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Steven Malanga
What Gotham Needs from Washington
The mayor and the New York City Partnership can’t figure it out.
24 October 2003

New York’s large and wealthy business community is often seen as the fundraising mecca for Washington politicians, with well-heeled local citizens contributing hundreds of millions of dollars to federal elected officials.

Now Mayor Bloomberg and a major business group want to ensure that this money goes to politicians who by their definition are “friendly” to the city. The mayor and the New York City Partnership have devised a list that will keep track of how much national office holders—from the president down to senators and congressmen—bring to New York in the form of Washington appropriations, or how much they cost the city through budget cutting in D.C. The move is spurred in part by controversy over a recent successful fundraising swing through New York by House majority leader Tom DeLay. Critics have argued that New Yorkers shouldn’t be giving heavily to DeLay, because he has proposed changes to federal funding formulas that will result in fewer federal dollars for some New York City programs.

But in proposing their list, the businessman mayor and the business group show that they simply don’t understand how the city’s economy works nor what kind of public policy best benefits Gotham. Politicians who support tax cuts in Washington—like DeLay who helped ram President Bush’s tax reform package through Congress—do much more good in New York than officials who fight for a few dollars more for city programs at a time when New York already receives far more than its share of domestic program appropriations from Washington. Here’s why:

New York perpetually has what is known as a “balance of payments” deficit with Washington, because the city sends far more in taxes to the federal government than it receives in federal spending. Over the years, New York politicians have argued that the federal government should redress that imbalance by funneling ever more money to the city for domestic programs. But the argument has mostly been a loser down in Washington, because—despite the overall balance-of-payments deficit—New York already gets more than its share of most domestic programs.

For example, New York receives an astounding $1,285 per capita from Washington in Medicaid spending, compared with a national average of just $425 per capita, and average payments in big cities like Chicago and Los Angeles of just $514 and $468, respectively. The city also receives about twice the national average on spending per capita for food stamps, and four times the average on welfare. In all of these categories, New York also receives substantially more per capita than other large cities. For years, in fact, the city ranked first in average domestic spending on the late Senator Patrick Moynihan’s well-known studies.

Federal officials and representatives who oversee these and other programs know this, which is one reason why the balance of payments argument never gets any traction in Washington and why, on some programs, like Medicaid, it’s likely New York will receive less of the federal pie over time, not more.

What actually causes the city’s payments deficit with Washington is the fact that the Defense Department spends so little money here in the city—an average of just $75 per capita, compared with defense spending of about $835 per capita nationwide. In part, this low spending is a function of New York’s attitudes toward our armed forces. Most of the city’s congressional delegation and city council members, for instance, opposed the Reagan administration’s efforts to build a naval base on Staten Island in the 1980s, and later key city leaders lobbied to have the base shut, though had it been fully staffed the Homeport would have brought about $100 million a year in federal salaries to New York and helped revive the shipbuilding business along the Brooklyn waterfront—a big boost to the local economy.

Even so, by far the surest way for Washington to help New York is to cut federal taxes, because that allows New Yorkers, who have higher average incomes than the nation as a whole and thus pay more in taxes, to keep more of their money right here at home. The Manhattan Institute’s E.J. McMahon estimates that the first round of the recent federal tax cut kept $1 billion in the city that otherwise would have gone to Washington. Over the ten-year life of that tax cut, city residents and business would keep as much as $40 billion from traveling to Washington. Despite this, New York’s own representatives consistently oppose federal tax cuts and even support tax hikes.

The latest tax package included cuts in the capital gains and stock dividends tax rate, which are already having a profound positive effect on New York—but, incredibly, the mayor and the Partnership seemed to have missed this important fact. Since the tax cuts passed nearly six months ago, the markets have soared more than 10 percent, an effect that economists predicted before the cut. The extra trading on stocks has nourished the city’s Number One industry, Wall Street, which is now on track for a record profit year. That alone will bolster the city’s budget in a way that no domestic appropriation from Washington could ever do, to say nothing of how a more vibrant Wall Street will boost the local economy.

But while most of New York’s elected representatives were opposing the tax cut, Tom DeLay was a big supporter of that tax package, and in fact pushed successfully to add the capital gains cut to the overall package. For that, he should be hailed as a local hero, considering that the last two capital gains tax reductions have helped sparked sharp hiring on Wall Street. Moreover, DeLay and the GOP are bringing their convention here to help further bolster the city’s economy. For that, DeLay has wound up on the mayor and the Partnership’s new list as one of the “unfriendlies,” and he has rightly complained about it.

A businessman mayor—a former financial industry exec no less—and a Gotham business group shouldn’t have such a hard time calculating who the city’s true friends are.

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More by Steven Malanga:
Borrowing Trouble
Why the State and Local Pension Problem Will Get Worse
Grassroots Soccer Mania
More . . .
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