While New York City has long had a reputation as a taxing place to live and work, a study earlier this year by the city’s Independent Budget Office quantified government’s deep bite into Gotham businesses and residents, provoking headlines in the press and justifiable shock among some public figures. One angle that the press missed, however, is that the city’s tax burden has grown under the Bloomberg administration, reversing the gains produced by tax cuts during the 1990s.
The IBO study concluded that the combined state and local tax yoke in New York consumed more than $9 of every $100 of taxable income in New York’s economy—47 percent higher than the average of the country’s next eight largest cities (Los Angeles, Chicago, Houston, Philadelphia, Phoenix, San Diego, San Antonio, and Dallas).
Though high state taxes account for some of the difference, the IBO found that New York’s municipal taxes are the main culprit. The local tax burden is 90 percent higher in New York than the average of the other major cities, and that’s because Gotham collects more kinds of taxes, and at higher rates, than they do. For instance, seven of those eight cities don’t have any income tax, but New York’s consumes more than $1 of every $100 in taxable income produced in the city. Many cities tax business income, but New York takes 71 cents out of every $100, while Los Angeles takes 20 cents and Chicago just two.
The IBO study prompted some local politicians and policymakers to call for trimming the city’s taxes. But Mayor Bloomberg defended the high levies by arguing that they’re necessary to provide “premium” services that New Yorkers demand. What the mayor failed to note is that the gap between New York’s tax burden and that of the other eight cities has widened under his administration, even though city services haven’t increased substantially. In the 1990s, tax cuts engineered by the Giuliani administration and the City Council under former speaker Peter Vallone began shrinking that gap, without substantially reducing the level of services delivered.
To understand just how much less competitive New York has become under Bloomberg’s tax increases, go back to the IBO’s first study of the tax burden in major American cities, published in 2000. That study found that New York’s local tax burden (not including state taxes) was about 79 percent higher than the average of other major American cities for tax year 1997 (the most recent year that all the relevant data were available). But it also noted that significant tax cuts in 1998 and 1999 in New York (not included in the report because similar data from other cities weren’t available at the time) had trimmed about 8 percent off the city’s tax burden, reducing it by about 64 cents per every $100 of taxable income. As the IBO noted: “Available information suggests that other large cities haven’t matched this tax cutting vigor.” Further tax cuts that occurred after the report appeared in 2000, especially the elimination of the sales tax on clothing purchases under $110, shrank the city’s tax gap even more.
But New York has lost ground since 2000. Among Bloomberg’s tax and fee increases was a record property-tax hike in 2004. With the higher tax rate contributing to a big jump in collections, New York City hauled in $11.45 billion in property taxes in 2004, or 57 percent more than it collected back in 1997. Property-tax collections in other cities increased by an average of 40 percent over the same period, but mainly because of more development and higher real-estate valuations, not increased taxes. The difference between New York’s rate of increase and other major cities’ represents a huge additional chunk of money taken out of New York’s private sector.
It shouldn’t have surprised anyone when the IBO announced that the city’s tax gap was big. The real news is that it’s growing.