New York City’s post-9/11 fiscal problems are prompting fresh calls in some quarters for reinstating the city’s commuter tax, which could generate as much as $500 million, to help close a projected budget gap of at least $3.6 billion. The latest supporter of this approach is Assembly Speaker Sheldon Silver—who was instrumental in repealing the commuter tax three years ago, but who now says he would support its reinstatement if the revenue is earmarked for specific purposes.

Many proponents of an added tax on the roughly one million nonresidents who pour into the city to work each day claim a commuter tax is justified as a simple matter of fairness. Otherwise, says the Citizens Budget Commission, “residents must pay for services to commuters.”

The notion that commuters are a bunch of well-paid freeloaders has long been popular in financially strapped U.S. cities. But it’s a fallacy.

Think about it for a moment: Many of the middle- and upper-echelon jobs in corporate offices, brokerage houses and law firms in lower Manhattan are held by people who live in the suburbs. If these commuters are so costly to New York, why is the city so concerned about losing them to New Jersey?

The answer, of course, is that everyone who works in New York contributes to the city treasury—directly, through sales taxes on purchases in the city, and indirectly, through a broad array of city taxes paid by the firms that employ commuters and profit from their productivity.

Yes, workers who live in the city pay more in taxes, but they also consume more services (education, policing, etc.).

Commuters getting off cheap? Workers who travel to jobs in the city from neighboring states already pay a tax premium to be here—they’re subject to the New York state income tax.

In recent years, New Jersey and Connecticut residents who work in New York have generated nearly 10 percent of this state’s total income tax collections, equal to $2.5 billion this year. At least a third of that money (plus a similar share of state taxes on business income attributable to their labor) flows back to the city in the form of state aid or direct spending.

Background

The city commuter tax was last set at 0.45 percent of wages and 0.65 percent of self-employment income. Unlike the regular income tax (with its graduated rate schedule for different income brackets), the commuter tax was a flat rate applied to a worker’s entire city income. This meant it could raise commuters’ New York income tax bill by 10 percent or more, depending on their level of income. (In fact, given the graduated rate structure of the regular income tax code, the commuter tax represented a proportionately bigger add-on for lower-income workers than for high-income workers.)

Many supporters of reinstatement would still assert that the commuter-tax rates are too small to affect the number of jobs created or retained in the city. But this overlooks what might be called the final-straw factor —especially post-9/11.

Suppose you’re an investment adviser with a Manhattan-based securities firm, earning $100,000 a year. Married, with two kids and a house in Hoboken, you’re already effectively paying a $2,000 commuter tax —the difference between what you’d owe on the same salary in New York and New Jersey state income tax. Assuming your employer won’t make up the difference, an added city commuter tax at the former rate would cost you another $450 a year.

That $450 might not look like much. But combined with other factors—such as commutes two to four times as long as before 9/11, and general anxiety about returning to an area stigmatized by death and destruction—a few hundred more dollars in taxes per commuting employee certainly won’t strengthen the case for staying in New York. That’s especially true at a time when many firms are pondering relocation decisions.

To be sure, the 1999 repeal of the commuter tax wasn’t Albany’s finest hour. By all accounts, it had nothing to do with the substance of tax policy and everything to do with the politics of a hotly contested special state Senate election in Rockland County, with leaders of both parties eager to pose as champions of suburban interests. The move was angrily condemned by Mayor Rudolph Giuliani, Council Speaker Peter Vallone and the editorial pages of the city’s newspapers—all to no avail.

Nonetheless, it’s safe to say that the repeal of the commuter tax made absolutely no difference in New York City’s bottom-line. That’s because Giuliani and the Council were already planning a different set of tax cuts for the same amount of money before the commuter tax was repealed. When the commuter tax disappeared, those tax cuts were pushed aside.

So the loss of commuter tax revenue is not the reason New York finds itself on the verge of a new fiscal crisis. On the other hand, the restoration of the tax would pose a very real threat to the city’s recovery. In this shaky economy, the city desperately needs to attract and retain more commuters—a goal that will not be served by slapping them with what amounts to a wage toll.

Originally Published: Fiscal Watch Memo