Significant changes in state and local tax rates can have significant consequences for New York City’s economy. But how do we measure and predict those consequences? To answer that question, the Manhattan Institute’s Empire Center for Public Policy has commissioned an updated and upgraded version of the State Tax Analysis Modeling Program (STAMP), developed by the Beacon Hill Institute at Suffolk University in Boston, Mass.
Our new model, known as Gotham STAMP 2006, is a Computable General Equilibrium (CGE) model. This means it is larger and more complex than the NYC-STAMP model first used by the Manhattan Institute to study the effects of tax policy in the late 1990s. (See Methodology for details.)
Applied to recent tax developments and potential future changes in tax policy, Gotham STAMP 2006 generates these findings:
- Federal tax rate increases would significantly undermine the city’s recent growth trend. Even a federal income tax hike limited to restoring the pre-2001 top bracket would cost New York more than 8,000 jobs.
- Rolling back the city’s record 2002 property tax rate hike would boost overall employment in the city by about 15,700 jobs.
- Eliminating the remaining Dinkins-era surcharge on New York City’s resident income tax would increase overall employment in the city by nearly 26,300 jobs.
- Retaining the income tax surcharge and postponing the scheduled “sunset” of temporary higher rates in upper income brackets would reduce overall employment by 4,400 jobs.
These numbers are grounded in fundamental, generally accepted economic principles. Higher income taxes reduce the incentive to work, save and invest in New York; moreover, they can prompt some taxpayers (especially upper-income earners) to migrate to lower-taxed jurisdictions. Increases in sales taxes hurt the economy by increasing the relative cost of products sold in New York.Property taxes directly affect the cost of living and doing business in New York. In sum, taxes have pervasive economic effects, which Gotham STAMP 2006 is designed to capture.
Dodging a job-killing bullet
Faced with an enormous budget shortfall in late 2002, Mayor Michael Bloomberg and the New York City Council agreed to enact a record 18.5 percent increase in the city’s property tax rates. This change was reflected in tax bills payable in January and July of 2003.On the heels of the property tax increase, in the spring of 2003, the State Legislature authorized a series of temporary increases in the city’s income tax and sales tax rates.
The city income tax hikes, along with state income tax increases retroactive to Jan. 1, 2003, were first reflected in wage withholding tables during the first week in July. But that same week, New York taxpayers also began feeling the effects of a large new federal tax cut enacted at roughly the same time as the city increase.
The new federal law included:
- Acceleration of tax cuts adopted in 2001 but not scheduled to become fully effective until 2006, including marginal rate reductions, marriage penalty relief and an increase in the child credit, making all of these provisions fully effective in 2003.
- Immediate reduction of tax rates on corporate dividend payments to 15 percent.
- Reduction of the tax rates on long-term capital gains from 20 percent in the top bracket and 10 percent in lower brackets to 15 percent and 5 percent, respectively.
The Gotham STAMP 2006 model was used to retrospectively estimate the combined impact of the 2003 changes in federal, state and city income tax rates (all of which were retroactive to Jan. 1, 2003), along with the increase in city property taxes (which became effective at the end of 2002) and sales taxes (which became effective in mid-2003).
Our tax model’s finding: the combined effect in New York City of reduced federal tax rates and increased state and city taxes was a net gain of at least 16,000 jobs, including at least 6,000 private sector jobs and 10,000 public-sector jobs.
It should be noted that the model’s estimate of the combined impact of the federal, state and city tax changes in 2003 does not fully reflect the ancillary economic benefits of significant reductions in capital gains and dividends taxes, which boosted asset values and ignited a fresh Wall Street boom. Thus, if anything, the model significantly understates the countervailing economic effects of the 2003 federal tax cut in New York City.
If the 2003 federal tax cuts had not been enacted, the model indicates that the city and state tax hikes would have reduced private sector employment would have been reduced by 37,200 jobs — offset only partially by an added 16,300 government jobs (mostly city positions preserved by the decision to raise taxes instead of reducing spending). The net result would have been about 20,900 fewer total jobs.
These findings are not inconsistent with actual experience.In fiscal year 2004, New York City gained 20,400 total jobs, a growth rate of 0.6 percent.The city would have created nearly 24,000 more jobs if it had kept pace with the national rate of employment growth during this period, which was roughly 1.3 percent. The Gotham STAMP 2006 estimate thus suggests the relative slower growth in the city’s economy could be attributed largely to the effects of state and city tax hikes.More recently, as the city and state have begun to phase out temporary tax hikes, employment growth in New York has come closer to (but still trails) the national average. This pattern indicates New York’s performance will continue to improve if the temporary taxes proceed to “sunset” on schedule.
The city tax rate increase of 2002 came just when the tax assessments were beginning to soar as a result of the strongest commercial and residential real estate boom since the 1980s. The vagaries of New York’s Byzantine property tax code are such that the growth in the tax base will need several more years to work its way through the assessment “pipeline.” By 2009, according to Mayor Bloomberg’s latest financial plan, property tax receipts are expected to reach nearly $14.7 billion — an increase of nearly 50 percent over the 2003 level.
Less than half the projected increase in property tax collections over the balance of the decade will be attributable to the 2002 rate hike. So what might the city gain from rolling back the increase? The NYC-CGE-STAMP model estimates that a reduction of property tax rates phased in over four years would ultimately boost private sector employment by 26,400 jobs. Offset by a net reduction of 10,700 government jobs, the total employment baseline would grow by 15,700 jobs.
Another option would be to pursue opportunities to reduce the city’s personal income tax.Under current law, the temporary rate hikes approved in 2003 are supposed to disappear at the end of 2005 (i.e., the middle of the city’s 2006 fiscal year). However, even if the sunset occurs on schedule, the rate will still include a 14 percent surcharge, which was first enacted in 1990 and is next due to sunset at the end of 2008. Allowing this surcharge to expire would bring the top rate down to 3.2 percent from its currently scheduled level of 3.65 percent, with commensurate reductions in three lower brackets.
The Gotham STAMP 2006 model indicates that eliminating all income tax surcharges in effect as of 2005 would be a potent economic growth-booster. Private-sector employment would increase by 30,162 jobs and government employment would drop by 3,795, producing a net employment gain of 26,267.
Unfortunately, tax hikes appear to be the last thing on the minds of city officials. During the recent mayoral election campaign, Mayor Bloomberg’s leading Democratic opponents all favored some form of broad-based tax increase. The mayor did not propose any tax increases and said he did not think tax hikes would be necessary if the economy continued to grow. However, his remarks fell well short of a commitment to holding the line on taxes.
Post-election, the mayor reiterated his desire to restore the city’s commuter tax on the wages of people who commute to their jobs in the city. The Mayor has not said what form of commuter tax he might favor. Moreover, the initial version of our CGE model is not calibrated to estimate the economic effects of such a tax, which would affect wage-earners in multiple jurisdictions outside the city.
In any event, prominent Democrats and Republicans in both houses of the Legislature have flatly ruled out a commuter tax in any form.Thus, if any tax increase is actually considered for the city in the year ahead, it most likely would take the form of an extension in the higher rates that were imposed as a temporary measure in 2003.
Gotham STAMP 2006 estimates that, compared to the current baseline, extending these rates would reduce private-sector employment by 5,792 jobs while increasing public-sector jobs by 1,422, resulting in an overall loss of 4,370 jobs.
High future stakes
Despite a surge in tax collections fueled by the recent real estate boom and strong securities industry profits, New York City’s recurring annual expenditures continue to outpace recurring city revenues by billions of dollars a year. The resulting “structural” imbalance is the reason why each economic slowdown threatens to ignite a financial crisis for city government.
Given strong organized resistance to spending restraint, budget gaps also become a source of pressure to raise taxes in what is already the nation’s most heavily taxed big city.
Meanwhile, the federal tax picture is unsettled. The Bush tax cuts of 2001 and 2003 have not yet been made permanent, and continuing federal deficits will bring increased pressure in some quarters to reverse the pro-investment, pro-growth policies that have done so much to spur New York City’s recovery.
Even seemingly small increases can have pronounced effects. For example, the model estimates that the city would lose over 8,000 jobs–including many in the well-paying financial sector–if the top federal tax rate was immediately returned to its pre-2001 level of 39.6 percent. Moreover, this would lead to a net $77 million reduction in the city’s own fiscal 2007 tax revenues.
Gotham STAMP 2006 also estimated the effects of two more sweeping federal tax increase scenarios:
- Rolling back all federal income tax rates to the levels originally scheduled for 2003 under prior law would cost New York City at least 40,600 jobs, growing to at least 43,000 jobs by the end of the decade.This would have the further effect of reducing the city’s own tax revenues by $468 million, growing to $542 million by 2010.
- Returning the federal income tax rate schedule to pre-2001 levels would cost New York City about 70,000 jobs, growing to nearly 77,000 by the end of the decade. This would reduce the city’s own tax revenues by $820 million in 2007, growing to $935 million by 2010.
To be sure, taxes are hardly the only factor influencing economic growth, even in exceptionally high-taxed New York. But the Gotham STAMP 2006 model shows the high price the city can pay for ignoring the consequences of tax increases–and failing to exploit the potential of tax cuts.
1. In all cases, the employment effects attributed to the STAMP model are not intended to represent actual net changes in employment; rather, they reflect changes from the baseline of actual and projected jobs. In other words, if the model estimates a given tax increase will result in a loss of 10,000 jobs in a given year, it doesn’t mean that employment will decrease by that amount; but, rather, that the city will have 10,000 fewer jobs than would have been projected without the tax increase (which might still be a net increase).
2. In fiscal 2005, New York City gained 34,000 total jobs, a growth rate of just under 1 percent; the national employment growth rate during the same period was 1.6 percent, according to the federal Bureau of Labor Statistics (www.bls.gov).
3. Assessment increases for Class 1 properties, consisting of one-, two- and three-family residential property and small condominiums, are limited to six percent a year and 20 percent over five years. Market value changes for commercial properties are phased in through assessments over a five-year period.