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Winter 1991
 
City Journal Winter 1991.
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The Truth on Taxes

I read with interest the recent article by Lawrence Lindsey and Edwin Rubenstein on New York State's personal income-tax reductions ["Did New York's Tax Cuts Work?" Autumn 1990.] We are pleased that they support the dramatic income-tax cuts signed into law by Governor Mario Cuomo that provide more than $3 billion of tax relief to New Yorkers each year.

Unfortunately, their article contains several inaccuracies and a few rather striking omissions.

As an economist on President Bush's staff, Mr. Lindsey certainly knows that New York's progress in income-tax reduction comes at a time when our neighboring states have been forced by the staggering national economy to increase state income-tax rates, thus improving New York's competitive position. Connecticut now imposes a top rate of 14 percent on interest and dividend income. New Jersey's top tax rate has risen to 7 percent. Massachusetts has enacted a top rate of 12 percent on unearned income. Some of these states have also increased sales-tax rates, while New York did not. Unlike the Bush Administration, these states did not have the option to finance "read-my-lips" revenue policies with accumulating deficits.

Lindsey and Rubenstein accurately reported on the significant drop in New York's top income-tax rate from the 1983 maximums of 14 percent for unearned income and 10 percent on earned income, to the 1990 rate of 7 7/8 percent for all kinds of income, the lowest rate in 30 years.

They inaccurately suggest, however, that the New York Tax Reform and Reduction Act signed by Governor Cuomo is unfair to middle-income taxpayers. While some taxpayers obviously benefit more than others, the overwhelming majority of taxpayers at all income levels did receive tax cuts. For New York taxpayers with incomes below $50,000, these tax reductions averaged 18 percent.

Lindsey and Rubenstein also inaccurately assert that New York's tax reform imposed a "marriage penalty" on two-earner married couples. While the law abolished the cumbersome three-column tax return and substituted a joint return similar to the federal income tax, New York's tax-rate brackets were adjusted to embody the principle of "income splitting" under which married couples pay no more tax than they would have had they remained single.

Your authors also overstate the impact of "bracket creep"--the tendency of inflation to increase tax liabilities in a progressive income tax--in offsetting New York's tax reductions. Lindsey and Rubenstein based their assertion on calculations that the "elasticity" of the income tax is 1.64 percent. In fact, estimates by the Office of Tax Policy Analysis of the New York State Department of Taxation and Finance place that rate at 1.37 percent, thus reducing significantly the offset projected.

While significant progress has been achieved in reducing tax rates in New York--especially relative to those of neighboring states--the Empire State is not immune to the dramatic drop-off in revenues that have confounded state and local governments across the United States this year. Coupled with greatly reduced federal aid to the states, the national economy has pushed six states (not including New York) into recession and left 10 more teetering on the brink.

Even as the Federal Government is urging, rhetorically, that states increase efforts to fight drugs, reduce crime, improve education, and rebuild roads and bridges, Washington is increasingly shifting these burdens to state and local governments. That may be good politics for Washington, but it is lethal for tax reductions at the state and local level. It is not surprising, therefore, that local property taxes across the nation have, on average, doubled in the past decade.

I think it is fair to say that Governor Cuomo and both houses of the Legislature share Lindsey and Rubenstein's primary thesis: New York should make further progress in tax reductions. Our difference is in how best to achieve that goal.

Here in New York, we have achieved results by holding spending below the average growth of other states in the nation and particularly in our region. In the past two years, for example, we have kept general-fund spending growth below the rate of inflation. So long as the national economy remains troubled, such sacrifice will be required if New York is to meet the most urgent needs of its citizens and preserve lower tax rates.

Mr. Lindsey can be particularly helpful to his avowed desire to reduce New York's tax rates if he can convince the President to finally adopt realistic fiscal and monetary policies to help restore national economic growth, and encourage the President to assume a greater share of responsibility for national problems that have been dumped upon the state. Such policies would help preserve New York's ongoing commitment to tax reductions.

James W. Wetzler
Commissioner of Taxation and Finance
New York State

Edwin Rubenstein and Lawrence Lindsey Reply:
In defending New York's tax cut Mr. Wetzler resorts to a variation of the old shell game. He tells us to keep our eye on the top marginal tax rate, which has indeed been cut from 10 percent to 7.785 percent since 1983. Mr. Wetzler correctly notes that neighboring states have raised their top income-tax rates to levels approaching and, in some cases, even exceeding New York's.

Unfortunately, the tax burden facing most New Yorkers is influenced more by what the other shells conceal--the elimination of personal exemptions in 1987, the higher marriage penalty on married couples, and the failure to index income-tax brackets to inflation. As our article points out, the effective tax rates--taxes as a percentage of income--of many working-class families are higher now than before the tax "cut." Those taxpayers who managed to keep gross income growing at the rate of inflation find they have considerably less after-tax purchasing power because of bracket creep.

No matter how you measure it, New York's income tax is far more burdensome than that of any other state. In 1988 (the latest year for which data on all the states are available) state income-tax payments averaged $728 per capita here versus $327 in the nation as a whole, a differential of more than two to one. Between 1983 and 1988 the average effective income-tax rate faced by New Yorkers rose from $38.06 per each $1,000 of personal income to $42.28 per $1,000 of personal income, a rise of 11 percent. This despite the "biggest income-tax cut in New York history."

With 7 percent of the nation's population and 9 percent of the personal income, New York collects 16 percent of all state income taxes.

This spring Albany decided that we could not afford the last phase of the tax cut. To the wealthy this meant little: Most of the planned reduction in the top rate had already occurred. But low-income taxpayers were deprived of a substantial increase in the standard deduction scheduled for 1990. This was to have been a major step toward removing poor New Yorkers from the tax rolls and reducing tax burdens on the state's lower-middle-class taxpayers. It should never have been postponed.

Is New York Going Down the Tubes?

Peter Salins's heartwarming assurance that New York is not "going down the tubes" ["Is New York Going Down the Tubes?" Autumn 1990] is an accurate reflection of his good digestion and cheerful mien. The same set of facts might well produce a far more pessimistic conclusion in a less well-favored observer.

To "go down the tubes" hints at a sudden and complete catastrophe, an abandonment of the city matching the fate of a Western mining town as the local vein of gold ran out. A lot of terrible things can happen short of tubular jettison.

The question for New York is whether its economy and thus, inevitably, its government, will continue to deteriorate, and if so, who will suffer what. The industries that drove expansion in the Eighties are now declining. The more traditional enterprises that have stagnated since the end of the Second World War--shipping, large-scale garment-making, and small-scale, relatively high-skilled manufacturing enterprises--are hardly reviving.

Salins recognizes that the city's physical assets, essential to its comfort and prosperity, have been sadly neglected. The prospective costs of waste disposal, water supply, highway and bridge repair, and environmental protection are ominous. He suggests that the city could rebuild deteriorating assets by cutting back on human services. The intent is admirable, but who would dare to suggest it from a political platform? Where is the political will to balance the budget on the backs of the poor, as the practice would be described?

There are, of course, hopeful signs, not least the cresting of a new wave of immigration. But the recent political history of New York City suggests that present residents are less likely to see improved economic prospects than a continued drop in the market value of the city's land and buildings, decreased funding for public and private capital plants, growing numbers of people without comfort, prospects, homes, or emotional stability, and desertion of the central city by what's left of the present entrepreneurial cadres.

Not down the tubes exactly, but still a sunless possibility.

Roger Starr
New York, N.Y.

Peter Salins is right when he says that "everything is relative. Urban America is a troubled enterprise everywhere, so the most critical measure of New York's future is whether the city is losing ground relative to its municipal peers or near peers." As The Report of the Commission on the Year 2000 pointed out, the standard of New York is not Detroit or Dallas, but rather London or Paris. New York is this country's only world city (although Los Angeles may eventually get there), and must be measured by the standards of its real peers, not by the standard of Portland, Oregon.

Compared to its real peers New York City remains a mecca for the talented, the ambitious, and the risk takers, despite social ills on a scale unmatched in any other world city. Yet New York's ability to attract and retain the best in every field is weakening. That's what worries Salins--and me.

Not only are traditional municipal responsibilities threatened by cutbacks, some are dangerously weak already and desperately need strengthening--the schools and the capital plant in particular. When working citizens and businesses are required to pay increased taxes for diminished basic services, a groundswell of cynicism is likely to emerge, and that is happening. We are at risk of being paralyzed by negative messages.

The contrast between New York's enormous assets and its daunting problems has been part of the city's character for most of its history (see Walt Whitman for one), but we are facing something new today: The confidence that we can solve our problems may be slipping away. In the short run, New Yorkers need to hear that positive change is in the making. That is Salins's main argument and I see it as a call to action.

With regard to particular reforms, it would be useful to look back at the Year 2000 report for guidance on where and how change can be made. That report mirrors Salins's perception of a city of promise, and suggests just how problems can be turned into opportunities. I suggest that New York's leaders--in government, the nonprofits, and business--use it to begin a debate on how a partnership can move the agenda.

Margaret E. Mahoney
President, The Commonwealth Fund
New York, N.Y.

Peter Salins has written deftly--as he usually does--about New York. His is a balanced piece exposing the pros and cons of city life. Yet it leaves me with a curiously empty feeling.

There is a passion to the dismay that New Yorkers feel that goes beyond disinterested analysis. The statistics may indicate "we are not going down the tubes," but the average New Yorker will tell you that is precisely what is happening.

The combination of high taxes that are getting higher each year and poor service has put the working class in a vise. Crime is not evaluated on the basis of murders per 1,000 in the population, but on well-publicized events such as the Central Park jogger case or the girl murdered while sleeping in her mother's arms amid a cross fire of bullets. These events are the source of memories etched in the New York consciousness.

It is not easy to erase perceptions nor is there a formula for doing so. But impressions often run deep. A metaphor like New York going down the tubes will not disappear from a collective memory bank as long as stories of violence appear in the press and the signs of visible decay are ubiquitous.

Herb London
New York, N.Y.

Helping the Homeless

I read with great interest the article by Randy Filer, "What Really Causes Family Homelessness?" [Autumn 19901. This issue has been with us in the City of New York as far back as John Lindsay's administration, if not before, and still faces the current Dinkins administration. It appears almost intractable.

Many people have examined why families become homeless, but I believe no one has provided as many well-researched insights as those which appear in Mr. Filer's article. I concur with his conclusions.

Edward I. Koch
New York, N.Y.

Housing Madness

William Tucker's article, "The Hidden Cost of Housing Madness" [Autumn 19901, provides a concise and comprehensive picture of the costs and consequences of New York City's failed housing policies. Mr. Tucker's thesis, that the city's distaste for traditional small landlords has contributed to the fiscal crisis, is upheld by recent data. The city has completed tax foreclosures on twice as many properties in the first six months of 1990 as in all of 1989.

The dramatically increased rate of abandonment is only a portent of things to come, since the city is now foreclosing on delinquencies that occurred at least two years ago, before recent sharp increases in property taxes and water and sewer bills, coupled with inadequate rent increases, began to take their toll. Sad to say, we are now faced with the prospect of the abandonment of thousands of additional housing units. These new abandonments will further deplete the city's tax revenues and doom many remaining low- and moderate-income neighborhoods.

Let us hope that Mr. Tucker's article will prompt a reevaluation of New York's housing policies. The city is now spending more than $5 billion to rehabilitate housing it previously acquired through abandonment. If that housing is restored to the same overly regulated environment that forced it to be abandoned in the first place, then the city is merely sowing the seeds for future disaster.

John J. Gilbert III
Rent Stabilization Association of N.Y.C., Inc.
New York, N.Y.

 

 


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