable coverage for his employees, saving him more than 50 percent in premium costs. This made his employees not only happier, but healthier. According to Wood, his employees “were less likely to leave because they had good health benefits.” For Cartridge World this translates into increased employee satisfaction and higher productivity.
In a recent survey conducted by the Brooklyn Chamber of Commerce, an overwhelming majority of small businesses support universal healthcare and want to offer coverage to their employees.
The problem for owners like Wood and other Kings County businesses is that it can often be difficult to afford. But Brooklyn HealthWorks, the insurance program founded by the Brooklyn Chamber of Commerce, can provide an interim solution as the nation debates how we can cover more workers - whether through mandates or a free-market based system or a combination thereof.
And soon, small businesses in other boroughs will be able to reap the benefits, including attracting and retaining qualified employees.
Last week in her annual State of the City Address, City Council Speaker Christine Quinn proposed an expansion of Brooklyn HealthWorks into Manhattan and Queens. Quinn’s speech balanced a call for continued fiscal responsibility with initiatives to stimulate the local economy, protect affordability and support New Yorkers.
Under the speaker’s plan, the city would subsidize premiums for businesses in Queens and Manhattan. Based on Brooklyn’s experience with HealthWorks, upward of 600 new businesses are expected to enroll in Manhattan and as many as 300 businesses will enroll in Queens during the first year alone. This equals an additional 4,500 New Yorkers with employer-based coverage. Citywide expansion is expected to follow and will further increase the number of New Yorkers with health insurance coverage. Since Quinn’s address, Brooklyn HealthWorks has received inquiries from small business owners and brokers in Manhattan and Queens - all looking to learn more.
In 2004, with the help of the New York State Insurance Department, the chamber created Brooklyn HealthWorks, a private-label Healthy NY insurance product. Brooklyn HealthWorks allows eligible small businesses in Brooklyn to offer affordable health coverage to their employees and dependents at lower premium rates than other small group plans because of premium subsidies made available by the state. Brooklyn HealthWorks currently covers approximately 180 small businesses, including more than 850 employees and their dependents.
Brooklyn HealthWorks builds on the success of Healthy NY by offering a plan that eliminates hospital co-payments that run between $500 and $900 per occurrence for Healthy NY plans. Brooklyn HealthWorks also does not dictate how much an employer must contribute to premiums. For Healthy NY, businesses are required to contribute at least 50 percent of the cost of individual coverage. Finally, Brooklyn HealthWorks provides coverage to independent contractors (1099 employees) who work at least 20 hours per week at small businesses that also cover traditional (W-2) workers.
The same eligibility requirements will apply for an expanded HealthWorks program: A business must have a location in the participating borough with 2 to 50 employees and have not provided comprehensive health coverage during the last year (or have contributed less than $75 per employee per month). Additionally, 30 percent of the company’s employees seeking coverage must earn $36,500 or less annually. For businesses that qualify, healthcare savings can be reinvested into employee training programs, promotion and the creation of new partnerships with other local businesses—all of which stimulates economic growth.
HealthWorks operates in partnership with Group Health Incorporated. Businesses with access to HealthWorks coverage are able to obtain care at over 142,000 provider locations throughout the tri-state area, all without the need for a referral. Some of the benefits included in the plan are physician services, hospitalization, prescription drug coverage up to $3,000 annually, maternity care, emergency services, and diagnostic X-ray and laboratory services.
The Brooklyn-based program has changed and grown over the years, but because of permanent funding streams – secured with the assistance of Brooklyn legislative leaders such as Assemblymember Joseph Lentol and Senator Martin Golden – it continues to flourish. We are confident HealthWorks will continue to address the affordability of healthcare for small businesses in Brooklyn and beyond.
Carl Hum is president and chief executive officer of the Brooklyn Chamber of Commerce. Â
Mayor Michael Bloomberg's January Financial Plan for the next four fiscal years repeats the message of last October's budget modification: The economy is slowing, city tax revenues are down, and it's time to make budget cuts. The mayor balances the preliminary $58.5 billion budget for 2009 through agency spending cuts over the next 18 months and the use of surplus funds from last year. The four-year plan, however, projects deficits of $5.6 billion in 2011 and $5.3 billion in 2012.
Excessive cuts for commercial interests seem to have caught the attention of the City Council, if only in its recent near-unanimous vote to end the 25-year-old property tax exemption held by Madison Square Garden (a vote that is meaningless unless the state legislature and governor also act). Testimony at the council on the garden's tax break also called attention to much larger commercial tax breaks that also could use council review.
A variety of tax cuts and breaks - including the $400 property tax rebate - cost the city revenues. With no significant service initiatives or increases in the preliminary budget for 2009 - and education cuts that look like a major retreat from an earlier mayoral priority - it's a good time to look a little more closely at city tax breaks in general. Who wins, who loses, and what are the costs?
The city's recently updated Tax Expenditure Report for fiscal year 2007 provides a useful window into the billions of dollars in city tax breaks - commercial and residential property taxes in particular.
Many seem likely to remain during the widely predicted economic downturn. The mayor's financial plan extends the big property tax cuts in the current fiscal year through all four years. Next year's property tax cuts -- the $400 rebate for homeowners and a 7 percent property tax rate cut -- will cost over $1.3 billion in lost revenues. This almost dollar-for-dollar underwriting of tax cuts with agency cuts in 2009 will presumably be controversial at the City Council, setting the stage for the annual "budget dance," in which the mayor diverts the council from larger issues by slashing council initiatives, which the council then fights to restore.
The city took in about $13 billion in property taxes in 2007. All the individual property tax breaks add up to $3.3 billion in lost revenues. This does not include the 7 percent rate cut, but does include the $256 million cost of the homeowner rebate, the $311 million property tax abatement for co-op/condo owners (a 1996 "temporary" council plan to narrow the property tax burden between those owners and house owners that keeps getting extended).
Business income and excise tax breaks added another $573 million in lost revenues (in 2004). The largest of these remains the $248 million that insurance companies saved because they do not have to pay any city business income tax.
At the January 7 City Council hearing on ending the Madison Square Garden $12 million property tax exemption - granted in 1982 when the Knicks and Rangers threatened to leave the city - Bettina Damiani, director of GoodJobs New York, an advocacy organization, asked the council to review much larger questions of tax expenditures (a technical term for tax breaks) granted by the city's Industrial and Commercial Initiative Program.
The tax expenditure report notes that 5,771 exemptions and abatements under this pogram cost $410 million in lost revenues in 2007. Good Jobs New York argues that the initiative program, which was intended to help small firms outside the core Manhattan commercial district now includes benefits for "some of the priciest commercial districts in the city," including $14 million in tax breaks in 2007 for properties in mid-town Manhattan.
These tax breaks rarely get any review. The 2007 tax expenditure report does not feature any independent comment by the Department of Finance, which publishes the report, and offers only a single "evaluation" of business tax breaks. That's a one-page summary provided by the mayor's Economic Development Corporation of its Local Law 48 report for 2006, which is supposed to track the costs and benefits of the development corporation's tax exemptions. This mini report makes two extraordinary claims.
It states, "The present value of city benefits [from 631 EDC investment projects] is estimated to be $23.9 billion, over 34 times the value of city costs."
Further, it contends, "The projects will return a cumulative net benefit to the city (city benefits minus city costs) of approximately $3.2 billion."
If the council wants to pursue serious review of economic development projects, those claims would be a good place to start.
Beyond the breaks, the across-the-board 7 percent cut in the property tax rate cost about $1 billion this year (Note: The January Finance column incorrectly reported it was $750 million).
The mayor's financial plan does acknowledge the current economic and fiscal uncertainty by making the 7 percent property tax rate cut conditional on the overall fiscal picture. The key variable is anticipated - but uncertain - state and federal aid. Already the mayor has complained in Albany that Governor Eliot Spitzer's state budget proposal shortchanges the city by at least $500 million.
For all the money it costs, though, the rate cut provides very modest benefits to taxpayers. In total dollar gains, it primarily benefits commercial properties because they pay the lion's share -- over 40 percent -- of the city's property tax -- although their properties represent only 22 percent of the market value of all properties in the city.
One-, two- and three-family houses, co-ops and condos together represent over 55 percent of the total market value of city properties, but their owners pay only 15 percent of the tax levy. That's good for residential owners, but on the flip side, in the aggregate, they get less of the benefit from an across-the-board cut than commercial owners.
George Sweeting, deputy director of the Independent Budget Office, explained in a New York Post op-ed last summer that most property owners saw little change in their tax bills after the cut. Owners of houses, for instance, saved an average of $43, or less than 1 percent. Condo owners got a $99 average benefit, and the average co-op owner had virtually no reduction. The reasons for these minimal gains are very complex (and desperately in need of simplification) but a key one is that assessments on average grew by 8 percent, while the rate cut was only 7 percent.
Put another way, the commercial benefits of the rate, while nominal for individual property owners, add up to a cost of some $400 million in lost revenues - while the new budget proposes cutting $324 million from education and hundreds of millions in other areas.
At the same time, the city's more progressive tax breaks, such as the $73.5 million for nearly 100,000 senior and veteran homeowners, the $86 million in rent-savings for 45,000 low-income seniors, and the $65 million (in 2004) in earned income city tax credits for 734,000 low-income working individuals, tend to be modest and dwarfed by big-business breaks.
There are many good arguments for the residential property tax breaks, such as the burden of the city personal income tax and other taxes. But the lack of tax relief for renters who are not senior citizens makes the owner benefits look unfair.
Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.Â