Saddled with yet another high-priced mandate from Albany, Mayor Giuliani and the City Council are rethinking their tax-cutting agenda. But curtailing tax cuts now would represent a step backward from policies that have contributed to the city’s strongest private-sector employment growth in a half century.

The state Legislature has handed retired city workers a permanent cost-of-living adjustment (COLA) that will add nearly $500 million to the city budget by 2004. That effectively spends nearly half of the money that the mayor and the council wanted to devote to tax cuts as part of the 2001 city budget.

Scaling back the tax-cut package–which includes a personal income-tax cut and repeal of the commercial rent tax–is the quickest and easiest way to free the cash needed to digest the COLA. But this prescription could hurt the city more than the disease it seeks to cure.

There’s no question that the city’s sky-high taxes have been job-killers. And fresh evidence of a strong correlation can be found in a new study of urban finances by a team of respected economists, including Andrew Haughwout of the Federal Reserve Bank of New York.

An econometric model developed by Haughwout and his colleagues suggests that cuts in New York’s top personal-income-tax rate since 1998 resulted in the creation of 55,500 jobs–more than half the city’s net employment growth last year. The same model indicates that the income-tax cuts that the mayor and City Council had planned on could lead to creation of another 21,500 jobs, with millions of additional tax revenue.

These predictions jibe well with the city’s actual experience over the pa st few decades. In every prior economic expansion since 1950–including a couple of roaring bull markets–New York City’s share of national private-sector employment fell. That is, city job growth failed to keep pace with the rest of the country even in years when New York managed to grow in absolute terms.

Over the last four years, however, this barometer has been virtually unchanged; indeed, the city share of the nation’s total private sector jobs actually rose slightly, from 2.8 to 2.81 percent, in 1999. That trend is continuing through the first half of 2000. In June, city private-sector employment reached its highest total since 1971.

The job growth has followed cuts in personal income taxes. Starting with Gov. Pataki’s state rate cuts in 1995 and continuing through the 1998 city tax cut pushed by City Council Speaker Peter Vallone, the combined state-city income-tax rate has been reduced at the margin from 12.3 percent to 10.6 percent. Though still considerably higher than in neighboring jurisdictions, the combined top tax rate in New York is now at its lowest point since the city first imposed its own income tax in 1966.

City tax policy is likely to be even more important as today’s New Economy continues to evolve. As highlighted in the latest issue of the Manhattan Institute’s City Journal, the Silicon Alley entrepreneurs who are now the most powerful engine of employment growth in New York are particularly sensitive to elements of the city’s income tax and to the commercial rent tax.

In a time of plenty, tax cuts should be a no-brainer for New York–as should efficiency and productivity gains to preserve vital services. Of course, this is no small challenge in the birthplace of municipal tax-and-spend liberalism.

The tax cuts are now in jeopardy because of growing shortfalls projected in the city’s budget for 2002 through 2004. But well over half the budget gap is attributable to city spending growth–and not just the new pension obligation. While Giuliani was able to reduce real spending during his first few years in office, more recent city budgets have reflected the philosophy enunciated a few weeks ago by Herb Berman, the council’s finance chairman: “If we end up with more revenue, what are we going to do with it? You have to spend it.”

That attitude has gotten the city into past trouble, leading to the tax hikes that that Haughwout and his colleagues blame for the loss of 492,000 jobs in New York since 1970.

A key decision point on taxes is fast approaching. Once Gov. Pataki signs the bill authorizing the income-tax cut, the council must act by July 31 or the window will close on this tax cut until next year.

The best signal that city officials can send to the workers and investors who are building New York’s new economy is to continue cutting personal income taxes and start phasing in a repeal of the commercial rent tax now, and to get to work more vigorously than ever on reducing spending trends for the future.

E.J. McMahon Jr., a senior fellow at the Manhattan Institute, is a former deputy state tax commissioner and minority staff director of the Assembly Ways and Means Committee.

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E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

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