Just before the attack on the World Trade Center, Mike Bloomberg said he couldn’t “prudently promise” not to raise city taxes, “because you can’t see the future.”

But after Sept. 11, his position became much firmer. “Raising taxes is not an option,” he exclaimed in his post-9/11 economic recovery plan. “Higher taxes are a disincentive to those considering moving into the city — and encourage those already here to leave.”

The mayor-elect will soon get a chance to prove he really means it, because city residents may be hit next year with an automatic tax increase — their first in a decade.

At issue is a 14% “temporary” income tax surcharge that was imposed in 1991 as part of then-Mayor David Dinkins’ disastrous attempt to tax his way out of a New York’s last fiscal crisis.

While other city taxes were reduced under Mayor Giuliani, the surcharge survived at its original rate until last year, when Giuliani and the City Council agreed to cut it in half for incomes below the highest bracket. This year, the mayor and Council agreed to shave an additional 3.5% for all taxpayers.

But the final word belongs to the Legislature, and here the picture is complicated. For reasons never quite made clear, in August legislators passed and Gov. Pataki signed a bill extending the full 14% through 2004, leaving the city with a continuing option to reduce it. This basically threw the matter back into the laps of the mayor and Council, who had thought they were through with it.

Assuming the lame-duck Council rejects Giuliani’s last-ditch effort to enact a corrective measure before the end of the year, Bloomberg will be left with three choices:

Do nothing, in which case the surcharge apparently will return to 14%. This would represent a $275 million tax increase, costing a typical middle-income city family about $200 a year — and leading to the destruction of another 11,000 private-sector jobs, as estimated by the Manhattan Institute’s tax policy model (based on pre-Sept. 11 job data).

Reduce the surcharge to zero, effectively repealing it, by far the best result from an economic standpoint. This would cut the city’s top income tax rate of 3.59% down to 3.2%, its lowest level in 30 years, and promote the creation of up to 14,000 jobs, as estimated by the Manhattan Institute model. However, it also would cause an additional $350 million drop in revenues at a time when the city faces a budget gap of up to $4 billion.

Extend the surcharge, but at the lower rates reflected in Giuliani’s last budget. This would not add to the post-Sept. 11 budget deficit because it is already built into the baseline of the financial plan.

While the issue has attracted little public attention, Bloomberg shouldn’t be surprised if unions and other public-sector interest groups urge him to take the course of least resistance — do nothing. Aside from the damage it would do the city’s struggling economy, this would represent a moral victory for defeated Democratic mayoral candidate Fernando Ferrer, who made repeal of the surcharge cut a central plank in his budget-busting campaign platform.

But Ferrer’s frequent derision of the tax cut as a matter of “pennies a day” was both arithmetically misleading and ultimately beside the point. See what kind of reaction you get by asking straphangers for a 30-cent increase in the subway fare, which would cost about the same over a full year.

There’s ample evidence that changes in income tax rates affect economic growth by providing incentives to work, save and invest in the city, especially in the top income brackets.

At an absolute minimum, Bloomberg should move quickly to stay the course charted by Giuliani, extend the income tax rate cuts and make complete repeal of the surcharge a high priority as soon as possible. Anything less would create just the kind of disincentive the mayor-elect has pledged to avoid.

McMahon is the Manhattan Institute’s senior fellow for tax and budget studies.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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