The unexpected surge in the third-quarter GDP is wonderful news for the national economy, all right. But don’t read too much into it – yet – as far as New York State and City are concerned.

Paradoxically enough, signs of a strong economic recovery could actually spell danger for New York taxpayers. That’s because state and city politicians are all too eager to seize on any evidence of a turnaround as an excuse to loosen fiscal belts they had barely begun to tighten.

There has already been plenty of irrational exuberance in New York political circles over the past weeks. In late September, the securities industry announced its pre-tax profits were not only rising but might set a new record in 2003. Around the same time, city government’s bean-counters disclosed that their first-quarter tax collections were $300 million higher than expected, and that old audits had yielded an extra $110 million.

The buzz among cockeyed optimists in the Capitol and City Hall was that the stock market was riding to the rescue with a massive infusion of new tax revenue – relieving pressure on lawmakers to rein in spending next year. Those hopes were barely dampened by Mayor Bloomberg’s continuing call for further budget cuts or by Gov. Pataki’s downbeat mid-year state budget forecast, which still pegs next year’s gap at $5 to $6 billion.

The latest piece of economic good news, in other words, means state and city lawmakers will badly need another reality check.

As Bloomberg put it last month, “Anybody that thinks our money problems are over is sadly mistaken.” The city and state budgets are still rising at roughly twice the inflation rate. As a result, both New Yorks face continuing, multibillion-dollar budget gaps as far as the eye can see, even under the most favorable economic scenarios. The gaps have been only temporarily closed, thanks mainly to massive borrowing and tax hikes.

In New York City alone, the total impact of all city and state tax increases enacted since the start of 2002 now totals $3.4 billion, which will put a damper on any incipient recovery. Indeed, as of September, the city was still losing private-sector jobs at roughly double the national pace on a year-over-year basis.

On the positive side, there are clear signs that the city’s employment decline is finally bottoming out. Most other metropolitan regions in the state are enjoying low unemployment and higher-than-average job growth. A strong economic recovery on the national level inevitably will auger a continuing recovery on the city and state level as well. But the question remains: Just how strong will the turnaround be in New York?

The answer depends largely on how Pataki, Bloomberg, the City Council and the state Legislature deal with their respective budget challenges over the next few months. They need to pay attention to three priorities:

* First, no more new taxes. It may be early to talk specifics, but it’s by no means too soon for city and state leaders to commit themselves to doing whatever it takes to avoid any further tax hike next year. This will reassure the many employers who now fear they are the next tax-hike target and thus are inclined to steer their new job-creation elsewhere.

* Speed up the scheduled phase-out of this year’s supposedly “temporary” state and city income- and sales-tax increases, which are now set to slowly disappear by 2006. (As things stand, none of the major players has yet promised even to live up to the current “sunset” schedule.)

* Adopt a pro-active strategy for driving city and state taxes further down. After all, New York was a tax hell even before this year’s latest round of hikes. The state and (especially) the city are at an enormous tax disadvantage even when compared to relatively high-tax New Jersey and Connecticut. If and when the next expansion begins in earnest, other states will be poised to eat our lunch. (Memo to the City Council: Targeted mini-cuts in property taxes for senior citizens don’t constitute an economic-growth program.)

If there’s one major factor in New York’s favor, it’s President Bush. The president’s tax cuts have helped to reignite the stock market and have benefited New York’s high-income households, while offsetting increases in state and local income taxes.

Here’s hoping the national economy comes roaring back like an express train. But the city and state need to crack down on their own fiscal excesses if they want to avoid trailing behind.

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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