New York City’s Tax Burden

E.J. McMahon surveys New York city’s tax burden, which has increased mightily under Mayor Bloomberg:

Once you add state levies, New York City’s tax burden on a family of three with an income of $50,000 is $909 higher than the average for the nation’s largest cities, according to a 2011 survey by the District of Columbia’s chief financial officer that included income, property, sales, and auto taxes in its calculations. But that tax gap grows with income: a three-person New York household earning $150,000 pays $5,980 more than the big-city average. Not surprisingly, New York looks worst compared with low-tax cities, such as Houston, where the family with an income of $150,000 would pay $12,240 less. But Gotham also manages to out-tax cities with free-spending traditions. The combined tax bill for the $150,000-a-year family is $3,047 lower in Los Angeles than in New York, $3,997 lower in Chicago, and $5,410 lower in Boston.

And he offers a blueprint for how the next mayor ought to start reforming New York city’s tax code:

So it’s important to start moving city taxes in a more competitive direction: down. And any cuts should apply across the board, rather than being targeted to those who would yield the maximum political gain—the thrust of some current proposals, such as Liu’s, for middle-class tax breaks financed by tax hikes in higher brackets. Picking up where Giuliani left off at the end of 2002, the next mayor’s first budget should include a multiyear phaseout of an income-tax surcharge first imposed under Mayor David Dinkins. That would reduce the top income-tax rate from 3.9 percent to 3.4 percent, its lowest level since 1989. The remaining commercial rent tax in Manhattan should be phased out as well. If the next administration merely began to eliminate the surcharge and the rent tax in its first budget, it would send economic decision makers a signal that the city was going in the right direction, as Giuliani’s 1994 hotel tax cut did.

A more ambitious way to make New York attractive to business would be to restructure the property tax to stop favoring homeowners at companies’ expense. In the past, the city council and the state legislature have viewed that proposal as a political third rail. But at the very least, they should make sure that any future property-tax reduction applies to all property owners—unlike Bloomberg’s politically motivated $400 rebate for homeowners only, repealed in 2009.

McMahon is right on the merits, but the only scenario in which the next mayor is likely to pursue a revenue-negative tax reform is if the next mayor is a Republican, and successful GOP mayoral candidates in New York city have tended to rely heavily on the support of homeowners. That said, conservative local politicians really ought to draw attention to the difference in the tax burden between New York and other large cities. It would also be instructive to link the New York city tax burden to the rising cost of pension and health benefits for municipal employees, which Nicole Gelinas recently addressed:

In fiscal year 2002, which began in July 2001, six months before Bloomberg took office, city-funded spending was $26.3 billion, or $33.9 billion in today’s dollars when adjusted for inflation. In fiscal year 2014, the last budget Bloomberg will sign into law, the mayor projects city spending to be $50.7 billion.

This nearly 50 percent increase in inflation-adjusted spending has not funded basic city services. Rather, it has largely funded what the mayor calls “uncontrollable expenses”—pensions, health, and other “fringe” benefits for workers and retirees. Under the mayor’s final budget, these “uncontrollable expenses,” at $23.1 billion, will exceed controllable expenses, at $22.7 billion, for the first time in New York City’s history.

Two big-ticket items—pensions and health care— have defined budget growth.2 In 2002, for example, the city spent $2.4 billion on health and other “fringe” benefits such as workers’ compensation for city employees ($3.1 billion in today’s dollars). In 2014, the cost will be $8.8 billion. In 2002, the city spent $1.6 billion on pension contributions ($2 billion in today’s dollars). In 2014, the figure will be $8.2 billion. Together, these two costs alone comprise $17 billion, or nearly three-fourths of “uncontrollable expenses.” Now nearly 34 percent of the city-funded budget, these costs comprised 15.2 percent of the city-funded budget when the mayor took office.

There is no reason to believe that any of the leading Democratic mayoral contenders intends to do much of anything about the rising cost of pension and health benefits, and the Republican mayoral candidates have yet to make much of an impression. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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