The elephant in CUF’s middle-class room

| NY Torch

The Center for an Urban Future has issued a new study documenting the continued flight of the middle-class from New York City.  “Reviving the City of Aspiration: A Study of the Challenges Facing New York’s Middle Class” offers valuable data, insights and anecdotes.  But, in something of a CUF tradition, it strives mightily to downplay the role of taxes in creating the “challenges” it seeks to highlight.

While the study includes some passing references to the city’s high tax burden, it avoids confronting the high and rising cost of city government as the driving force behind that burden.  And in nine specific recommendations for helping to “preserve and expand the city’s middle class,” it mentions taxes only once–and only in a very minor key.  (The city, it says, should help reduce utility bills by eliminating some of its telecommunications taxes and fees.)

A key CUF finding:

Astonishingly, more residents left the five boroughs for other locales in each of the years between 2002 and 2006 than in 1993, when the city was in far worse shape.

Hmm.  What government policies between 2002 and 2006 might have provided an added incentive for a middle-class family to flee New York City?  The increase in property tax bills–reflecting a rise in property valuations as well as Mayor Bloomberg’s 2002 rate increase–is duly noted among other factors driving the cost of living.  But the study doesn’t mention the temporary 2003-05 state and city income tax increase, which affected households with incomes as low as $150,000.

In fact, the phrase “income tax” doesn’t appear anywhere in the 50-page document, even though the city’s resident income tax is the major reason why New York’s combined tax burden on middle-class families is among the highest in the country, as shown in a series of annual urban tax comparison reports from the District of Columbia’s Chief Financial Officer.  (In contrast, the same studies show New York’s tax burden on the working poor and lower-middle class is comparatively light.)

Income taxes don’t just add to expenses; they also weaken incentives for city residents to engage in the kind of business activity that creates economic opportunity for other middle-class New Yorkers.   The increases enacted in 2003 were particularly burdensome for married couples earning between $150,000 and 200,000, who would fall within the CUF’s appropriately “loose” definition of New York’s middle class. Consider this example from our 2003 NYFiscalWatch Memo:

On a joint return [as of 2003], a married couple with gross income of $200,000 using the standard deduction will owe $2,533 in new state and city taxes ($1,205 to the state and $1,328 to the city).

[snip]

Say, for example, that you are a free-lance writer living with your lawyer spouse in a Brooklyn brownstone apartment. Soon after Thanksgiving, you tally up your accounts and estimate that, after deductions, your family will end the calendar year with $150,000 in taxable income—just below the threshold of the state and city tax increase.

It’s been a good year, but living in the city is expensive, and you’d still like to scrape together a few hundred more dollars for holiday gifts for relatives. Now suppose an editor calls you with a small project for which he offers to pay $750. At [2002] tax rates, another $750 fee would have netted you $437 after federal, state and city income taxes, making it well worth your effort to accept the assignment.  But in 2003, thanks to the peculiar structure of the new state and city tax law, you will owe at least $684 on the next $750 you earn—an effective tax rate of 91 percent—so this project will now net you just $66.

Another key conclusion of the CUF study is certainly valid:  The middle class is exiting New York, the authors say, because the “job mix has shifted away from positions that provide middle-income wages and benefits.”  Of course, taxes also play an important role in determining that “job mix” — a role once again unacknowledged by the CUF.

The combined state and local tax on corporate profits earned in New York City can reach as high as 17.6 percent, easily the highest in the nation.  Small business owners and partners in professional firms face a double-whammy from the combination of income tax (which, for city residents, tops out at 10.5 percent, highest rate in the nation) and the city’s 4 percent Unincorporated Business Tax.  Firms in Manhattan pay a unique commercial rent tax on top of extremely high rents — which, in turn, reflect the city’s extremely high commercial property taxes.

The city’s heavy business taxes give corporate employers a strong incentive to move back-office and middle-management jobs out of New York City.  The remaining employment base is increasingly concentrated at the extremes: low-paid service workers on one end, and at the other a highly paid elite of top corporate executives, investment bankers, lawyers and other skilled professionals whose contribution to the bottom line is significant enough to overcome the deadweight tax loss of locating them in the city. The trend accelerates with each recession, when firms are forced to give closer scrutiny to operating costs.

A prediction: if the CUF updates this report in 2019, it will find another “astonishing” surge in middle-class migration from New York that began with the current recession.  Maybe by then it will be willing to give a little more recognition to T-A-X-E-S.

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