Politics & Policy

Taxed Town

Bloomberg's New York.

After New York’s Republican mayor, Michael Bloomberg, gives the opening speech at the upcoming GOP convention tonight, he should stick around to hear President Bush talk tax policy Thursday. Bush gave Americans the largest tax cut in more than two decades–while Bloomberg imposed a series of large tax hikes, which largely offset the benefits of the Bush cuts for New Yorkers.

Bloomberg’s tax increases tarnished the GOP’s tax-cutting image, and he added insult to injury with a tax reversal like that of the first President Bush. In his 2002 inaugural address, Bloomberg declared: “We cannot repeat the mistakes of the past. We cannot drive people and business out of New York. We cannot raise taxes.” But Bloomberg proceeded to hike the city’s cigarette tax rate from 8 cents to $1.50 per pack, increase property taxes 18 percent, and raise income and sales taxes.

Bloomberg’s high-tax policies are worse than a repeat of New York’s past mistakes. Today, skilled workers and investment capital are more mobile than ever, and are more likely to flee high-tax jurisdictions. The types of industries that New York depends on, such as media and financial services, are particularly footloose. Despite the many advantages of New York, intense global competition is forcing businesses to minimize every cost, including tax costs.

The mayor argues that tax hikes were needed to balance the city’s budget. But current city projections show that a $3.7 billion deficit will open again by 2006. Clearly, tax hikes have not solved the city’s budget problem. That’s because higher taxes simply fuel expanded spending and allow politicians to avoid tough budget trade-offs. And the overall burden–of income, sales, property, and other taxes–is much higher than the average for 51 U.S. cities examined in a study by the District of Columbia government. The study found that at a $50,000 income level, New York families paid 30 percent more taxes than average. At a $75,000 income level, New York families paid 41 percent more.

As a billionaire, Bloomberg may not appreciate the hardship imposed on middle-class families by having to pay thousands of dollars in city taxes each year. But as a former businessman, Bloomberg should understand the economic damage caused by high taxes. Yet he hammered New York with tax increases right after 9/11, with the result that the city’s economy has been much slower to recover from the recession than the national economy.

Looking ahead, some New York officials are calling for further tax hikes to close future budget gaps. But Bloomberg can ward off more tax hikes by pressing for cuts to New York’s bloated $48 billion general-fund budget–a budget that expanded 53 percent between 1994 and 2004. A new Cato Institute study by New York economist Ray Keating provides numerous reform options for Bloomberg to consider. Some city services can be contracted out to the private sector to save money and improve quality. Other services–such as housing, transportation, and recreation facilities, including golf courses, ice rinks, and stadiums–can be privatized. City-worker schedules could be better planned to cut rapidly rising overtime costs. The city’s pension plan could be converted to a defined-contribution system. Extra Medicaid services not required by federal rules can be pared back.

New York can no longer coast on its impressive business history; to attract new employers, it has to cut taxes. As a major business center, New York should have one of the lowest unemployment rates in the country, not one of the highest. Bloomberg’s challenge is to reform the budget, cut the uncompetitive tax load, and make New York a leading center of growth once again.

Chris Edwards is director of fiscal policy at the Cato Institute.

Chris Edwards — Chris Edwards is the editor of www.DownsizingGovernment.org at the Cato Institute.

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