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Mayor Michael Bloomberg deserves praise for publicly recognizing that deep service cuts hurt the city's economy more than reasonable tax hikes. But beyond this welcome admission, the mayor has made three basic missteps in response to the fiscal crisis.
First, it was obvious even on September 10, 2001 that there would be an unusual amount of red ink coming. Because "the best time to repair the roof is when the sun is shining," ideally Mayor Bloomberg could have spent some political capital during his post-inaugural honeymoon on freezing hiring, reducing the workforce by attrition, educating the public about what to expect, and beginning the painful but unavoidable process of raising taxes. Although the City Council was courageously suggesting the need for some additional revenues last Spring, the mayor repeatedly rebuffed their proposals other than an increase in the cigarette tax.
By delaying the day of reckoning in order to repay a political debt to Governor Pataki, the mayor must now seek steeper service cuts and tax hikes to dig us out of a deeper hole. And lurching from the optimistic Dr. Pangloss to the doom-saying Cassandra within three months of his June 2003 budget, he confused the public.
Second, the mayor's revenue raising measures continue the troubling trend away from taxing those most able to pay. It must be a near first for a chief executive with a growing budget gap to urge tax cuts for the most-wealthy income-earners yet tax hikes for middle class homeowners. (37 percent of homeowner households had annual incomes under $40,000, the city's 1999 housing survey found). It's reverse-Robin Hood to propose raising taxes $500 a year on Queens homeowners while reducing income taxes by $9,000 annually for a million dollar a year New York City businessman. That is not shared sacrifice - and it is not something to impress Albany as we rightly ask it at least to re-impose the old commuter tax. Isn't progressive taxation the underlying philosophy of our tax code?
Third, City Hall is making scant progress toward reinventing government to cut costs and improve services. Indeed, while we agree that government is more efficient than the Gingrich "hate-government-first" crowd implies, it was a mistake for the mayor to imply, within his first year of government service, that city agencies are efficient and largely incapable of substantial savings.
The $1.1 billion in agency reductions included in the city's November financial plan were more in the nature of cutbacks, program eliminations and modest efficiencies than carefully considered efforts to restructure how government works. Government reinvention cuts red tape and bureaucracy and uses incentives such as agency performance budgeting to encourage innovation and improve productivity. Instead, the November financial plan relies on scores of small measures like consolidating family health centers, cutting assistance to industrial parks, and not hiring seasonal parks workers.
The financial plan also calls for saving $600 million through "labor productivity" measures, which remain to be worked out. Will these include "gain-sharing," a proven government reinvention strategy in which workers get to keep a large cut of the savings they produce?
There are fairer and more effective ways to address the city's immediate and long-term fiscal problems. The city ought to:
Increase, not lower, personal income tax collections from top-earners. Chances are nil that state lawmakers will approve the mayor's plan to simultaneously reduce the city income tax top rate and extend the tax to suburban commuters at six times the rate of the commuter tax that was repealed in 1999. The city's Plan B should include a commuter tax at a more realistic rate - hopefully, twice the previous rate - combined with a personal income tax surcharge that raises at least $1 billion. To restore the progressiveness that was lost when the 12.5 percent Safe Streets/Safe City surcharge was ended in 1998, top earners should pay a higher rate as they did under the Safe Streets/Safe City surcharge.
It's not very plausible that higher earners would flee New York City if their city taxes returned to the 1998 level - not when many profited from the stock market run-up of the 1990s and not when neighboring jurisdictions also are raising taxes. For instance, Connecticut is set to increase the income tax on taxpayers with incomes of more than $1 million now that Republican Governor John Rowland has reversed his initial opposition to the proposal.
In fact, thanks to the Bush federal tax cuts of 2001, wealthy taxpayers would pay less in total taxes even with a surcharge. In 2002, the federal tax cuts saved a family of four with an adjusted gross income of $500,000 a year approximately $5,000, twice as much as a $1 billion surcharge structured like the Safe Cities/ Safe Streets surcharge would cost them. Their federal savings will grow as additional scheduled top rate cuts take effect in coming years.
Restore some business taxes. Over the last quarter century, and even during the corporate profits boom of the 1990s, the city's business taxes never varied more than few percentage points above or below 12 percent of total tax collections. In sharp contrast, the personal income tax more than doubled from 10 percent of tax collections in the 1970s to 25 percent in 2001.
According to our recent New Democracy Project report, Closing Deficits: What's the Right Kind of Tax Increase?, the business community's contribution did not keep pace in part because the city cut its corporate income tax rate and did not plug tax code loopholes that are increasingly exploited by savvy corporate tax planners. The rise in the use of offshore tax shelters and New York State's authorization in 1994 of the limited liability corporation (LLC) corporate ownership structure also reduced corporate tax burdens. Businesses that organize as an LLC pay the unincorporated business tax on their profits at a rate only one-half the corporate income tax rate.
In a recent report, the New York City Independent Budget Office noted that corporate tax collections have been flat in the last several decades and urged the city to "examine its business taxes in light of changing ownership structures and shifts in the amount of income that multi-state and multi-national firms apportion to the city." Because New York City tax laws remain largely coupled to New York State tax laws, it will be up to the state to make most of the necessary reforms so that businesses once again contribute a fair share of the cost of running government. Among the needed state actions is legislation similar to New Jersey's Business Tax Reform Act, enacted this summer, which is expected to raise several hundred million dollars by closing loopholes similar to New York State's and New York City's.
The much-repeated conventional wisdom that even a moderate increase in business taxes causes corporate flight is a myth. No matter how often and how vehemently The New York Post and the Manhattan Institute say it, nearly all objective studies of this subject have concluded that, because state and local taxes are such a small percentage of a company's overall costs, location decisions are usually made based on considerations such as occupancy and labor costs, the quality of the workforce, the ability of the transportation network to efficiently move commuters and goods, and proximity to customers.
Continually reinvent government. The Bloomberg administration is beginning to make progress on this front including, notably, in the Education and Buildings Departments. And there is a new emphasis on introducing state-of-the-art technology in all agencies, such as the important 311 initiative (to answer non-emergency calls and requests).
But much more can be done to aggressively reinvent city government. Public Advocate office studies detailing several hundred millions of dollars in potential savings in the city's antiquated procurement system and in energy expenditures were reiterated in this month's Citizens Budget Commission studies on streamlining procurement and managing energy usage more closely. A District Council 37 white paper this year concluded that an extensive New York Police Department civilianization program could save $127 million a year compared to $40 million under the administration's more limited plan.
Rather than casually assert that government is efficient, City Hall should create an Office of Continuing Reinvention to aggressively keep pursuing new streamlinings and efficiencies - a COMPSTAT for all services. Only such a permanent watchdog can fight natural bureaucratic complacency and can develop the trust between City Hall and labor essential for gain-sharing agreements to occur and work.
Press Albany for mandates relief. The city should insistently press the governor and legislative leaders and coordinate even more closely with other local governments to get the state to reduce the costs of un-funded mandates and especially to control rapidly rising Medicaid spending, for which local governments pick up a quarter of the cost, unlike in most other states.
Unfortunately, massive regressive tax cuts approved during the 1990s have put the state in an even more precarious fiscal situation than the city. Local governments are being threatened with cuts in state education aid and other essential programs. So it is in the city's interest to push for reasonable, progressive state revenue restorations.
The city's continuing fiscal crisis calls for shared sacrifice, which is often more called for than done. Residential property owners will start doing their part as they begin paying higher property tax bills next month and renters will pitch in when their renewal leases include the cost of higher taxes. New Yorkers who rely on government services like home care and senior centers will sacrifice as budgets are cut and programs trimmed. Straphangers are likely to see significant fare hikes. The city workforce will be asked to accept modest salary increases, as the transit workers just did. Top earners and the corporate sector must do their part, too. All of us must contribute as our city struggles to rebuild its downtown, its economy and its schools.
© Gotham Gazette, 2002
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