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Reviewing Federal and City Tax Cuts


The large tax cuts in the city’s budget -- $1.6 billion in 2008, growing to an estimated $2.2 billion in 2011 – are part of a national tax-cutting movement that has flourished since 2001.

What, though, is the impact of cutting taxes? And how do New York City’s efforts to cut taxes compare with the moves taken by the Bush administration at the national level?

The national and city cuts both have reduced tax bills, particularly for people with high incomes. Neither has sought to make the tax system much fairer for people at the lower end of the economic ladder. But President George W. Bush’s tax cutting springs at least partly from ideology while Mayor Michael Bloomberg has been more pragmatic, adjusting his tax policies to meet immediate fiscal realities. The president’s tax cuts have spawned large deficits, but Bloomberg, who by law must balance his budget, has seen large surpluses for much of his administration — at least until now.

A Sea of Red Ink

Several new studies on Bush’s 2001 and 2003 federal tax cuts find that the cuts have had a regressive impact, widening the gap between the rich and the rest of America.

According to the president, the tax cuts have spurred the economy. He has also said they put more money in the hands of individuals as opposed to government. To some extent, that is correct. The tax cuts cost the federal government about $300 billion in lost revenues in fiscal year 2007 alone, according to a July report by the Center on Budget and Policy Priorities. Because the federal government has had to borrow money to pay for those tax cuts, the reductions have contributed to the $3 trillion that Bush has added to the national debt since he became president in 2001.

As reported in a September 13 report by Citizens for Tax Justice, a research and advocacy group, the impact of the tax cuts and the size of the new debt is masked by the way in which Bush defines annual “deficits.” The president announced this summer that estimates of the 2007 budget deficit had dropped from $244 billion to $205 billion. That figure, though, included only the $205 billion borrowed from outside government to help balance the federal budget. It does not consider the additional $180 billion in Social Security funds Washington borrowed. Including that brings the actual deficit to $385 billion. The best one can say is that the projected $385 billion actual deficit in 2007 is lower than the deficits of more than $500 billion a year that the federal government ran in 2003, 2004 and 2005.

The result of this deficit spending is that the Congress has had to raise the national debt limit five times. The new limit will be $9.815 trillion, some $3.9 trillion more than it was when Bush took office.

Shifting the Tax Burden

In an April report, Citizens for Tax Justice noted that, contrary to popular opinion, the United States is one of the least taxed industrial countries in the world. Of 30 nations in the Organization for Economic Cooperation and Development, only two, South Korea and Mexico, have lower taxes. In 2005, total federal, state and local taxes in the U.S. were 25.8 percent of our economy, as measured by our gross domestic product (GDP, the market value of goods and services). The 27 countries with higher taxes ranged from Japan – with taxes at 26.4 percent of GDP – to Sweden at 51.1 percent.

Because of relatively high income and property tax rates, residents of New York State pay a greater percentage of their income in taxes than most other Americans. The federal state and local tax bill for an individual in the U.S. averaged $3,699 in 2005, according to figurescompiled by the Business Council of New York State. New York State residents, the council said, paid an average of $5,770.

The Citizens for Tax Justice report also shows that in the last 40 years there have been significant shifts in taxes, both as a percentage of the economy (measured by the GDP) and in individual taxes as a percentage of total taxes. Business taxes account for a much smaller percentage of total taxes today than in the 1960s. In 1965, U.S. corporate income taxes were 4.0 percent of our GDP. By 2004 they represented only 1.9 percent of GDP.

Personal income taxes are the main source of U.S. federal (and many state) tax revenues. In 2000, largely reflecting President Bill Clinton’s 1993 progressive (i.e., higher earners pay at a higher tax rate) new top rate of 39.6 percent, total personal income taxes in the nation (including state and local taxes) accounted for 41 percent of all taxes. After Bush and the Republican Congress dropped the top rate to 35 percent in 2001, personal income taxes as a percentage of all taxes declined to 34 percent by 2004. Since the bulk of personal income tax revenues comes from higher income households, this high-income households save much more money than lower-income ones.

At the same time working- and middle-class households are carrying a higher tax burden because of social insurance and payroll taxes like Social Security and Medicare. In 1965, these taxes were only 13 percent of all the nation’s taxes. Since 2002 they have totaled 27 percent of all taxes each year.

The 2003 capital gains and dividend income tax cuts have proved particularly regressive. The capital gains rate was cut from 20 percent to 15 percent. And the tax rate on dividend income, which had been treated as ordinary income at the time and so taxed up to 35 percent, was also cut to 15 percent.

It will come as no surprise that the very rich made out like, well, bandits. An August 10 Citizens for Tax Justice report shows that the cost in 2005 alone of the capital gains and dividend income cuts was $92 billion. Three quarters of the benefit went to less than 0.6 percent of all tax filers, providing those earning over $500,000 in 2005 with an average benefit of $81,204.

“Most amazing, the 13,776 tax filers with adjusted gross income in excess of $10 million – a mere 0.01 percent of all filers – received 28.2 percent of the total tax savings,” the report said. Their average tax break was almost $1.9 million.

A Center on Budget and Policy Priorities report issued in March 2007, asked, “Have the 2001 and 2003 tax cuts made the tax code more progressive?” No, it answered. The 2001 and 2003 tax cuts, the report said, “will increase the incomes of high-income households by a much larger percentage than the incomes of low- or middle income households.”

It calculated that if the tax cuts become permanent – they are currently scheduled to expire at the end of 2010 – by 2012, those earning over $1 million a year will see an increase of 7.5 percent in income, compared to only a 2.3 percent increase for middle-income households and an increase of just one half of one percent for the one fifth of households with the lowest income.

Conservative proponents of the tax cuts argue that the rich pay a higher share of taxes now than they did before the cuts. Yes, between 2000 and 2004 the share of personal income taxes paid by the top 1 percent of taxpayers went up slightly, from 36.5 percent of all personal income taxes paid to 36.7 percent. But total income tax revenues dropped by $250 billion between 2000 and 2004 because of the rate cuts, so the top 1 percent paid about $100 billion less than they would otherwise have paid at the higher rates in 2000.

Further, between 2000 and 2004, federal income tax rates dropped by 4.6 percentage points for the top 1 percent of taxpayers, 2.1 percentage points for those in the middle of the income scale, and by only 1.6 percentage points for those at the bottom.

New York City’s Tax Cuts

The Bush tax cuts clearly reflect a conservative, regressive-tax ideology. The recent New York City cuts are harder to characterize.

During his more than five years in office, Mayor Michael Bloomberg’s policies reflected no consistent position on taxation. Instead, he has variously adjusted the city’s tax system for pragmatic and political reasons.

The mayor determined in 2003 that the city needed $2 billion in new taxes to avoid a huge deficit, and he increased all the big taxes (except on corporate income): property, personal income and sales taxes. In 2007 he went the other way and cut taxes by $2 billion a year because he had the (one-year) surplus money to do it. At the same time, Bloomberg shows little interest in a progressive tax agenda.

The elimination of the 4 percent city sales tax on all clothing in the 2008 budget is marginally progressive, since clothing expenses as a percentage of income will be slightly lower for low-income households. But the loss of tens of millions of dollars in high-end taxes on clothing like the outfits touted in the recent fashion shows is a reminder of how much the modest gains for low-income New Yorkers have cost us.

The biggest part of the 2008 cuts – the across-the-board property tax rate cut and residential owner ($400) rebate -- no doubt eased the tax burden of many lower- and middle-income homeowners who needed it (and many wealthy residential owners who didn’t), but the bulk of the rate-cut benefit went to large corporate property owners.

Further, the one significant progressive idea in recent years never made it into the adopted budget because the mayor rejected the City Council’s proposed $300 rebate to low- and middle-income renters. That’s a missed opportunity.

In terms of creating a more progressive city tax system, the city’s personal income tax offers a big opportunity. The rates for this tax currently resemble a flat tax (where everyone pays the same tax rate, regardless of income) because they range only from a 2.9 rate for joint filer with an annual taxable income of $21,600 or less to a top rate of 3.7 percent for joint filers making $90,000 or more. There were higher top rates through much of the 1990s and from 2003 to 2006.

In comparison, the federal personal income tax has six brackets and ranges from 10 percent on joint taxable incomes up to $15,650 to 35 percent on joint taxable incomes above $350,000.

Without a more progressive personal income tax rate structure and without a review of inequities in the property tax system, the city under its current leadership seems likely to continue to use taxes – reducing them or increasing them in an ad hoc way -- as immediate economic conditions dictate. That’s non-ideological, but it’s also a missed chance to establish a fair and more stable city tax policy for the long term.

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

 

Worrying About Wall Street


Although Wall Street firms employ only 5 percent of workers in New York City, they account for 20 percent of the city's total wages and salaries. Any ups or downs in the financial district can subsequently create a ripple effect elsewhere, seeping unsteadiness and insecurity into the pockets of New Yorkers citywide, from real estate brokers to waiters.

Thus, when the market acts volatile – as it did on Friday following a U.S. government report on job losses -- the city is at risk.

The End of an Era?

As the stock market dives and climbs, plummets and rallies, city financial experts and officials cannot help but ponder what effects that could have on the city's overall economy and the city government's upbeat fiscal outlook.

Some fear the current turmoil could end a rosy economic era that featured billions in budget surpluses, which enabled the city to cut taxes it had raised during a recession earlier in the decade.

"People have gotten used to, in the last several years, for every year to be better than the last," said Marcia J. Van Wagner, the city's deputy comptroller for budget. "I think what is going to happen here, as the economy turns a little bit, we're going to have to get out of the habit of thinking that way."

The Bloomberg administration, the city's Independent Budget Office and the city comptroller's office all expected an economic slowdown even before the recent dives. The Bloomberg administration’s decision to use some $2.3 billion in this year's budget to cover debt service in future years, Van Wagner said, could offer some initial protection. Although it is still too early to speculate on future fallouts from the market, Van Wagner added that any concern should not be directed toward this calendar year, but the next.

Wall Street's Reach

The city relies on revenues received from Wall Street. Bonuses alone last year, estimated Van Wagner, contributed $20 billion to the city's economy. These bonuses, Wall Street wages and capital gains have accounted for nearly half of the state's growth in its income tax base since 2003.

The market's swings - sparked by a so-called crisis in the sub-prime mortgage market and subsequent credit crunch (see related stories below) – could affect other industries as well. Sales of luxury items could decrease, New York City's soaring housing market could sink, nonprofit organizations could have difficulty fundraising, brokers could lose their jobs and gourmets might find it easier to get a table at exclusive restaurants, said city officials.

However, Van Wagner said, there is no reason to panic. "There are certain people who have jobs in certain parts of Wall Street that have every reason to be worried right now," said Van Wagner. "For New York City residents in general, I don't think they should be alarmed at the moment."

Predicting the Future

That should officials watch for? City officials said they would turn to business tax returns due at the end of the month as an economic indicator. They will also keep an eye on layoffs. Employment growth is another indicator to watch. The comptroller's office projected that employment in the city would grow by 50,000 jobs this year, and it has already increased by 54,000, Van Wagner said.

Nationally, however, employment dropped in August for the first time in four years. On Friday, an employment report revealed the country had a net job loss of 4,000 last month, despite economists' predictions of more than a 100,000 gain. The stock market's drop in response indicated how national economic developments could affect New York's financial workforce and eventually the wider city economy.

In the months to come, New York City definitely will see a slowdown in its economy, said Doug Turetsky of the city's Independent Budget Office. How bad it is or whether it's better than previous estimates, remains to be seen, he added.

"The city is still very dependent on the financial services sector," said Turetsky. "It's still the main driver of the New York City economy. We haven't had the kind of diversification that people have talked about that would help the city insulate from the cyclical downward trend that Wall Street goes through."

Others are not so pessimistic. James Parrott of the Fiscal Policy Institute wrote in Gotham Gazette that Wall Street would have to go into a “sustained slump” for city economy to suffer a serious downturn. “Many other parts of the economy should continue to generate jobs and economic stimulus – even if the stock market gets the jitters,” Parrott said.

Whatever happens in the long run though, the coming days promise to be anxious ones on Wall Street as experts try to figure out whether August’s job loss represented a one-month glitch or an early sign of a looming recession. And as long as there are jitters on Wall Street, there promise to be some restless moments in City Hall as well.

Also this week:

--Charles Geisst, a professor of finance at Manhattan College, predicts real estate brokers are likely to see prices fall as a result of turmoil on Wall Street and in the national housing market.

--New York City-based credit risk analyst Rebecca Jones explains the foreclosure crisis and looks at whether – and how – it affects New York City.

Related coverage in Gotham Gazette:

• Jittery Wall Street, Calm City? (April 16, 2007)
by James Parrott
Even though New York remains heavily dependent on Wall Street, other sectors of the local economy continue to remain strong.

• Neighborhoods and the Fiscal Boom (August 2007)
by James Parrott
The economy's surge on a citywide scale has boosted tax revenues, but some communities have not felt the full effects of the good times.

• Looking at the Four-Year Financial Plan (August 2007)
by Glenn Pasanen
How the city plans on spending its money – including all those surpluses -- over the next several years.

• Behind the Low Unemployment Rate (May 2007)
by James Parrott
Why the city’s jobless rate has reached an all-time low.

• Wall Street Bonus Babies (January 2005)
by Andrew Beveridge
Who gets Wall Street's record-breaking bonuses.

 

 

Looking at the Four-Year Financial Plan


The latest gyrations on Wall Street may complicate the city's financial picture somewhat but, assuming things do not go badly awry, Mayor Michael Bloomberg and the City Council can look forward to one and maybe two happy budget years. That's the finding of the city’s three major fiscal monitors in their July reports on the city’s recently adopted 2008-2011 financial plan.

The reports from the city comptroller, state comptroller and stateFinancial Control Board are especially informative on three major components of the plan: the big four-year tax cut, the large increase in education funding and city’s plans to spend the $6.5 billion “windfall” that accumulated in 2007. They also provide insight into the capital budget, hiring and accountability in education and stress what they see as the plan’s fiscal prudence.

The $6.5 Billion Surplus

Enjoying $6.5 billion in “surplus resources” the city, in the fiscal year that ended in June, pre-paid $2.7 billion that would otherwise be due in 2008, $2.9 billion due in 2009 and $1 billion for 2010. In doing this, the government retired $1.2 billion of debt early and spent $4.7 billion (what the mayor calls the official 2007 “surplus”) on other pre-payments, mostly on debt service.

This unique distribution of excess one-year revenues over three years apparently encouraged the big tax cuts, which cost $1.6 billion in 2008 and $2.2 billion in 2011. The monitors accepted and even cheered the tax cuts -- despite their professed worries about long-term budget problems. The state comptroller’s report applauds the tax cuts because they “stimulate economic activity and improve the city’s competitiveness with surrounding jurisdictions”

Bloomberg has often said that taxes have little effect on business location decisions. So who actually benefits from the property tax cuts?

Of the $1.6 billion in 2008 tax cuts, $1.05 billion came form the cut in the property tax rate. Although the mayor and council spoke of a 7 percent cut in the property tax rate, that was only an average. In fact, different types of property got different rate cuts, because of the bizarre structure of the city’s property tax system.

Commercial properties got an 8.5 percent rate cut and private home owners got a 4.2 percent rate cut. But that was actually good news for the home owners, because without a last-minute change in state law in June, they would have seen a slight rate increase under existing law, according to the control board.

Many of the ostensible gains from the rate cuts were washed out by increases in assessments. Projected revenue from the property tax system in 2008 is nearly $13 billion, or about $50 million higher than in 2007, says the control board.

Property market values increased by $122 billion, or over 18 percent, in 2007, according to the city comptroller. And assessments, which determine actual taxes paid and are always much lower than market values, went up $9.3 billion, or about 8 percent. (The actual tax for a home or business is the property’s tax rate times its assessment.)

The financial reduction plan also included elimination of the city sales tax on clothing, a child care tax credit and some business tax cuts. Together, over four years, they will cost a total of nearly $8 billion, according to the city comptroller.

Money to the Classrooms

The other big new expenditure in the plan is for the city’s public schools. By 2011, funding for the city’s public schools will rise by $5.5 billion, according to the state comptroller’s report.

The report shows a shift in education funding, from the city to the state, as a result of the settlement of the Campaign for Fiscal Equity case on spending for schools. Although both the city and state will greatly increase their funding for education over the four years, more will come from the state. In 2007 the total education budget (including pension and debt service costs) was $18.6 billion. Some $9.5 billion, or 50.9 percent, of that is city funds; $7.2 billion, or 38.9 percent, is state funds; $1.8 billion, or 9.8 percent, is federal funds.

By 2011 the education budget (including pension and debt service costs) will be $5.5 billion higher, or more than $24 billion. The financial plan assumes the city will then be paying $11.9 billion, or 49.2 percent of the total education funding, and the state $10.3 billion, or 42.6 percent.

Perhaps the best illustration of the increase in education spending is in the city comptroller’s report, which points out that per-pupil spending in Department of Education programs will jump by 35 percent over four years. “Even after adjusting for inflation, projected per pupil spending would still jump 23 percent during [the four-year] period, driven primarily by a 33 percent increase in real dollar growth for instructional spending,” the comptroller said.

With all this money come worries about accountability and management in the city’s education department. As the state comptroller points out, the increase in state education funding comes with strings: “The state will now require the city to submit plans and report annually on how it will use additional state education aid to improve student academic performance and to achieve other measurable educational goals.” The State Board of Regents is developing additional accountability measures. At the same time, the Campaign for Fiscal Equity and other advocates have criticized the Bloomberg’s administration’s plans for some of the state funding.

Plusses and Minuses

Overall, the city’s expense budget is projected to increase from $59.1 billion in 2008 to $69.1 billion in 2011. According to the financial control board, the bulk of the increase goes to wages, pensions, health insurance and other benefits for city workers (reaching $37.9 billion in 2011); Medicaid ($5.9 billion in 2011); and debt service ($6.2 billion in 2011) for the city’s capital program.

Other spending – so-called discretionary, other-than-personal-service, which includes all the contracted youth, health, social, and other human services – will rise by only 0.8 billion over four years.

The monitors include some other interesting details:

-- The city realized over $1.2 billion from tax audits in 2007, far more than the $600 million it usually gets from such audits each year. According to the state comptroller, the increase stemmed from “the settlement of several outstanding audits of financial firms and the clarification of the tax treatment of investment capital,” another example of the city budget’s dependence on Wall Street.

-- The city-funded workforce increased by 12,186 from fiscal 2004 to 2007, to about 264,000. Another 6,095 will be added in 2008. The largest growth is in new hires for the Department of Education. The uniformed police force remains at about 35,500, 11.5 percent below the total in June 2000. Since 2004, the police department has added 1,411 civilians to replace uniformed officers performing administrative duties, a cost-saving reform long sought by city comptrollers and council members.

-- The city has a massive $83.7 billion ten-year capital plan. By far the biggest element, according to the financial control board report, is the education capital budget of $28.2 billion. Some $20.4 billion of that will go toward bringing current schools to a state of good repair. More than 50 percent of the funding for the education capital projects, it is currently assumed, will be provided by the state.

--At the same time, the control board reports, the city will invest only $2.5 billion of the $5.1 billion needed to bring city capital assets up to a state of good repair over the next four years. The $5.1 billion figure comes from the recently published 2007 Maintenance Report. Projected highway maintenance funding is only $885 million of a recommended $1.9 billion. Bridge maintenance, on the other hand, is fully funded at just under $1 billion over four years.

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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