Well, well, well. It seems that Governor Spitzer and Mayor Bloomberg, having bought into the Campaign for Fiscal Equity and the idea that the problem with our schools is a lack of money, are now fighting tooth and nail over the rest of the budget. That was certainly the news yesterday out of Albany, where the mayor hastened on his return from Europe to try to wheedle more money out of the already strapped taxpayers of the state. We don’t mean to belittle the mayor’s efforts. Given the world view he brings to the table, he’s a terrific advocate for the city. And he has been a marvelous manager of the money the city has. But there was no disguising the fact that he and the governor — the two most ambitious politicians in the state even, we would suggest, including Senator Clinton — are at loggerheads.

The mayor began by remarking about how Mr. Spitzer has made “One New York” the theme of his State of the State message. He then endorsed the stepped up funding for city schools contained in the governor’s executive budget, saying it was “righting an historic wrong.” Later in the speech the mayor rattled on about the glories of all this. But the mayor promptly went on to assert that, in areas other than schools, the governor’s budget does not advance toward the goal of One New York. He referred to the budget as “unjustly” eliminating $660 million in state revenue-sharing funds to the city. He complained the budget was “unfair” and that New York has been over the years nickel-and-dimed. For a moment there one almost expected him to pitch a sleeping bag over a grate in front of the governor’s office.

But the mayor is no derelict and neither is New York City. On the contrary, much of the mayor’s argument has to do with the richness, the productiveness of the city, which contributes, he said, nearly half — 48.6% — of the state’s tax revenues. “The continued strong performance of our economy is why the State is enjoying its current budget surplus,” the mayor asserted. “At the very least,” he argued, “that means that the state budget should not undercut New York City’s economy, which to some extent this budget does.” Then he offered this lecture: “In government, when an agency or, in this case, a locality, is doing well, policy makers often commit the error of cutting its funding. Successful businesses, let me remind you, do exactly the reverse; they invest in their top subsidiaries which this budget does not.”

We would argue that there’s a difference between investment and subsidy. It is the latter primarily that the city is seeking. The mayor’s argument illuminates the fact that the city — and, for that matter, the state — have become mortgaged to the rich. Given that, the more logical approach for the mayor is not to go subsidy hunting but to address the tax disincentives to growth. And here the mayor made some headway. He asserted flatly: “New York City’s high taxes hurt our ability to compete with other regions — other cities in this region.” So he asked for some tax relief, proposing the Legislature renew the $400 property tax rebate. He also sought approval of an additional $250 million in “job-creating local tax cuts” of various sorts, including new deductions and credits to the Unincorporated Business Tax and targeted reductions in the General Corporate Tax and some sales tax relief. He also proposed tax credits to qualified low-income families with young children.

So far so good. But the best part of the mayor’s presentation was when he confronted the tax hikes the governor proposed after campaigning on a promise that he wouldn’t raise taxes. This refers to what the governor likes to call “loophole” closures. If a neoconservative is someone who is mugged by reality (as Irving Kristol once put it), the mayor has hit the first step — he knows when he’s getting mugged. “The revenues from plugging tax ‘loopholes’ promised the City in the Executive Budget will in no way fully offset these losses,” he said yesterday, a reference to the losses of revenue-sharing aid. Added he: “Let me remind you that the legislature voted these loopholes for economic incentive reasons that haven’t gone away.” So the governor’s scheme means that “double the amount of money is taken out of New York City’s economic businesses than the numbers say. These are the same businesses that are so highly taxed, we’re working hard to keep them from leaving our city.”

Mr. Bloomberg seems to be on to the flaw in the trade the governor has proposed. Mr. Spitzer would allow the city to raise certain of its taxes in parallel with the governor’s own tax increases (or loophole closings). The Manhattan Institute’s fiscal expert E.J. McMahon says these complexities in corporate tax rules “would represent a fairly substantial tax increase for New York City-based corporations that have operations around the country and have transactions with a lot of subsidiaries.” In sensing the problem, the mayor has opened a bigger fight with the new governor than is apparent from the civil tone of his presentation in Albany. It’s a far better fight for the mayor to have than spending his time seeking subsidies from the state. It not only is a better deal for the city, but it sets the mayor up for a tax-cutting campaign for the presidency and leaves Mr. Spitzer the mantle of tax-raiser.

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The Empire Center is an independent, non-partisan, non-profit think tank located in Albany, New York. Our mission is to make New York a better place to live and work by promoting public policy reforms grounded in free-market principles, personal responsibility, and the ideals of effective and accountable government.