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See No Taxes

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See No Taxes

Economic-recovery programs for New York City and State ignore the high levies and thicket of regulations that add to the cost of doing business. April 4, 2022
New York
Economy, finance, and budgets
Politics and law

New York officials must be longing for those 25,000 lost Amazon workers and the many construction jobs that the tech company’s “HQ2” project was supposed to bring to Queens. In early 2019, Amazon had chosen Long Island City for one of its new headquarters in a highly visible search, only to cancel the project amid criticism of government subsidies and hostility among much of the city’s political class. Back then, the city’s economy was humming along, and opponents argued that New York could find better jobs from better employers at less cost. But today, the city’s unemployment rate, 7.0 percent for February, is nearly double the national average, and its metro area ranks near the bottom nationally in terms of joblessness. And Gotham is the biggest engine in a foundering state economy, ranked in a year-end survey as one of the slowest recovering states from the pandemic.

These distressing results are no mystery. A high-tax, highly regulated city, New York has relied for the past 25 years on a growth formula of low crime, a stable social order, and an emphasis on high-value jobs at profitable companies for whom being in the city brought advantages that outweighed the costs. The result was a prosperous but hollow economy that featured well-paid jobs in finance, law, and technology alongside low-paid service-industry jobs necessary to support those workers, but lacked many of the middle-class jobs in manufacturing or financial back offices that the city once boasted.

The pandemic has changed that calculus. The work-from-home movement has hit New York City’s office market—the backbone of its economy—right in the pocketbook. More than two years after the initial lockdowns that brought much of the economy to a standstill, only 38 percent of office workers have returned to their city jobs, which is below average for major cities. Employers have tried to get workers back to their Manhattan offices, only to be thwarted by Covid surges and resistance from employees who don’t want to return to working in person five days a week. A rise in violent crime and disorder hasn’t helped. Both the city’s current mayor, Eric Adams, and his predecessor, Bill de Blasio, as well as former governor Andrew Cuomo and successor Kathy Hochul, have at various times urged workers to return, but to little avail.

The more that workers and companies discover they can accomplish through remote work, the greater the danger—because New York is by far the most expensive place to locate a worker in the country. Its overall cost of occupancy, including labor, utilities, and taxes, is 50 percent higher than the next most expensive American city, San Francisco, and three times as high as Dallas, Chicago, and Seattle. The gap is even larger with many smaller metro areas that seem poised for growth. One big component of these costs is taxes: the city and state together out-tax other competitors, taking as much as 45 percent more taxable income than the average of U.S. big cities and their states. No surprise, then, that even in the pandemic’s early stages, experts rated New York one of the places that might struggle the most to recover its jobs and residents.

Facing this existential challenge, Governor Hochul and Mayor Adams have formulated recovery plans. The mayor’s program focuses on several key elements of the city’s former success, especially returning to its low pre-pandemic crime rate, so essential to the city’s stunning recovery in the 1990s and early 2000s. He also commits to transforming how the city regulates and otherwise impedes small businesses through the numerous fees, fines, licenses, and rules it imposes on owners. Previous mayors have struggled to reach this worthy goal, and Adams will need persistence to make the city more hospitable for small firms. Other parts of his plan—such as expanding minority contracting programs (which every mayor since Ed Koch has done)—are more about redistributing the city’s business wealth than growing it for everyone.

Hochul’s plan is still more predictable. She wants to spend $10 billion to rebuild the state’s health-care work force with public money—perhaps a necessity, but not one that will necessarily expand the economy. She’s rolled out a program of job training to better prepare workers for employment, though government training initiatives don’t have a particularly good record of finding people jobs, and at this point the jobs may not be there. Hochul is also eyeing infrastructure projects, such as a new train line in Queens, and may create a public fund to help small businesses.

Yet both plans have a glaring omission: they offer little to reduce the stunning cost of doing business in the state and city. Hochul proposes to accelerate a $1.5 billion tax cut for middle-class New Yorkers, which was put in place in 2018 but isn’t scheduled to go into effect until 2025. But this comes after the state raised taxes by $4.3 billion in during the pandemic on residents and businesses, becoming one of the few states to increase levies amid the economic carnage. While both Republican- and Democratic-led states are using budget surpluses created by President Biden’s stimulus package to cut taxes and make themselves more competitive, Hochul’s plan keeps the state an outlier, and could make it even less competitive. Worse, perhaps, is that Hochul simultaneously ignores the biggest potential program for new investment and jobs in New York: lifting the ban on fracking to unleash the Western New York economy.

Meantime, Adams’s 68-page recovery plan for the highest-taxed city in the country contains the word “taxes” just twice (in minor references to the fees and levies small firms pay). One telling sign of how uncommitted the city’s political culture is to addressing its deep cost disadvantages is that New York continued throughout the pandemic to collect its commercial rent tax. While most municipalities tax property that residents own—and New York does plenty of that—this unprecedented levy taxes the rent that big Manhattan companies pay on their offices, in addition to the taxes that office-building owners pay. The $700 million the city collects in the rent tax represents a decreasing share of its budget, especially with all the federal dollars flowing to the city, but New York government has consistently ignored calls to suspend or eliminate this added “occupancy” cost during the pandemic—an illustration of how anathema cutting taxes is in Gotham.

High taxes and dense regulations illustrate a government-first mentality that also expressed itself with some of the nation’s strictest pandemic lockdowns. Covid restrictions, too, have had a profound influence on recoveries: rebounding states imposed some of the lightest Covid restrictions and lifted them the fastest. In a nationwide survey of business executives conducted last year, CEO Magazine found that states with the least intrusive Covid mandates were places where executives were most positive about the competitive environment. Executives gave Florida, Oklahoma, and Texas high marks for politicians’ management of the pandemic, which shows in their recoveries. Yet persistent talk of renewing some Covid mandates in New York, and possibly making certain measures permanent (such as masks on city transit lines), reminds executives that many New Yorkers may still not be over their pandemic paranoia. Adams and Hochul should shut down such talk and assure businesses that these rules are finished.

The remote-work movement has given companies far more options for cutting location costs than they had before March 2020. Businesses central to New York City’s office market have perhaps the greatest flexibility. That represents a major threat to the city’s economy—and New York needs recovery plans that take that threat seriously.

Photo by TIMOTHY A. CLARY/AFP via Getty Images

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