Well, that didn’t take long.
New York City government has barely begun to bring its spending into line with post-meltdown reality—and Council Speaker Christine Quinn is already saying “we’ll need to look at personal income-tax changes,” among “other ideas,” for closing budget gaps that are likely to swell beyond $8 billion over the next two years.
If the best Quinn and the council can come up with is the paltry $210 million in potential cuts she cited in her Citizens Budget Commission speech last week, they need to explore a lot of other ideas. But an income-tax increase is the very last thing they should be thinking about at the moment.
Some of Wall Street’s leading (surviving) investment bankers pointed out the obvious at a recent downtown conference: New York’s status as a global financial hub is now in jeopardy. A leaner, more heavily regulated and less profitable financial sector will be more sensitive to the high cost of doing business in New York—including, of course, the state and local tax burden.
That burden is already quite heavy, for both individuals and businesses. New York City’s top resident income-tax rate of 3.65 percent is imposed on top of the state income tax of 6.85 percent, and one is not deductible from the other. Thus the best measure of New York’s income-tax competitiveness is the combined rate of 10.5 percent—the highest in the region and, in fact, the country.
Few other major cities impose any tax on incomes—and no city replicates New York’s practice of taxing corporations, partnerships, small businesses and freelancers’ business incomes as well. For the growing number of New Yorkers subject to the Alternative Minimum Tax, city and state taxes are not even deductible on federal returns.
In times of fiscal stress over the last four decades, city leaders repeatedly have resorted to raising income taxes—almost always with bad results.
A whopping 75 percent increase in the income tax, enacted under then-Mayor John Lindsay when the economy began to sink in the early 1970s, failed to balance the budget and contributed to a fiscal death spiral that culminated in New York’s near bankruptcy in 1975.
Lindsay’s mistake was repeated in the early 1990s by then-Mayor David Dinkins, who responded to another Wall Street downturn by imposing a pair of surcharges that raised the top city income-tax rate to an all-time high of 4.46 percent. Making matters worse, Dinkins’ tax hikes came amid repeated, significant increases in both state and federal income levies. It all helped to prolong a severe regional recession in which New York state ultimately lost over a half million private-sector jobs.
One of the two Dinkins-era income-tax surcharges was finally allowed to expire in mid-1998. This change, which followed income-tax reductions on the state level, contributed to the city’s strong economic recovery in the Giuliani years.
But that gain was short-lived. When a recession, the 9/11 attacks and a bear market on Wall Street combined to blow a huge hole in the city’s financial plan early in Mayor Bloomberg’s tenure, he responded by raising the income tax (as well as property and sales taxes) yet again. This time, however, Gotham got lucky: Bloomberg’s tax hikes took effect the same day as President George W. Bush’s much larger cuts in federal income taxes, which helped to ignite a strong Wall Street recovery. The resulting torrent of revenues made it easier for Bloomberg to let his income-tax increase to expire in 2005.
The current economic situation is in many ways much more dire than the one the city faced in 2001-03. Federal taxes certainly aren’t going down again anytime soon. If Barack Obama is elected president, federal taxes are likely to rise sharply for New Yorkers earning more than $250,000—who already pay a disproportionately large share of the city’s taxes.
Some New York residents targeted by Obama’s proposed federal tax hikes would respond by earning less or shifting around their incomes in ways that would also further erode the city’s tax base, which is already being battered by the loss of tens of thousands of well-paying Wall Street jobs. Under the circumstances, a city income-tax hike will slow any recovery—raising less revenue than expected and making New York less attractive to fresh capital at a time when it is needed most.
In the past, Bloomberg has suggested that high taxes are less of a hindrance to economic development in New York than in other cities. New York, he says, “isn’t Wal-Mart… It’s a high-end product, maybe even a luxury product.”
The mayor’s luxury-product analogy is actually an even stronger argument for tax restraint in troubled times. Staring down the barrel of a severe recession, employers and investors alike will now be thinking much harder about “luxury” purchases they once considered essential.