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Winter 2003
   
Bloomberg to City: Drop Dead
Steven Malanga
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The voters who elected businessman Michael Bloomberg as New York’s mayor in November 2001 selected a man whose political philosophy was a mystery to them. Many of those who pulled the lever for him were really just voting against his Democratic opponent, unreconstructed liberal Mark Green. About Bloomberg, the best voters could say is, we’ll have to wait and see how he governs.

A year later, it’s now clear what the city has gotten with Bloomberg: a political neophyte, presiding haplessly over a government that is rapidly spinning out of control. In a dismaying rerun of Mayor John Lindsay’s 1960s mayoralty, Bloomberg is behaving as if New York were once again the ungovernable city. The mayor has emerged as a guardian of the local status quo, the defender of big government and the municipal workforce. Proclaiming that forces beyond his control are compelling him, he has instituted the largest tax increase in the city’s history, apologized for even the smallest cuts in government services, declared that everything New York City’s massive government does is vitally necessary, and confidently announced that tax increases won’t drive out citizens or businesses. Anyone old enough to remember what happened under former mayor David Dinkins in the early 1990s knows that such a course is bound to end in disaster, with businesses and residents leaving the city by the tens or even hundreds of thousands. It’s like watching a train wreck in slow motion: the initial impact has occurred—one can foresee the crumpled tangle that will follow.

The rookie mayor is making four catastrophic errors. The first, and worst, is that he believes that raising taxes will work to solve the city’s budget deficit and that businesses and residents will willingly pay the increases. Bloomberg seems utterly unaware that we’ve tried this tactic before and that it failed utterly, making things much worse.

Just consider the experience of Mayor David Dinkins a decade ago. His efforts to solve his budget problems with a succession of tax increases only produced steep job losses and even worse deficits. Dinkins, facing his first budget crisis just months after taking office in 1990, swiftly increased taxes on businesses and residents, even though a number of big companies, including J. C. Penney, had only recently fled the city’s high costs, and even though corporate profits were shrinking and workers were being laid off because of a national recession. The tax hike only exacerbated the city’s downward economic spiral, turning the moderate national recession into an economic rout in New York, which ultimately cost the city 325,000 jobs and further shrank tax collections. Dinkins responded with still more tax hikes in his second budget, and Governor Mario Cuomo increased state taxes, too. When the economic tailspin continued, the mayor proposed yet more increases, though by this time opposition from distressed businesses and struggling citizens had grown so great that Albany nixed his new levies.

The deficits didn’t go away, however—not for another two years, including the first year of the Giuliani administration, when the new mayor faced a $2.3 billion budget gap, larger than anything that Dinkins had confronted. In other words, four years after Dinkins began raising taxes to solve a deficit, the city’s budget gap was not only still around, but it had grown.

Bloomberg’s big tax increases are setting the city on the same path by siphoning capital out of an already shrinking private economy. By analyzing 25 years’ worth of data on the effect that previous tax increases have had on the city’s economy, the Manhattan Institute’s E. J. McMahon estimates that the mayor’s 18 percent property-tax increase is likely to cost the city some 65,000 jobs—beyond what 9/11 and the national slowdown have cost. Moreover, the Bloomberg administration is seeking about $1 billion more in additional taxes that McMahon estimates will cost some 37,000 additional jobs.

More significantly, by depressing economic activity, these tax increases are unlikely to generate the revenues that the Bloomberg administration is counting on—raising the prospect of several years of continuing deficits. A 1997 study of tax rates in four cities by a team of economists, including the Wharton School’s Robert Inman and the University of Houston’s Steven Craig, found that New York has little room to raise taxes, especially property taxes, because they are already so high. The study noted that because capital, labor, and people are mobile, they can simply flee a jurisdiction where taxes are excessive. Looking at New York’s tax rates, the authors concluded that an increase in New York’s property taxes would produce “little or no additional net revenues,” because every dollar’s rise in tax rates would decrease the city’s tax base by a dollar.

The city will face the same situation should Bloomberg try to raise its inordinately high personal income tax, as the City Council is urging. Households earning more than $100,000 a year already pay two-thirds of the personal income taxes collected by the city, even though they account for a mere 11 percent of all those who file. These are the most mobile New Yorkers, who can easily choose to flee higher taxes for homes in the suburbs. The 13,000 richest households—those that earn more than $1 million a year and pay 29 percent of Gotham’s taxes—might respond to an income-tax hike by spending more than half the year in their second or third homes in the Hamptons or Palm Beach, removing themselves from the city’s income-tax rolls. Census Bureau figures show that the city is continually losing more of these upper-income families than it attracts, undercutting the mayor’s notion that the most successful people feel compelled to live in New York.

Bloomberg, however, blithely ignores the lessons of the city’s previous taxing sprees. “I know of no major company that is even suggesting they would move their headquarters out of the city,” Bloomberg said when announcing massive tax increases in November, hardly sounding like the mayor of a city that has lost the headquarters of more than 100 major corporations over the past 35 years.

Bloomberg’s declaration represents the exact opposite of what he said during the 2001 mayoral campaign, when he had it right (though perhaps only for political expediency). “You cannot raise taxes,” Bloomberg told the New York Times just before the election. “That is clear. If you raise taxes you will drive enough business and people out of this city, [so that] your total tax revenues over a period of time would probably decline rather than go up.” That is an all-the-more critical consideration in the wake of September 11, when Gotham is struggling to lure back companies displaced by the terrorist attack and to retain its place as the center of global finance.

Bloomberg had no choice but to declare an aversion to taxes during his campaign because he needed the support of Mayor Giuliani, who repeatedly castigated Democrats during their party’s mayoral primary for advocating higher taxes. Giuliani himself had fiercely resisted raising taxes when he took over as mayor in 1994 and faced a $2.3 billion budget deficit—not much smaller proportionally than what Bloomberg’s is now. Giuliani balanced the city’s budget by cutting jobs, eliminating redundancies in city government, and getting more productivity out of the city’s workforce. So it can be done.

Bloomberg’s second significant error is that he naively believes that New York’s government is the optimal size and can’t be cut. Therefore, he reasons, the crushing tax load that New York imposes to support that government is necessary. But even before Bloomberg’s new levies, New York already taxed its citizens and businesses far more heavily than most American cities. After about $3 billion in tax cuts during the Giuliani years, the city’s tax rates were on average 75 percent higher than those of other large American cities, and more than double the rate of many surrounding suburbs, with which New York is now competing for jobs, especially for the financial-services jobs chased out of lower Manhattan by 9/11.

The city’s commercial property tax, which Bloomberg has raised by 18 percent, is especially out of whack, and a commonsense look at the numbers shows why taxes matter so crucially to businesses. The average commercial lease in Manhattan contains about $9.91 per square foot in annual property taxes, while in cities like Los Angeles, Atlanta, and Dallas, commercial property taxes average between $2.50 and $4 per square foot. And on top of this, New York adds a commercial occupancy tax—a tax on rent—that doesn’t exist in most cities. This produces staggering differences in costs.

Even before the Bloomberg tax increases, a company employing 2,000 people and renting 500,000 square feet of space, or about 15 floors in a large modern midtown Manhattan skyscraper, might pay up to $7 million a year in property taxes through its lease, including the commercial rent tax. With the Bloomberg increases, the business will now pay more than $8 million. By comparison, that same company, located in downtown Los Angeles or Atlanta or across the river in a New Jersey office park, would pay from $1.3 million to $2 million a year in property taxes—or at least $6 million a year less than in New York. That’s money that goes straight to the bottom line as profit, but the businessman mayor is now arguing that such additional costs don’t matter, even to recession-wracked companies. In a statement that defies the reality of the Fortune 500 out-migration from New York City over the last 35 years, Bloomberg said when he announced his tax increases: “This is still the city where you want to have your company if you want to be successful.”

Ironically, the mayor’s own company, Bloomberg Financial, is one of the few major successes incubated in New York in the last 40 years—which may be one reason that his own perspective is so distorted. A recent listing by Entrepreneur magazine of the 100 fastest-growing, most entrepreneurial companies in America includes just one New York City company. And a study by the National Commission on Entrepreneurship recently ranked New York dead last among the nation’s major labor markets in cultivating entrepreneurial companies. Still, the idea that Gotham is such an appealing business environment that high tax rates don’t matter is one of the persistent and demonstrably false liberal myths that the businessman mayor is now retailing.

Despite New York City’s sky-high taxes, Bloomberg is making no significant efforts to save money, to reorder the city’s spending priorities, or to re-engineer government and operate it more efficiently. Instead, in what must rank as one of the most fatuously naive statements ever made by a New York mayor, Bloomberg recently praised the status quo: “I can’t tell you there’s a lot of waste in this city. Sure there are some things that we shouldn’t be doing that we do, but they tend to be very small. I can’t find any program in this city that doesn’t really benefit people. . . . You can’t say let’s just cut corruption, waste and meaningless programs, because fundamentally they are not there. This city has been fundamentally well run.”

That’s a perplexing statement for the mayor of a city that employs about 300,000 full-time and full-time-equivalent workers, about 50 percent more than it did in the early 1980s, though the city’s population has grown by just 12 percent since then. The city’s workforce is one-seventh the size of the federal government’s yet serves a population that is less than 3 percent of the U.S. population.

Still, in two successive budgets now, Bloomberg has asked virtually nothing of the city’s workforce. Most of the $500 million in productivity savings from city workers that he claimed in his first budget came from an accounting modification on worker pension contributions. Now, facing a $6 billion deficit, he incredibly made a no-layoff pledge to city workers, and he has targeted only a tiny reduction in employee headcount, to be achieved entirely through attrition. Even the Dinkins administration ultimately cut about 20,000 workers from the city’s payroll—about 8 percent of the workforce at the time—to balance its budget.

Though New York City’s government is already taxing far more on a per-capita basis than any other city in America, it doesn’t provide significantly better services than other cities. A 1997 City Journal study found that Gotham expends about 75 percent more per capita than San Francisco, twice as much per capita as Los Angeles, and nearly three times as much as Chicago. And yet the city’s spending on basic services—those that citizens want most, from garbage collection to transportation services—is about average. In other words, although New York outspends other American cities, much of what it spends is not even on essential services, despite Mayor Bloomberg’s conviction that city government programs are beneficial and well run.

One problem is that Gotham operates more like a mini-nation than a city, spending millions of dollars performing functions that other cities don’t. For instance, New York runs its own system of colleges, and although the state bears much of the cost of CUNY’s senior colleges, the city pays about $280 million a year to support the community colleges that are part of the CUNY system. Similarly, Gotham has many government offices that duplicate state and federal functions or that are largely ceremonial. The city’s office of the public advocate, which just churns out audit reports that duplicate other city and state auditing functions, spends $2.5 million a year. The borough presidents’ offices, largely ceremonial since the new city charter went into effect in 1990, spend nearly $27 million a year, while the community boards, which have no function except advisory, spend another $12 million a year. Like the federal government, the city has its own human-rights commission: cost, $7.5 million a year. A city that is going broke spends $128 million a year in grants to cultural groups. And it spends billions each year in social welfare programs that are endlessly duplicative and of dubious value.

Other cities have already made far more efforts to operate more effectively and inexpensively, creating a revolution in municipal governance that has revitalized urban America. Across America, mayors like Rudy Giuliani, Steven Goldsmith, John Norquist, and Jerry Brown have transformed the way cities do everything, from fighting crime to treating waste water. Notably, these innovative leaders have successfully been using managed competition and other techniques to save their taxpayers billions of dollars.

Gotham has done little of this, and Bloomberg isn’t pushing for it. For instance, a recent Manhattan Institute study of bus privatization estimates that New York could save hundreds of millions of dollars a year by such competition. The study found, not surprisingly, that the city runs one of the nation’s most expensive public bus monopolies, which includes not only publicly run bus routes but city subsidies to private bus companies through contracts that are not competitively bid but that operate as very expensive monopolies. By comparison, in Los Angeles, 21 percent of the bus routes are awarded through competitive bidding, resulting in a 40 percent cost savings. Houston contracted out 12 percent of its lines and saved 26 percent; San Diego privatized 44 percent, for a 33 percent savings. In New York, merely a 20 percent savings would total nearly $350 million annually, and savings commensurate with what other cities have realized could push the total cost reductions above $500 million a year.

Other opportunities for more efficiency through managed competition abound. Budget watchdogs have urged the city for years to contract out some residential trash collection. Using competition in just under half the city’s trash districts, the Independent Budget Office estimates, would save more than $50 million annually. One big area of potential savings in sanitation is personnel costs. Over the years, the city has given sanitation workers salary increases and fringe benefits approaching what other uniformed personnel such as cops and firemen receive, even though it is far more difficult to attract police and fire candidates and those jobs are far more demanding and dangerous. As a result, city sanitation workers’ pay is equal to 90 percent of the pay of police and firefighters, and working for the city’s sanitation department is such a sweet deal that every opening draws nearly 80 applicants.

City workers in general get a better deal than their counterparts in the private sector, and taxpayers bear the cost. For instance, most private-sector employees pay a portion of their health-care insurance costs today, but not the city’s workers. And the mayor refuses to ask them to pay even a modest 10 percent of the cost of their health premiums, which might amount to a contribution of from $250 per year for individuals to $600 per year for those with family plans. Such a move could save the city $200 million a year. In addition, about 67,000 city employees only work a 35-hour workweek with many more vacation days than the private-sector grants. Having them work 40 hours would enable the city to eliminate more than 8,500 workers, saving more than $500 million, according to a study by the Citizens Budget Commission. But instead of seeking such concessions, the mayor signed a new teachers’ pact last spring that added $275 million to payroll costs.

The mayor’s third major error is that, despite a lifetime in the private sector, he views government as the employer of last resort, and so he is going out of his way to protect municipal jobs at the cost of the private sector. Not even David Dinkins or John Lindsay—for all their extreme liberalism—spoke as passionately and as adamantly about defending public-sector jobs as the mayor has. “I will do anything I can to protect [the jobs of] the men and women of the Fire Department, the Police Department and every other municipal worker,” the mayor said. He appears to believe that public-sector workers have some vested right to their jobs, rather than that their role is to serve the citizens of the city as long as the citizens need and can afford them. When discussing the budget of the city’s Board of Education, the mayor grudgingly admitted that it was bloated and administratively top-heavy. But to Bloomberg, that was not reason enough to cut its workforce. “Unfortunately in the case of education,” the mayor said at a budget briefing, “there are a lot of bureaucrats that we don’t have a need for. We will try to find them other jobs.”

Like someone stuck in a New Deal time warp, the businessman mayor believes that public-sector spending is the key to reviving the private economy. Shortly after signing into law his big property-tax increase, for instance, the mayor debuted a massive housing program, using public money to subsidize construction. While the mayor’s housing plan is short on market-driven solutions—such as rolling back rent regulations to spur more investment—his administration is touting government housing spending as a way of boosting the private sector, arguing that a similar publicly financed housing program in the 1980s produced tens of thousands of new jobs in New York. But this approach ignores the number of private-sector jobs squelched by taking billions of dollars in additional taxes to pay for such programs. And it assumes that wise bureaucrats can decide better than private-sector businessmen what is the most economically advantageous way to spend those billions—a dubious proposition, especially voiced by a man whose office looks out over the infamous Tweed courthouse.

It might seem strange that an entrepreneur who spent a lifetime in the private sector now seems to demonstrate so great an urge to protect public workers. But Bloomberg was never a fiscal conservative, despite his strong anti-tax statements during the mayoral campaign. He was a self-described liberal and lifelong Democrat who migrated to the Republican Party because the GOP was desperate for a self-financing candidate. More pointedly, he is a prominent member of the thoroughly liberal Manhattan elite, which little understands the rest of the city—especially those working-class outer-borough voters who provided Bloomberg’s margin of victory. This Manhattan elite helped elect David Dinkins and opposed many of Mayor Giuliani’s most successful reforms, and now through Bloomberg its worldview is again running the city. Billionaire Bloomberg, unlike most politicians, is not beholden to the unions for their money, but he does seem to be beholden to the elite New York Times (which calls his tax hikes “courageous”) for its good opinion.

The new mayor’s fourth major error is that, rather than approach the city’s problems boldly and imaginatively, he consistently portrays himself and the city as subject to vast forces beyond his control. Perhaps the most important change that Rudy Giuliani brought to New York, beyond any of his individual policy successes, was a sense that the city was governable, that it was not simply spiraling out of control or buffeted by forces beyond its powers—that it was not, as the newsweeklies called it in the Dinkins era, “ungovernable” and dying. Giuliani preached personal responsibility to the city’s citizens, but he led by the example of his own willingness to take responsibility for making the city work and handing it on to his successor in markedly better shape than he found it.

By contrast, Bloomberg is sounding more like a victim than a leader, someone who is raising taxes vertiginously while saying over and over again that he has no other choice, that circumstances are making him do it. In tackling the budget, for instance, Mayor Bloomberg has repeatedly argued that his own options for controlling city spending are limited, using phrases like “forces beyond our control” and “it has to be done by law” to justify continued spending growth. At times, he has claimed that he controls only about $15 billion of the city’s $42 billion budget. In one budget briefing, he went even further, arguing that he had command over less than one-tenth of the city’s budget, because he could do little to reduce spending in the police department, the fire department, the Board of Education, and sanitation services. “If you say we can’t touch any of those because they are so important,” the mayor said, “we are down to cutting a $6 billion deficit out of $4 billion.”

What is startling about this statement is the degree to which this mayor is simply abdicating responsibility for governing the city. Invoking one of his favorite phrases, the mayor argued, for instance, that the sanitation department budget could not be cut because “the amount of resources we have to devote are dictated by forces beyond our control. We have to pick up however much garbage is out there.” Never mind, of course, that Rudy Giuliani got more than $300 million in productivity savings out of the sanitation department with work-rule changes, or that cities across America are contracting out sanitation services to save money. In New York under Bloomberg, sanitation costs are strictly a function of how much garbage is on the streets, not whom you hire to pick it up, how you pay them, and what productivity you require of them.

What makes Bloomberg’s style and worldview so troubling is that the rest of New York City’s government has also lurched to the left, providing no check on his paleo-liberal agenda. During the early years of the Dinkins administration, Peter Vallone, a fiscally moderate Democrat from Queens, led the City Council. Representing a district of middle-class homeowners, Vallone, along with his outer-borough allies, reined in many of the Dinkins administration’s tax proposals. Later, when Giuliani became mayor, the council went along with a number of his tax-cut proposals and—when the city began running budget surpluses—even prodded the mayor to make further tax reductions.

But the current City Council is far more inclined to favor big government and high taxes. About 60 percent of the current council members previously held jobs with government and nonprofit social services, or they were community activists. Almost invariably, this group favors more spending. They overwhelmingly voted in favor of Bloomberg’s property-tax increase and are already lobbying for an increase in the personal income tax on “rich” New Yorkers—meaning a family earning what a construction worker married to a secretary earns. Moreover, this City Council continues to spend money lavishly while the city faces its budget crisis. Virtually at the same time as it approved big tax increases, it voted to create a living-wage bill in New York that will raise the city’s contracting costs by millions of dollars.

Bloomberg himself seemed to be the best hope of countering this leftward drift in New York. That’s certainly how voters viewed him. He won by re-assembling the Giuliani coalition of outer-borough middle-class voters, capturing 54 percent of the vote in Queens and 74 percent in Staten Island. He swept to victory in neighborhoods thick with homeowners—like Forest Hills and Flushing in Queens—that Giuliani had won. He captured 56 percent of the votes of New Yorkers who work in the private sector, while his opponent, Mark Green, snared 57 percent of the vote of government employees. Yet Bloomberg is governing as if he had won with Green’s support. His property-tax increase is aimed squarely at those outer-borough middle-class voters who supported him, even as he protects the city workers who largely voted against him. If he runs again, perhaps he’ll switch parties and run as a Democrat—again, like Lindsay.

After September 11, 2001, New York garnered an enormous amount of goodwill from those who wanted to see it revive after the devastating terrorist attack. Even businesses that were chased out of their offices by the attacks or forced to endure difficult conditions in the city were understanding and tolerant. But as New York reverts to type as a tax-and-spend capital, as if it had learned nothing from the last decade’s reinvention of urban government, it is starting to squander that goodwill. That’s a message that the businessman mayor needs to understand, before New York’s downward economic spiral goes into freefall.

 

 

 
The businessman mayor’s archaic tax-and-spend liberalism will cost a fragile New York many thousands of jobs and make its recovery uncertain.
City Journal Winter 2003.
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New Book From Steven Malanga:
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The Immigration Solution.
The New New Left: How American Politics Works Today
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