Having endured their own catastrophe four years ago, New Yorkers have empathy for the victims of Hurricane Katrina and have already done their share to lend aid. But New Yorkers also need to be wary of a post-Katrina mindset in Washington that will set back Gotham’s own revival.
Exhibit A is the talk coming out of Washington that Congress may postpone its vote to extend the 2003 dividend and capital gains tax cuts, since the cost of the hurricane cleanup, some feel, makes such an extension unseemly. Even supporters of extending the cuts, set to expire in three years, seem squeamish about proposing renewal at a time when so many have lost their homes and desperately need aid.
But no other single action or event has been as crucial to New York’s revived fiscal prospects as those tax cuts. Allowing them to expire would cast a dark cloud of uncertainty over the city’s fiscal and economic prospects. New York’s mayoral candidates, as well as its congressional representatives (many of whom foolishly voted against the cuts last time), should now be making a strong case in Washington that maintaining a vibrant stock market is key not just to the city’s economic future but to the country’s, and that repealing those tax cuts could undermine Wall Street.
Before the Bush administration proposed those cuts, the city’s financial outlook was dire. Mayor Bloomberg, in his preliminary financial plan of January 2003, warned that a continuing post-9/11 Wall Street slowdown had produced “an unprecedented decline in wage income,” resulting in reduced tax revenues and deep projected deficits. In 2002, City Hall pointed out, Wall Street firms had earned only one-third as much as they’d netted in 2000, and the prospects for 2003 weren’t much better. The city projected that, due to declining profits, fiscal 2003 tax revenues generated by Wall Street would be off by $1.2 billion from their 2001 peak.
But in the spring of 2003, the press began reporting plans to include both a capital gains and dividend tax cut in a federal tax package. News of such potential cuts brightened investors’ outlook, since lower tax rates mean they get to keep more of their gains. The stock market suddenly began improving, then caught fire after the president signed the bill. The S&P 500 rocketed up 22 percent for the year, its biggest gain since 1998. The rise produced an immediate boost for Wall Street and for the city’s fiscal prospects. Instead of earning only about $7 billion, as predicted, security firms racked up nearly $17 billion in profits. Tax collections—including business levies, the personal income tax, even the real estate transfer tax (which typically surges when Wall Street does well)—improved by more than $1 billion, easing the city’s fiscal crunch and slowly bettering the jobs situation.
None of this should have been surprising, since previous investment tax cuts had produced the same effect. A 1978 capital gains tax cut sparked a doubling of Wall Street profits in just two years and set off a hiring frenzy, with securities firms adding 40,000 jobs, a 57 percent growth, in just five years—after nearly zero job growth during the previous decade. In the three years after the 1997 capital gains tax cut, Wall Street enjoyed $45 billion in profits and hired 25,000 new workers, nourishing both the city’s tax rolls and its economy.
The 2003 tax cuts haven’t been a boon just for New York; they’ve also benefited the national economy. That’s why the idea of not extending them in the aftermath of Hurricane Katrina makes no sense. Lower tax rates have spurred more companies to boost dividends, raising total payouts by $81 billion from 2002 to 2004. And average investors are big beneficiaries: according to the Securities Industries Association, 60 percent of tax filers who reported dividend income make less than $75,000 a year. Meanwhile, a healthy stock market, something that the last two capital gains tax cuts have helped encourage, has lowered borrowing costs for companies and made it easier for them to finance their expansion plans. It’s also boosted consumer confidence by shoring up many people’s retirement portfolios.
Allowing the investment tax cuts to expire could undermine the markets and thus short-circuit any potential economic revival in Gotham. That’s especially a risk, because although investment firms’ profits have rebounded, Wall Street has been slower to add city jobs this time than in previous turnarounds—in part due to continuing terrorism concerns as well as uncertainty surrounding the tax cuts themselves. So far, the street has only added back about 3,000 jobs, after losing 30,000 in the current recession. If Wall Street’s rebound sputters now, it may be years before the city gets back the rest of the jobs it lost—if ever.
Still, despite the obvious local benefits, most city politicians remain cool to stock tax cuts. Of local officials after 9/11, only Rudy Giuliani supported them. Instead of tax cuts, Democratic mayoral candidate Fernando Ferrer has made taxing Wall Street more heavily, through a stock transfer levy, a centerpiece of his fiscal plan.
It’s a strange political myopia that sees the key to Gotham’s fiscal revival as a burden to the federal efforts to bail out Katrina victims. It’s time for city leaders to speak up.