Left photo (cc) archivalproject, right photo (cc) skittlbrau

In the midst of the New York's budget woes, one bright note has been the steady revenue flowing from the city's biggest tax, its real property tax. According to the Independent Budget Office's March Analysis of the Mayor's Preliminary Budget for 2010, city property tax revenue will increase by 10 percent next year and an average of 4.1 percent annually over the next three years, 2011 to 2013. This includes the 7 percent increase in the tax rate, which became effective Jan. 1, 2009.

In the current fiscal year, property taxes are projected to be $14.4 billion, or about 41 percent of all city taxes. And while the IBO projects personal income taxes will fall next year by nearly 22 percent and business income taxes by 23 percent, property taxes will rise to $15.8 billion, making them account for more than 47 percent of all city tax revenues in 2010.

What explains such an increase at the same time both residential and commercial properties are so obviously declining in value?

While answering that question, the IBO report also discusses several continuing problems with the convoluted, often bizarre structure of the city's property tax system -- a system whose inequities and opaqueness the Bloomberg administration and the City Council have failed to address.

The IBO notes that inequities in tax burdens still exist among house and apartment owners. It notes that attempts to equalize tax burdens have created new inequities and that a promised city report on structural reform has been repeatedly postponed.

Values Fall But Assessments Rise

An increase in property tax revenues as the real estate market tumbles certainly presents an anomaly. The IBO projects that the total market value of all taxable city property for 2010 will decline by 2.2 percent from 2009, falling to $792.3 billion. From 2005 to 2008, total market value growth averaged 13.5 percent annually. Yet at the same time, the IBO projects that total property assessments in the city will increase by 5.5 percent to $140.3 million in 2010.

In most places, property tax assessments -- the value a tax assessor applies to a property -- are the same as market values. Not in New York City, where nearly $800 billion in market value translates into only $140 billion of taxable assessments. Because city and state legislators have wanted to protect certain classes of property owner -- particularly house owners -- city tax assessors have for over 25 years assessed different kinds of properties at different fractions of market value.

For instance, assessments of one, two and three-family houses are currently supposed to be 6 percent of market value (called an "assessment ratio"). In practice, however, given the complexities of the system, assessment ratios are well below 6 percent. In fact, the IBO suggests the median assessment ratio for houses in 2010 will actually be 4.4 percent. So a typical $400,000 house would be assessed at $17,600.

After the assessment is set, actual taxes for a property are then determined by applying a tax rate, say 15 percent, to the assessed value. In the case of the house worth $400,000 in the marketplace but with an assessed value of $17,600, the actual taxes would be $2,640.

Business properties, rental properties, and most coops and condos are assessed at 45 percent of market value, so that a $400,000 commercial property would be assessed at $180,000. Further complicating matters, co-ops and condos are assessed as if they were rental properties -- a bizarre formula that, as the IBO has pointed out, lowers their assessments and therefore their taxes.

In a 2006 report, Twenty-Five Years After S7000A: How Property Tax Burdens Have Shifted in New York City, the budget office pointed out the relatively high market values given coops and condos.

Assessment "Pipelines"

In New York City, increased market values are phased in over five years, rather than recorded immediately. This helps allow city property taxes to continue to rise in a down market. This phase-in (technically called a "pipeline") means that previous increases in value are still being reflected in the tax take even as values fall.

More specifically, the IBO points out that the 632,000 one, two and three-family houses in the city lost 5.0 percent in market value over the past year, but in 2010 will increase in assessment value by 4.3 percent, because the rising values of recent years have yet to be fully phased in. There is one limit on this though: Homeowner assessments are capped as well as phased in, which means some of the increased value may never be captured.

For the longer term, 2011 to 2013, the IBO projects the total assessed value of the 632,000 houses to continue increasing at an average rate of 1.4 percent a year, while their total market value continues to decline from a peak of $426.9 billion in 2008 to $333.9 billion in 2013, a 21.8 percent drop.

Commercial properties will also see the effects of the pipeline. From 2011 through 2013, their assessments will continue to rise at an annual average of 5.5 percent. At the same time their total market values will grow only by 0.4 percent in 2011 and decline the next two years by about 1 percent a year.

Cuts, Hikes, Rebates and Abatements

Political decisions have also affected property tax revenues. For one, effective Jan. 1, 2009, the mayor and the City Council canceled the 7 percent reduction in property taxes that had been enacted for fiscal year 2008 and continued through the first half of fiscal 2009. That move has increased revenues by $591 million in 2009 and will increase revenues by $1.3 billion in 2010 and by $1.5 billion in 2013.

For next year, the city also canceled the $400 rebate for house, coop and condo owners. Mayor Michael Bloomberg said in his November 2008 budget proposal that he wanted to cancel the rebate in this fiscal year, but the council rejected that idea and the rebates - totaling $256 million -- went out in December 2008. But the rebates are no longer in the city's current four-year plan, saving $256 million annually.

The IBO report also gives an update to the coop and condo abatement program, a 17.5 percent reduction in property taxes for most owners and 25 percent for a relatively few with very low assessments. This was established in 1997 as an attempt to reduce the disparities between the higher taxes paid by coop/condo owners vs. house owners.

The program has been extended several times, most recently in 2008 for four more years. According to the IBO, though, it does not address disparities among coop/condo owners and provides too little tax relief in some cases and too much in others. Further, the legislation mandated a city report that would address the inequities in the property tax on a more permanent basis, but that report has never been written, and the recent extension of the abatement program pushed the report's due date back to February 2011.

The System's Bias

In its 2006 report, the IBO concluded that existing inequities in the system date back to a 1981 policy providing tax advantages to owners of private houses owners. Since then, the inequities have only increased. For instance, owners of one, two and three-family houses saw their tax burdens -- the amount of actual taxes paid as a percentage of full market value -- drop by 65 percent from 1984 to 2007, while the tax bill for coop and condo owners dropped also, by only by 29 percent and 28 percent, respectively.

On the other hand, tax burdens for commercial property increased by nearly 10 percent between 1985 and 1997. And on the rental side (about two thirds of New Yorkers are renters) elevator apartment buildings, where a majority of renters live, saw a 41 percent increase in tax burden during those same years.

Politics and Taxes

The city's own January 2009 report on tentative property market values and assessments for 2010 highlights the ongoing disparities in tax treatment between house owners and other property owners. On average, house owners currently pay an effective tax rate of 0.53 percent. They pay an average of $3,230 in property taxes on average market values of $604,197.

At the same time, property taxes on the 1.3 million rental apartments in the city, with average market value of $128,532 per apartment, average property taxes of $3,913 per apartment, for an effective tax rate of 3.04 percent, nearly five times the that of house owners.

The city's statistics on coops and condos, however, highlight the bizarre nature of treating these homes for assessment purposes as if they were rental housing. According to the city's figures, coops have a very high effective tax rate -- 4.23 percent for coops and 4.02 percent for condos.

This is largely due to their artificially low market value. According to the city's January 2009 list of tentative market values and assessments for coops and condos, the 375,797 coops in the city, according, to the assessment methodology, have an average market value of $105,000; the 237,438 condos, an average market value of $96,133. In Manhattan, coops have an average market value of $172,759 and 152,680 condos an average market value of $120,981.

These citywide and Manhattan values have no relationship to the real world -- even during a recession. To take only one example, an April 2, 2009 report in the New York Times noted that even with a 20.9 percent decline from a year ago, existing coops and condos in Manhattan were selling at an average of $732,000 per apartment, with new ones going for a much higher price, in the first quarter of calendar 2009.

As this disconnect between assessments and market values shows, current procedures in the property tax system are far too complicated, hopelessly opaque and all too often inequitable. As property taxes, already by far the most important city tax source, account for a greater share of city tax revenues it would be in the public interest for those in charge - the mayor and the City Council - to pursue transparency and equity in the system. Unfortunately, no one seems interested.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.

Fiscal crises don't stop the legislative process.

Here is a sample of bills introduced at the City Council lately, some of which are destined to drift about in legislative purgatory. The council is ready to consider bills that include requiring food inspector grades be posted on street carts to mandating a super majority for tax hikes.

Watching Stimulus Funds

The city is eligible to receive millions -- if not billions -- of dollars in stimulus funding from the federal government as part of the stimulus package approved earlier this year. Already, the city has received $271 million in funding for transportation projects.

To keep track of it all, Councilmember Bill de Blasio, who is a candidate for public advocate, introduced legislation (Intro 957) that would create a Web site detailing all of the stimulus funds awarded to the city. Recipients of funds, according to the bill, would have to give monthly progress reports and detail how the project would increase economic activity in the city.

The site would be called SunlightNYC.

“Without accountability, we risk another AIG," said de Blasio in a prepared statement. "SunlightNYC will require all stimulus spending to be tracked and transparent. The public deserves to know how their money is being spent, down to the last dollar."

City agencies would also have to detail what projects did not receive federal funding that they applied for.

The Bloomberg administration has launched a stimulus tracker detailing the types of funding the city can receive, and the projects that have been awarded federal money.

Posting Food Grades

The city already grades schools, why not pass or fail city food vendors? That is the question Councilmember Daniel Garodnick is asking.

Under legislation (Intro 958) introduced by Garodnick, the city would be required to give laminated grade placards to vendors 72 hours after inspections. Vendors would have to then post visibly on their carts at all times.

Noticing Foreclosed Properties

Under legislation (Intro 959) also introduced by Garodnick, any bank or individual issuing a foreclosure on a property with more than six units would have to notify all of the tenants of the building.

A similar bill introduced by Councilmember Thomas White (Intro 956) would require an entity notify tenants in buildings with between one and five units.

They would have to notify the tenants within ten days of the action, if not, the entity could be subject to a $1,000 fine per day.

Bulletproof Banks

In 2008, according to the council, bank robberies increased by 50 percent.

In hopes of curbing that trend, Councilmember Oliver Koppell introduced legislation (Intro 960) that would require all banks install bulletproof glass at teller windows. The legislation would not apply to atm machines.

If banks fail to comply, they could be fined up to $1,500 under the bill.

Super Majority for Taxes

The council's Republican trio wants to curb taxes. Despite Democrats more than super majority over the governing body, members Jimmy Oddo, Vincent Ignizio and newcomer Eric Ulrich want to require an official super-majority for any approval of a tax hike.

The bill (Intro 961 ) would require any fee, tax increase or decrease be approved by two-thirds of the City Council instead of a simple majority. That means 34 votes in the affirmative instead of 26.

Council Member Salaries

Councilmember Tony Avella, a mayoral candidate, introduced legislation (Intro 946) that would ban any City Council member salary increase within 30 days of a general, primary or special election. Any increase the council approves would not take effect until after the next general election, according to the bill.

Avella voted against the council's pay increase in 2006, which upped salaries from $90,000 to $112,500.

“The purpose of this legislation is to prevent the travesty that occurred in 2006 when the City Council voted itself a 25 percent pay increase," Avella said in a prepared statement. "It is sheer self interest when a legislative body votes to increase the salaries of its current members and only serves to further erode the public’s trust of the body as a whole and of each individual member."

Unattended Idling

After a drunken driver stole an idling car and killed two pedestrians in Middle Village, Queens in February, Councilmember Elizabeth Crowley set out to prevent it from happening again.

Crowley introduced legislation (Intro 947) that would increase the fine for leaving a vehicle unattended and idling from $5 to $250.

Though the city has had idling legislation in place since the 1970s, it has been sporadically enforced. Earlier this year, the council passed legislation to step up that enforcement by allowing sanitation and parks officials to issue tickets for idling. The council also recently passed legislation implementing stricter idling guidelines in school zones.

Fire Commissioner Power

The city's fire commissioner has a lot of discretion. He or she can close firehouses -- if fiscal times require -- as he or she sees fit, but needs to notify the council.

Now, Councilmember de Blasio would also like to have the commissioner notify the council when ambulance routes are terminated permanently -- or for more than six months. The legislation ( Intro 949) would require the department notify the City Council 45 days before a route was eliminated. Ambulance services are within the fire department's budget.

The administration is proposing to do away with 30 EMS routes this budget cycle, which many council members were caught by surprise by.

Retirement Age for NYPD

Legislation ( Intro 953) introduced by Councilmember Peter Vallone would increase the city Police Department's mandatory retirement age from 63 to 65.

Photo by Gotham Gazette

It's the tax season, and millions of working, poor New Yorkers are catching up on their bills. Whether it's paying for rent, childcare or groceries, tax time is an opportunity to reconcile past due notices, settle debts and start anew. While a range of tax credits targeting working poor tax filers has made the tax code a successful tool for alleviating poverty, the cyclical nature of the tax season creates a "feast or famine" condition for working poor families. That makes it difficult for these New Yorkers to achieve lasting financial security, but straightforward modifications to a popular and successful tax credit could change this for millions of people.

Working New Yorkers with low wages are eligible for the Earned Income Tax Credit (EITC), a refundable credit created by the Nixon administration as a type of "negative tax": If a household earns too little to incur a tax liability, the IRS sends the filer a refund. The Clinton administration seized the concept in an effort to "make work pay," and the EITC was vastly expanded. Now, families earning up to $41,646 can get a federal refund for as much as $4,824. With the New York State and New York City portions added, the credit can total up to $6,512.

These impressive figures make the credit a powerful anti-poverty tool. Each year, according to data from the Center on Budget and Policy Priorities, the credit lifts 5 million working poor people over the poverty line, and many of the beneficiaries are children.

EITC is also one of the most successful antipoverty tools. More people claim the EITC than any other publicly funded work support. About 85 percent of those eligible for the EITC claim it, compared to only 40 percent for food stamps (see related story) or 15 percent for childcare. While much of the successful uptake rate is because a routine filing of taxes -- all one has to do to get the credit -- carries less stigma than applying for Food Stamps, highly coordinated publicity campaigns have raised awareness.

Government and philanthropy also deserve credit for supporting large-scale free tax-preparation services, dramatically increasing the ability of working-poor families to access the EITC. By avoiding paid tax preparation services and costly refund anticipation loans, these New Yorkers also keep all the EITC dollars in their pocket.

But while the EITC combats poverty, it does not create financial security. The very purpose of filing taxes is to reconcile the income we earn over a year and the taxes withheld from our paychecks against the tax tables. However, poverty cannot be reconciled on a once-a-year balance sheet; it is a year-round condition. Not being able to make ends meet means that working-poor people are short on their rent in June, can't pay for school clothes in September or have to delay paying the babysitter in November. EITC does little to address financial insecurity, better one's ability to make ends meet or leave behind the paycheck to paycheck lifestyle.

Making a Good Program Better

A solution does exist, but barely. The Advance Earned Income Tax Credit (AEITC) distributes a portion of the EITC to a tax filer throughout the year in their earnings. For example, a parent with dependent children earning $11 an hour brings home about $1,665 every month. With the AEITC, that parent could bring home over $1,700, giving her a better shot at making ends meet. That same parent would still receive approximately $3,600 when she filed her taxes.

By adding a portion of the EITC to each paycheck, working poor New Yorkers would get a much needed raise. Research by the Center for an Urban Future and the Schuyler Center for Analysis and Advocacy indicates an overwhelming number of New Yorkers -- one in four -- do not have enough earnings to reach the threshold of a basic family budget. Without money to pay for necessities, they must make tradeoffs between rent, childcare or healthcare, and they cannot save for the future. These stark choices create "famine-like" conditions for families who work for low wages.

It is not surprising then that at tax time, the EITC becomes the "feast" by which families catch up on their obligations. In a study of low-income tax filers in North Carolina, the overwhelming majority (86 percent) said that most of their EITC would be spent on necessities. Another study revealed that half of the tax filers surveyed said that paying bills with their refund was their first priority, and for 83 percent of those surveyed, bill paying was among the top three priorities. It is clear that the EITC is a powerful tool for making ends meet.

Spreading the Word

Despite the fact that the AEITC can help alleviate this cyclical pressure by smoothing income throughout the year, the AEITC has the lowest uptake rate among all work supports: Less than 2 percent of those eligible for the credit apply for it.

Why does this solution barely exist? The most frequently cited reason is that many EITC recipients are unaware of the option. Tax filers also fear owing money to the Internal Revenue Service instead or do not let their employers know they are eligible.

Given the AEITC's ability to create financial security, and the immediate impact a universal raise would have on the economy, law and policy makers should consider modifying the AEITC program to increase participation. They could make the following changes:

Opt-Out Enrollment. Instead of allowing eligible tax filers to opt in to the AEITC, make it automatic so that filers who successfully claim the EITC every year receive payment year-round. Of course tax filers should have ready access to opt out at any time so they increase their tax-time refund.

Changing the default is a proven strategy for vastly improving enrollment rates. (Organ donation for European countries with opt-out policies maintain nearly universal participation rates, a stark contrast to countries with requirements to opt in.) The Obama administration is already considering an opt-out approach for low-income workers' retirement savings. A similar approach should be taken for the AEITC.

Seize the Opportunity. As the federal, state and local governments weigh strategies to help working-poor families cope with the recession, they will probably look to expansions of tax credits, including the EITC. This creates an excellent opportunity to expand the EITC automatically because, with an increase, working poor families would see more money in their paychecks and still maintain their tax-time refund at current levels. Effective April 1, workers will see about an extra $65 a month in their paychecks, a result of a payroll tax cut in Obama's economic recovery package. State and local governments could follow that lead by placing expansions to local EITCs directly into paychecks.

Marketing and Education. Community groups and advocates know how powerful a wide-scale marketing and educational campaign can be. In the last few years, many more working-poor New Yorkers have claimed the EITC and taken advantage of free tax preparation services because of highly coordinated public and private efforts. With the weight of government and philanthropic communities behind a similar AEITC effort, we could see similar accomplishments.

The EITC is a powerful elixir for working-poor New Yorkers who are struggling to make ends meet. The AEITC can ameliorate the "feast or famine" conditions working poor families face during the tax season by improving their financial security all year round.

Mae Watson Grote is the founder and executive director of The Financial Clinic, a nonprofit financial development firm that offers financial education, coaching and legal services to improve financial security for working poor New Yorkers. Through the United Way of New York City's MoneyUP Initiative, in which The Financial Clinic is the lead partner, the clinic prepared nearly 2,000 tax returns last year, securing $1.9 million in tax refunds and credits for working-poor New Yorkers while simultaneously providing free financial coaching services.

Sen. Eric Schneiderman of Manhattan could have been celebrating on Monday. The budget deal reached over the weekend included two major policy victories for him: reform of the Rockefeller drug laws and the income tax increase on high-income earners, both of which he had been pushing for. But Schneiderman was subdued. "This is not a good news budget," he said. "Frankly, it is amazing there isn't more pain for my district than what we have in the budget now."

That might be the major story of this year's budget process: major cuts proposed by Gov. David Paterson -- hailed as fiscally responsible by some and bemoaned as draconian cuts to important programs by others -- were largely restored.

In fact, this year's $131 billion budget is $10 billion more than the budget Paterson proposed in December. It increases state spending by about 8 percent and includes $170 million worth of member items. This means that many of the cuts slated for New York City -- including ones that Mayor Michael Bloomberg said would have forced the layoff of thousands of public school teachers -- have been restored.

Observers attribute the relatively lavish spending to the influence of Assembly Speaker Sheldon Silver of Manhattan's Lower East Side, who wields far more influence and experience than Paterson or Senate Majority Leader Malcolm Smith. Silver bucked the push for fiscal restraint and pushed ahead with a budget much bigger than Paterson's proposed plan.

New Taxes and Fees

So, how painful will the state budget be for New Yorkers? It depends on who you ask.

Outside the Senate chambers on Monday, lobbyists remained perched and alert, ready to seize the ear of any legislator. They complained about taxes and fees contained in the budget and how they will hurt business.

The budget includes an estimated $8 billion worth of new or increased taxes and fees, among them an income tax increase on those making $200,000 or more a year. There will be a new surcharge on cell phones, an increased fee on some forms of driver's licenses, a higher cost to renew commercial driver's licenses, higher registration fees for some vehicles, and increased surcharges on gas and electric companies. Stores that sell cigarettes will have to pay the state anywhere between $500 and $1,000, and taxes on beer, wine, cell phones and some insurance policies will also rise.

One lobbyist desperately explained to a legislator how a new tax on alcohol almost certainly would limit the beer selection available in New York and damage small breweries. Some legislators gave the impression that there was still time to make changes. Even on Monday, with the budget seemingly finalized, Sen. Ruben Diaz of the Bronx made it clear that he was still pushing for changes. "We're still working on it," he said referring to the budget. "The people of my district should be very happy with me," he concluded beaming a grand smile.

Observers have wondered if Diaz or one of his fellow members of the dissident Democratic gang of three might vote against the budget and send the Democrats back to the drawing board. But the sense is that the Democrats are unified.

"Absolutely, said Sen. Neil Breslin of Albany when asked if he expected the budget to pass without resistance from fellow Democrats. Schneiderman responded similarly.

General Funding

A major victory for the city was the restoration of $328 million of Aid and Incentives for Municipalities funding to New York City. Paterson had proposed entirely eliminating New York's payment while keeping funding for other cities flat. Now New York City, along with the state's other cities, will have AIM funding restored to 2008-2009 budget levels. Bloomberg had said that he might have been forced to go ahead with major layoffs of city workers if all the cuts facing New York had been enacted.

Education

The mayor had railed against proposed cuts to education funding and threatened that the cuts could lead to the layoff of some 14,000 teachers.

However, thanks to federal stimulus funds, the majority of education cuts have been restored, and earlier this week Bloomberg announced that he would likely not be forced to make the layoffs but might have to trim some non-teacher positions.

Geri Palast of the Campaign for Fiscal Equity said the budget "basically restores major cuts to the funding levels." Foundation aid for operating expenses will stay the same as it was in last year's budget. Increases in payments that were scheduled to be made to in-need school districts thanks to the Campaign for Fiscal Equity lawsuit will be put off for two years. The full payments that were expected to be made in four years will now be spread out over seven years, meaning that the full implementation won't be achieved until the 2013-2014 budget year.

The money had been intended to bolster school districts that had not received adequate funding and to help improve standards, including the quality of teachers. Those improvements will now be delayed for years. "All the things that had been laid out for the CFE money are now off the table," Palast said.

Palast said the CFE plans to send a letter to U.S. Secretary of Education Arne Duncan alerting him that the state has misused stimulus funds. For years, she said, the state has denied students in neglected schools the chance for a proper education, and no time should be lost in repairing that failure, especially since the federal stimulus package provides the state with money to fund education.

"I think Albany sadly has some of the wrong priorities," said Palast.

Health Care

The federal stimulus package also provides funds for Medicaid, the health program for low-income people. Earlier this month, however, Paterson announced that he is using some of that money to avoid enacting some of the unpopular nuisance taxes he had proposed last fall.

The budget leaves hospitals burdened with $306 million of the cuts, nursing homes facing $225 million and home care funds down by $68 million. The budget does go ahead with a plan to reform Medicaid reimbursement to hospitals.

Healthcare advocates have vehemently insisted that Paterson's plan to reduce Medicaid reimbursement for hospital while increasing payments for primary care will harm hospitals in New York City's struggling neighborhoods. They say that Paterson's plan would place a particular burden on hospitals that serve the underprivileged. Apparently legislators listened as they provided relief for hospitals with the highest percentages of Medicaid patients.

Despite that, the changes will severely damage hospitals that don't serve the highest thresholds of Medicaid patients, but still serve a large Medicaid community, according to William Van Slyke of the Healthcare Association of New York. Van Slyke said hospitals have yet to deal with the financial turmoil caused by last year's budget cuts. Some, he said, have been forced to make layoffs while others close. As a result, he said, New Yorkers are already seeing a slowdown in care and longer waits for appointments for standard procedures.

At the same time, Van Slyke says the budget takes away money that teaching hospitals use to fund graduate student training programs. He said that will mean hospitals will either be understaffed or forced to pay more doctors. That, he said, could actually increase costs since physicians command higher salaries than doctors in training. In addition, taking away funding for teaching hospitals will compound a physician shortage that already exists in many areas around the state, according to Van Slyke.

The budget also includes a gross receipts tax on hospitals that Van Slyke says will cost New York hospitals around $64 million.

"People are going to start wondering about these reforms when their standard of service goes down and hospitals start to close," said Van Slyke.

The Environment

A number of the features of the budget pleased environmental advocates, including a measure to place a 5-cent deposit on bottled water.

Environmentalists also were pleased to discover that the budget restores $45 million in cuts Paterson had proposed to make to the Environmental Protection Fund. Funding for that is now $222 million -- $17 million more than proposed in Paterson's budget. And instead of funding it with unclaimed bottle deposits as Paterson had proposed, the budget sustains the real estate transfer tax as the EPF's main funding source.

A number of New York City projects have relied on the fund for support including the Brooklyn Waterfront Greenway, Hudson River Park and the Harlem River Greenway.

Sharing the Pork

As for the $170 million worth of member items in the budget, Democratic senators have said privately that the money will help make up for the years that Republicans "starved" Democratic districts. One member pointed to his allocations to food pantries and homeless shelters in his district as something he felt good about. He noted that other leaders should have shown a little more tact in their choice of items, citing the $10,000 earmark one member requested for a Little League. Organizations all over the five boroughs -- tennis clubs, music organizations, afterschool programs and schools -- earned earmark attention from lawmakers.

One of the other notorious features of this year's budget -- the absolute secrecy of the negotiation process -- also is attributed to Silver. The speaker ensured the budget process took place exclusively behind closed doors and without public input. He even did away with the conference committees that were required by the 2007 budget reform act he himself once trumpeted as representing major progress.

Schneiderman said he is not at all proud of the process. "It would have been better to have more transparency, but we are trying to dig ourselves out of a hole we didn't dig," he said. When asked if he thought it was necessary to sacrifice transparency to secure drug law reform and the income tax increase, he shook his head vehemently, saying "One does not excuse the other."

New York City's future depends on maintaining its status as a financial capital. Every great 21st century city includes a financial center, because finance is the connective tissue of the global economy. Nothing can substitute for the FIRE (finance, insurance and real estate) sector as a source of high-paying jobs, tax revenues and economic output.

In the past year, New York's financial services industry has been the epicenter of a global crisis that has destroyed or diminished many of its most important financial institutions. The effects of the resulting losses on the regional economy are just starting to be felt. Economic conditions in New York will get worse before they start to get better.

Through 2008, the FIRE sector was responsible for about 25 percent of the $1 trillion economic output of the New York metropolitan region and employed one in seven New Yorkers working in the private sector. The financial services industry generated over 17 percent of city and 20 percent of state income tax revenues.

Going forward, "Wall Street" and the financial services industry generally will not look the same as they did in the past. The global economic crisis has brought a new reality with respect to investor expectations, regulation and business culture. New York needs to quickly reinvent itself as the new, more cautious, but equally creative world financial capital.

Our Reputation

Maintaining New York's status as a financial capital begins with stabilization of the national banking system. This is underway, thanks to federal rescue, stimulus and credit guarantee programs. Currently, recovery is being slowed by the negative energy going into retaliatory actions that Congress is being pressed to take against many of the nation's –- and New York's –- largest financial institutions. Hopefully, the country will move beyond anger so that rebuilding can proceed.

Other threats to New York's recovery are protectionist policies that discourage foreign investment, immigration and trade. New York leads the country in terms of the amount of foreign direct investment it has attracted. Some 15 percent of the city's economic growth in the past five years has come from foreign-owned business.

"Buy American" provisions in the federal stimulus package and threatened federal tax actions against foreign companies doing business in the U.S. will work against New York's position as a financial power and discourage foreign companies from listing on New York exchanges. Last year, two Chinese banks chose New York as their U.S. headquarters. A major component of future growth for the city will be as the Western metropolitan headquarters for financial institutions from Asia and emerging countries -– but only if the U.S. policies are conducive to foreign investment.

Staying at the Center

A prerequisite for the recovery and continued global leadership of New York's financial industry is keeping a large aggregation of top financial talent in the region. PricewaterhouseCoopers and the Partnership for New York City publish an annual comparative analysis of world cities and their attractiveness to business, called "Cities of Opportunity." The 2008 report determined that New York was still ranked first when it comes to intellectual capital, which is the single most important influence on 21st century business location decisions.

The latest edition of London's Global Financial Centers Index, published in March, indicates that New York's brand remains strong. London's survey of financial industry professionals found that those who work in New York are more confident about this city's future as a financial powerhouse than they are about any other city. The index still ranks London and New York at the top of 62 financial global centers, even though both have lost some ground in the past year.

Richard Florida, professor of business and creativity at the University of Toronto, writing in the March 2009 issue of The Atlantic argues that New York is more than likely to re-emerge from the current crisis as a financial leader because it is too far out in front of the pack for other cities to overtake. The historic strength of the city's financial sector and the sheer concentration of talent in finance and related disciplines, such as law and technology, give New York the best chance for continued dominance. Florida also concludes that New York's openness to talent and the diversity of its economy will help the city to exit from this crisis re-energized.

Headquarters: Big Apple

Another major factor in determining New York's future is the extent to which it offers a competitive environment for business, both large and small. State and city tax policies and economic development programs need to be carefully reconsidered with an eye toward recapturing jobs in support services, technology and back office operations that have been ceded to other states and countries during the past few decades. A changing cost structure in New York –- lower rents and reduced salaries -- may create opportunities to bring corporate operations back to New York City and state.

One certainty is that Washington will establish a new regulatory regime with unprecedented controls over all aspects of the industry, including sectors that have not previously been regulated. This should represent an opportunity for New York to redeploy financial talent. Sen. Charles Schumer has called for more regulatory agencies to relocate in New York so that these watchdogs are more in touch with the largest concentration of regulated institutions.

The possibility that the insurance industry will move to national charters, rather than state regulation, could also help New York. National regulation would level the playing field and attract national and global insurance headquarters to New York.

Administering the complex federal programs that are intended to jumpstart the national economy requires the expertise of the private sector, which the Treasury acknowledged in its procurement procedure. Already, major New York firms are involved, including Bank of New York Mellon, Goldman Sachs, Blackrock and JP Morgan Chase.

At the other end of the spectrum, New York companies also are taking the initiative to develop innovative products tailored to the new regulatory environment. Creditex, a startup launched in 1996 with funding from the New York City Investment Fund and a consortium of New York-based financial institutions, has won federal approval to operate a clearinghouse for trading of credit default swaps. Recently acquired by Intercontinental Exchange, Creditex has over 500 employees in New York and promises future growth as part of the effort to bring transparency to derivatives markets.

Using Our Strengths

Federal stimulus and stabilization programs create opportunities for the large number of financial firms owned by minorities and women that are headquartered in New York. Helping these firms get federal contracts and subcontracts is one way to re-deploy talent from Wall Street and build a new layer of successful financial enterprise in the city.

Opportunities for public-private partnerships are another area where New York investment firms and nonprofit institutions can make a contribution. New York led the nation in establishing the financial and real estate partnerships that created the nation's affordable housing and community development movement that restored the vitality of America's urban neighborhoods. This has been recognized by the Obama administration in tapping New Yorkers for key positions in housing, the economy and urban policy. This experience should be the basis for renewing and expanding the city's community development industry, both in the banking industry and the nonprofit sector.

The underlying strengths of New York City and its institutions, its diversity and depth of talent, and its internationally respected brand all suggest that it can survive the crisis and continue to thrive as a financial center. There has been reputational damage, but that can be repaired. While the business model will be different, and the profits less aggressive, New York will remain America's gateway to the global economy and the place where the world comes to invest and raise capital.

Kathryn Wylde is the president and chief executive officer of the Partnership for New York City.

Communities across our nation are searching for ways to deal with the worst fiscal crisis we've seen in decades. And New York City is no exception. We're facing a $4 billion budget deficit. We've lost 50,000 jobs already, and it seems like every day we learn of more layoffs in the financial sector and beyond.

You may hear many competing theories on how to improve our economy, but one thing is clear: The surest way to guarantee that our economy gets worse is by allowing our basic quality of life to deteriorate.

If we let an economic downturn erode our commitment to things like education and safe streets, we'll see the middle class begin to flee our city, just as they did in the 1970s. And when they leave, they take their tax dollars with them. But it won't just be residents -– we'll see tourism decline as well, costing our city millions in revenue and countless related jobs.

Soon we'll find ourselves having to raise taxes on those who remain, making the city less affordable and doing little to dig ourselves out of our quality of life hole. And before long, it will become a vicious cycle that gets harder and harder to escape.

Securing Our Services

That's why it's so critical that while we look for ways to tighten city spending, we keep investing in strong schools, safe streets, efficient mass transit, clean parks and public spaces. Smart planning on the part of the City Council and the Bloomberg administration, like paying down billions of dollars in future debt, has prevented us from having to make more drastic cuts so far.

The council has already fought successfully to protect things like police classes and classroom funding. We are also going to need to do without some programs that may be good but have to give way to the services that are the most essential.

But if we're going to continue to fight for these shared priorities and core services, we'll need to find additional revenue somewhere. The first step is creating a balanced tax approach, coordinated with the state to avoid piling on any one group of taxpayers. To the greatest extent possible we need to avoid taxes that are too onerous on businesses and threaten to drive commerce outside of the city.

And we need to make sure we're not squeezing middle-class New Yorkers and that we keep money in the hands of those who are most likely to spend it on necessities, fueling economic activity. At the same time, we'll ask those who have benefited most from the opportunities New York City offers to give a little back while we weather this storm. That's why I've proposed reforms to the city's income tax structure to create three new tax brackets for New Yorkers making over $300,000 a year, while easing the burden on those making the least.

Additionally, we'll look to the federal stimulus funding that's been directed to states and municipalities for exactly this purpose to help us invest in our infrastructure, create jobs and avoid laying off police officers, firefighters and teachers.

We're currently working with the state to see exactly how much of that stimulus funding will be directed down to New York City. But we're hopeful that Albany will recognize the importance of giving New Yorkers their fair share. New York City is the main economic engine for New York State, and the state government has as much stake as anyone in seeing that we continue to thrive.

Wall Street to Main Street

Now just as we're at the center of economic activity for the state, we are also at the epicenter of the fiscal crisis for the entire nation. As the home of Wall Street, New York City has felt both the rise and fall of high finance in recent decades, and we have as much of an interest as anyone in seeing Wall Street recover.

The Obama administration is working to reform the financial industry. We have great faith that it will create a regulatory system that strikes the necessary balance –- restoring stability and investor confidence in the market, without creating an environment that stifles innovation.

Wall Street will rebound, and the global economy with it. Meanwhile, we in New York City need to focus on diversifying our economy outside of finance. For too long, we've been overly dependent on Wall Street to fill our coffers and fund our growth. Now we're being forced to look around at areas we may have neglected.

New York City is home to 220,000 small businesses that account for 50 percent of all private sector employment. We need to make it easier for those businesses to stay afloat and for new ones to open. That's why I recently announced "Open for Business," a series of proposals to support the small business community that came out of the council's conversations with real business owners.

For example, we'll make it easier for new businesses to start up by streamlining the application process for city permits and waiving permitting fees for a 12-month period. We'll also better coordinate agency inspections, to keep business owners from waiting months before they can open their doors.

We'll support businesses that already exist by keeping more local dollars in our local economy. We'll work to change state contracting law, to allow us to give preference to qualified local businesses, and launch a campaign to promote hubs of retail, dining and entertainment around the five boroughs.

And finally, we'll eliminate red tape and help keep government out of the way of business growth. We'll start to evaluate the effects of new rules and regulations on small businesses –- before they get passed –- and we'll create a temporary late fee amnesty for small businesses that are drowning in unpaid fines.

Drawing in Emerging Technologies

In addition to supporting our small businesses, we need to start investing in new and growing job sectors that can further contribute to the diversity of our economy. Many of these industries already exist in New York City, and with a little help, they have the potential to grow by leaps and bounds.

For example, we're already a home to cutting edge research for the biotech industry. But when it comes time to turn that new discovery into a new drug or a new medical device, biotech companies often leave our city for other places –- places with aggressive programs to court these companies.

Thanks to the Bloomberg administration, we've already started by creating more commercial laboratory space. And recently, I proposed a City Biotech Tax Credit that will help dozens of biotech companies equip their facilities and train their staff, encouraging them to locate, and stay, right here. By becoming more competitive, we'll create nearly a thousand new high-tech and high paid jobs.

We're not going to climb out of this recession overnight. But by targeting resources to key job sectors and maintaining our commitment to a high quality of life, we can begin to rebuild. We can ensure that New York remains an international city, one whose top-tier colleges and career opportunities attract the brightest talent from around the world. And we can help our city to emerge from this economic crisis stronger than ever before.

Christine C. Quinn has been speaker of the City Council since 2006. She represents Manhattan's 3rd district and is running for re-election.

Photo by Gotham Gazette

Flash-forward a decade and what do you think New York City will look like?

Will we still be the financial capital? Will tourism, retail and Wall Street be booming or wallowing in the residue of the 2008 recession? Will the city still be home to more than 8.3 million people or will New Yorkers have fled for cheaper, more vibrant settings?

The policy decisions the city makes now will determine the future we see then. We asked small businesses, officials, an economist, advocate and union representative to weigh in on what they think the city should do to revitalize our economy -- ranging from taxing the wealthy to investing in infrastructure and doling out breaks for city businesses.

Struggling Small Businesses Look for Help
by Courtney Gross and Ya-Hsuan Huang
Gotham Gazette visited parts of Brooklyn and Queens to see how small business owners were faring in this plummeting economy. Watch our audio slideshow to find out.

Using Tax Incentives Wisely in the Recession
by Bettina Damiani
Good Jobs New York's project director says the city must retool its tax incentive programs so they actually create jobs -- and good ones at that.

Cutting Back -- Except for Transit
by Nicole Gelinas
Contributing editor to City Journal, Nicole Gelinas argues the city must cut spending while investing in vital transportation infrastructure. And, she says, politicians have to stop relying on raising taxes on the rich.

Working to Recover
by Seth Pinsky
The president of the New York City Economic Development Corp., Seth Pinsky, details steps the Bloomberg administration is taking to help the economy recover, including lowering taxes for small businesses and investing in capital projects, like Willets Point.

Keeping the Middle Class
by Christine Quinn
The City Council speaker hopes the city can streamline application processes for businesses, raise taxes for the wealthy while cutting them for low-income residents and bring the biotech industry to the five boroughs.

Tax Justice in a New Economy
by Lillian Roberts
The executive director of the city's largest municipal employee union, DC 37, says no-bid contracts must go if the economy is to recover. She wants a tax on the wealthy too.

Finance for the Future
by Kathryn Wylde
While the financial sector will never be the same, the Partnership for New York City's president and chief executive officer says the city must remain the financial capital and continue to lure in corporate headquarters and foreign investment.

Falling revenue has torn gaping holes in our city and state budgets, but our mayor and governor are wearing blinkers. Narrowly focused on the spending side of their fiscal plans, they see cuts in jobs and public services as the solution to the fiscal crisis. They're not looking at the revenue possibilities that would help them avoid these cuts -- cuts that are unwise, unjust and unnecessary.

The proposed cuts are deep and devastating. They want to chop hospital and school funding, raise subway fares, deprive vulnerable students of drug and alcohol counselors, shut free school dental clinics, cut ambulance service, contract out programs for seniors and youth, and eliminate thousands of jobs and set the stage for devastating cutbacks in our libraries and cultural institutions.

District Council 37, the city's largest municipal employee union, is fighting to defend our health care, our schools and our jobs. But, in doing so, we have decided that one of the first things we have to do is fight to reframe the role of government in New Yorkers lives.

Economist Jeffrey Sachs recently wrote that Americans are now paying the price for the Reagan-era-inspired rejection of "government solutions" to the problems of health, poverty, education and the environment. This, he continues, "kept our taxes as a share of national income lower than Europe's by focusing on the private sector."

So, if the current global economic crisis has taught us anything it should be that if government had played a larger -- especially regulatory -- role in our lives, the private sector might not have been able to trample millions of Americans' hopes and dreams.

Private Work in the Public Sector

To help with that reframing, we've researched and analyzed city spending only to find that under this mayor, the city has handed over some $9 billion to an unelected, unaccountable "shadow government" of private contractors and outside consultants. A number of these are no-bid, unregulated contracts. Given what's happening in America today, it should come as no surprise that this process undermines the transparency and accountability the public deserves from government.

We examined some 10 contracts between private companies and eight city agencies and identified a $130 million savings. And that's after a look at only a fraction of the 18,000 deals the city has made with private entities that, in many cases, provide the very same service city employees are paid to provide.

Frankly, that makes no sense. Especially when you consider that with city employees who are tested, investigated, fingerprinted and vetted the city and taxpayers know who and what they're getting. As far too many scandals have shown, the same cannot be said for private contractors and their employees.

To the Streets for Taxes

In addition to this analytical approach, we're taking to the streets. Joining with other unions and our community-based allies we're reaching out and talking to our elected officials.

In New York City, on March 5, over 50,000 members of DC 37 and a broad coalition of unions joined community activists and took our fight to City Hall.

On March 17, scores of New York City Department of Education substance abuse counselors, who service some 1.1 million school children at 1,400 schools, went to Albany to tell lawmakers that the proposed state and city budget cuts would gut a critically important substance and alcohol prevention and intervention program, put city school children at risk and result in the layoff of some 300 experienced drug counselors. On March 31, thousands of AFSCME members from around the state will take their message to Albany again.

Everywhere we go, we're urging lawmakers to focus more on the revenue side of the budget by canceling the most devastating budget cuts we've seen proposed in decades, and instead support public services with fair taxation.

The mayor and the governor want everyone to share the sacrifice except the ones who can best afford to pay, the richest New Yorkers.

Frankly, I simply can't see depriving the vast number of uninsured people of health care or letting teenagers fall into drug dependence, when modest tax increases for those who can afford it could replace these cuts. I can't see slashing services and cutting the jobs of those who know best how to deliver them when all we have to do is ask for a reasonable contribution from the extremely wealthy New Yorkers who can well afford to shoulder their fair share of the burden. It's a no-brainer.

Time to Tax the Wealthy

After all that is what the 2008 presidential election was all about. After eight years of tax giveaways to the rich and negligent regulation of business, the American people demanded change. They voted to get rid of those who said "government is the problem, not the solution." They chose to acknowledge that government does things for us that we often can't do for ourselves. They voted against policies and a philosophy that threw our nation's and the world's economy into a tailspin and saw millions of families thrown out of their homes and millions of breadwinners thrown out of work.

Have our city and state leaders learned nothing? Their spending cuts would slow economic activity at a time when we need a speedup. Their budgetary attacks on the working class, the middle class and the poor are the exact opposite of what President Obama is trying to do. He is going all out to save jobs while they are wiping out jobs. I agree with the president that we must invest in one another and build up services like hospitals and schools that only government can provide.

I ask the mayor and governor to take a serious look at the modest tax increases I am talking about. The Fair Share Tax Bill proposed by progressive legislators in Albany would raise rates by less than 1.5 percent on those with incomes over $250,000. It would cost someone making $300,000 a year — who brings home almost $6,000 a week — just $88 a week more. It would bring in $6 billion to the state.

The fair tax plan would simply ask the people who have gotten all the tax breaks under both the Bush and Pataki administrations to pay their share to reduce the misery the broken "bubble" economy has dumped on the rest of us.

I am also reminding the mayor that the city is still squandering billions a year on contracting out public work to the private sector. We have shown the city how to save money by reducing some of this waste. No responsible government can in good conscience cut vital services and lay off hard working public employees while real savings are within reach.

Whether the economy is booming or in a bust, it’s best to know where your taxpayer dollars are going. But good luck if you want know how those tax breaks are allocated to businesses in New York City -- all in the name of job creation. As our city navigates the current financial crisis and prepares to distribute between $4 billion and $5 billion of federal stimulus monies, we can’t pretend it is business as usual.

Most New Yorkers are surprised to learn that it’s nearly impossible to know how much money is allocated to companies for job creation or even how many jobs are created in exchange for tax breaks. Different agencies have different criteria and reporting requirements. For example, the largest economic development tax incentive, recently reauthorized as the Industrial Commercial Abatement Program, gave $500 million in property tax breaks last year, but it has no job reporting requirements.

At Good Jobs New York we pay close attention to the Web New York City Economic Development Corporation and its Industrial Development Agency, which last year allocated more than $48 million to mostly large fortune 500 firms whose threats to leave New York City are highly questionable. Using tax breaks as corporate giveaways will not revitalize our economy nor prepare it for the future.

Moving forward, and using the American Recovery and Reinvestment Act as a launching pad, city officials need to tighten up how we award tax incentives to large corporations. By doing so, we can use efficiency and transparency to help create good jobs for all New Yorkers and a healthy business environment for all companies.

Transparency is Key

First, the city must make public the costs and benefits and outcomes of its job retention subsidies funded by the federal stimulus package as well as upgrade the online reporting for the city's incentive packages. Today there is no central database for keeping track of this information, but people are eager to know what is happening.

According to the U.S. Office of Management and Budget, the federal recovery website received 150 million hits in its first two and a half weeks -- even though there is little data there. New York City has proposed a “stimulus tracker,” but it’s unclear if it will include data on jobs, wages and subcontractors or include data on the city's incentive packages.

This type of needed transparency -- uncovering the job creation, or lack thereof, of certain incentive packages -- is not unprecedented elsewhere.

Thanks to improved reporting at the New York City Industrial Development Agency, we’ve learned that some firms have received subsidies in the past even though they reduced their New York City workforce. Some never had to promise to create jobs in the first place. Pfizer, for instance, received a subsidy package, which could have been worth up to $47 million, from the city in 2003 but shut its Brooklyn plant in 2008. The city also failed to attach job creation guarantees on more than $1 billion in subsidies awarded to the Yankees and Mets for their new stadiums.

The city and state used similar tactics -- and had similar results -- with funding they received after September 11, 2001. Then, about $2.7 billion in Community Development Block Grants and $8 billion in tax-free Liberty Bonds were aimed at getting firms to stay or return to Lower Manhattan. But little of it benefitted the small businesses hardest hit, like those in Chinatown and the Lower East Side. After receiving these grants, large firms including American Express and HIP admitted they would have returned to Lower Manhattan without them.

The same year, Mayor Michael Bloomberg's own company, Bloomberg, L.P., turned down a subsidy for its headquarters in Midtown. The mayor said that businesses like his don’t make location decisions based on taxes, because they are such a marginal cost. Ironically, in recent weeks the mayor has waffled, saying just the opposite.

Prior to September 11th, community block grants and federally tax-exempt bonds were intended to benefit low- and moderate-income people and to create affordable housing but these requirements were waived by the Bush administration. The Bloomberg administration is hoping these rules will be waived again by leaders in Washington for the stimulus funds, creating an invitation for a replay of the 2001 corporate giveaways.

Eliminate the Silos

The city can spend less and get more by eliminating the silos that exist between its economic development and workforce development policies.

Tax breaks should be used as a leverage to place New Yorkers who need jobs at firms that get the tax breaks. For example, the New York City Economic Development Corp. and Industrial Development Agency have allocated hundreds of millions of dollars to companies, yet neither of them collaborate with training agencies like the city’s Workforce One Centers or private job training or readiness programs serving unemployed or under-employed New Yorkers.

When a firm accepts taxpayer subsidies, there should be an effort to connect them to potentially qualified New Yorkers who need jobs. There are plenty of New Yorkers who need jobs, and it’s about time we strengthen ties between companies that are hiring and our employment and training agencies.

Invest Wisely

The city should not only make sure jobs are created, but that good jobs -- those with an emphasis on helping those most in need -- are being created. Why give subsidies for jobs that keep people in poverty? Firms should pay employees a living wage and provide health benefits. Otherwise, taxpayers are paying twice: subsidizing the company and paying for social safety net programs.

It’s bad for the morale of responsible businesses to see low-wage companies receive tax breaks. Making sure New Yorkers have money in their pockets is a sure way to generate the economic activity we need.

Incorporating job quality standards won’t cause companies to flee New York City. In fact, we’re surrounded by places, including New Jersey and Pennsylvania, which have wage and health care standards attached to their subsidy programs.

Think Regionally

Most likely the biggest threat to the creation of a rational economic development policy is the economic war among the states. The Obama administration should encourage regions to work together by discouraging the use of tax incentives that “poach” companies from one location to another. New York, New Jersey and to a lesser extent Connecticut and Pennsylvania are in a race to the bottom by reducing taxes for some companies who promise to relocate.

But as mentioned earlier, taxes aren’t the main reason a company moves or expands. Access to the necessary workforce, infrastructure, suppliers, customers, affordable housing and school quality are critical in the decision-making process. Investing in these will give taxpayers the best bang for their buck

If a company doesn’t have the business basics, giving it tax breaks is futile. The economic war among the states benefits secretive site location consultants who pit cities and states against each other. To make the region stronger, officials should work together to magnify individual and collective strengths, not belittle them.

Bettina Damiani is the project director for Good Jobs New York.

Less than four months before Mayor Michael Bloomberg and the City Council must sign off on next year's budget, billion-dollar questions multiply. New reports from the Independent Budget Office and City Comptroller William Thompson suggest the city's budget gap in fiscal year 2010, which begins July 1, 2009, is much bigger than the January preliminary budget indicated and that the mayor's gap-filling plan has its own billion-dollar holes.

At the same time, Council Speaker Christine Quinn, has proposed a big alternative to the mayor's fiscal plan. With his focus on across-the-board service cuts and a large increase in the sales tax, the mayor has placed the biggest new burdens on lower- and middle-income New Yorkers. The speaker would shift at least a billion dollars of that sacrifice to higher-income New Yorkers by restoring the personal income tax structure to more progressive levels.

Billion Dollar Questions

What Would You Do?

As the city's fiscal situation gets worse, what would you do to close the city's growing deficit. Play Gotham Gazette's Balance! and you too can cut spending and raise taxes.

Testifying before the City Council on March 9, www.ibo.nyc.ny.us Independent Budget Office director Ronnie Lowenstein estimated that the 2010 gap is now $1.2 billion greater than estimated in the mayor's January plan. Most of that new gap comes from the IBO's projection that tax revenues will decline by $1.3 billion more next year than the mayor projected. Assuming that's true, that means, of course, that the mayor and council would need to come up with yet another billion-dollar plus package of new revenues and/or service cuts.

The primary reason for the increased gap, according to Lowenstein, is the rapid increase in job losses in the city, particularly in the financial world. The IBO projects the loss of 270,000 jobs from peak employment in the first quarter of calendar 2008 through the second quarter of calendar 2010. That's 30,000 more jobs lost than the office estimated in January. The city has already lost 59,900 jobs since January 2008 -- but, according to the budget office, the worst is yet to come.

In particular, the securities industry - the highest paying sector within the financial industry - is projected to lose 48,800 jobs by mid-2010, a decline of over 25 percent from its peak in 2008. Wall Street firms which, as recently as 2006, had profits of $21 billion, had net losses of $11.3 billion in 2007, and the IBO projects net losses of $45.1 billion in 2008.

City Comptroller William Thompson Jr.'s March report, Comments on the Preliminary Budget for FY 2010 and the Financial Plan for FYs 2009-2013, accepts most of the mayor's 2010 tax revenue estimates, but worries about nearly $1.9 billion of shaky assumptions in the mayor's plan for closing the 2010 gap. He identifies two potential problems: increasing revenues from the city sales tax by nearly a billion dollars, which requires state approval, and the $757 million in labor concessions, which would require the approval of municipal employee unions.

The city comptroller sees much bigger problems for the 2011 to 2013 period than the mayor. He sees risks in the administration's financial plan of about $3 billion in each of those three years, so his projections of future deficits are much higher than the mayor's. Gaps could be as high as $6.9 billion in 2011, $7.0 billion in 2012 and $6.9 billion in 2013. These projections dramatize the difficulty the mayor and council continue to have catching up with escalating gaps.

The End of the Rollover

Adding to the problem is the disappearance of the surpluses the administration has come to rely upon. At the end of each of the previous four years, the city had surpluses averaging over $4.1 billion and used those surpluses to pre-pay an equal amount of the next year's expenditures. That meant, of course, that in those years the city did not have to find an average of $4.1 billion in new taxes or expenditure cuts.

The current fiscal year, 2009, benefits from last year's $4.6 billion surplus, which helped offset the escalating problems this year. In fact, the IBO estimates this fiscal year will see a $1.6 billion surplus, which will be part of the gap-filling program for 2010. But the comptroller points out that, surplus pre-payments aside, actual operating expenses in 2009 will exceed current-year revenues by $3.8 billion.

Well aware of the forthcoming surplus depletion -- if not of the more severe economic and fiscal downturn in recent months -- the mayor has been cutting agency spending more or less across-the-board since the January 2008 preliminary budget and financial plan, as explained in the February 2009 finance column. One worrisome example of the impact of these cuts (made in January 2008, November 2008 and again in January 2009) is, as the city comptroller notes, the aggregate cut of $944 million in city education funding in 2010.

The comptroller notes that the federal economic stimulus plan could provide the city with about $1 billion in education funding in each of the next two years. That money would "alleviate many of the proposed reductions in state funding, allowing the city to avert the proposed layoffs," but would provide "no additional gap closing relief."

Billion Dollar Answers

Only two of the mayor's four roughly billion-dollar answers to budget deficit in his January plan look solid in mid-March: the on-going agency cuts, saving another $1 billion in 2010, and the anticipated $1 billion Medicaid relief money in the new federal economic stimulus plan. The other two noted by the city comptroller - nearly a billion dollars from increases in the sales tax -- and three quarters of a billion dollars in labor concessions on employees health and pension benefits - are highly uncertain.

So that leaves room for at least $2 billion in alternative revenue/expenditure packages - over $3 billion if the worst-case IBO scenario is acknowledged. It's in this context that the council speaker, Christine Quinn introduced on Feb. 12 a major tax revenue proposal that would, as she says, "balance the city's income tax structure and avoid sales tax increases." (For Quinn's explanation of her proposal go here.)

There are two essential parts to the Quinn plan: The first would eliminate the city personal income tax for all those - currently 224,000 families - who pay no state or federal income taxes but do pay the city personal income tax. The savings for those families (earning up to $46,000) would average $321 per family.

Quinn would pay for the revenues lost in reducing lower-income tax burdens (about $72 million) and abandoning the mayor's sales tax increase by creating three new tax brackets for those taxpayers with annual taxable income over $297,000. The current top rate - 3.65 percent - would increase to 4.25 percent for those filing jointly and making $297,000 to $532,000; to 4.45 percent for those making $532,000 to $1.2 million; and to 4.65 percent for those with incomes over $1.2 million.

A few days after introducing her tax proposal, Speaker Quinn, along with State Sen. Liz Krueger and the Drum Major Institute announced a proposal for state legislation that would eliminate the income tax on low-income people. The partners emphasized the economic benefits of putting $321 in the hands of lower-income New Yorkers.

That, of course, is only a first step. The state also would have to pass legislation to implement the higher tax rates on more affluent New Yorkers proposed by Quinn. Bloomberg has been reluctant to take that step, even though he introduced -- and the council immediately passed -- a similar, but temporary, proposal during the fiscal crisis in November 2002.

The larger Quinn plan is hardly radical. In fact, the city's top income tax rate was 4.45 percent from 1991 through 1998, under Mayors David Dinkins and Rudolph Giuliani and then, under Bloomberg, from 2003 through 2005. What's most surprising here, then, historically, is that such higher rates have not been re-introduced in earlier gap-filling plans.

There is no lack of other big, and more progressive, revenue alternatives to the mayor's sales tax proposal. For instance, the IBO's February www.ibo.nyc.ny.us Budget Options includes two that the mayor himself has proposed at one time or another, but no longer advocates: restoring the city's commuter tax to bring in $715 million in 2010 and instituting a more progressive commuter tax would bring in $1.4 billion.

Lessons from Reports

In the midst of this fiscal crisis and initial mayoral/council skirmishing, two reports mandated by the City Charter were released in February, the Preliminary Mayor's Management Report for Fiscal Year 2009 and the Annual Report on Tax Expenditures, Fiscal Year 2009. Although little known, they include some useful lessons as tax plans are debated.

Take the preliminary management report, which the mayor tried to eliminate a few years ago through his Charter Revision Commission. It is supposed to provide early data for the current fiscal year, data that might prompt budget changes for the following fiscal year.

Slim as the up-to-date data are in education, one indicator stands out. Class sizes in the elementary and middle schools, after some small decreases between fiscal 2006 and 2008, have gone up in this school year in all grades except fourth. In grade three, class size now averages 21.9, up from 21.0 just a year ago. In fact, class size in all grades kindergarten through the third are now higher than they were in 2006, one early result of those nearly $1 billion of cuts in 2010.

Then there is the report on tax expenditures, which records the impacts of selective tax cuts that have been established over many years. Some of these are questionable million-dollar and billion-dollar programs that can starve revenue needs at times like these. One of the biggest, the Industrial & Commercial Incentive Program, whose economic development assumptions have long been challenged by Good Jobs New York, costs the city $500 million in lost revenues in 2009. (For a related commentary, go here.)

City insurance companies, unlike all other companies, pay no city business income tax, at a cost to the city (in 2005) of $256 million. Co-op and condo owners gain from an allegedly temporary property tax abatement, introduced in 1996, but which continues today, at an annual cost of $337 million. Battery Park City, whose residential and commercial property is exempt from city property taxes, costs the city over $150 million annually. Then there is Madison Square Garden, which since 1984 has paid no property tax, costing the city $12.2 million in 2009.

Baseball, however, trumps basketball and hockey for outrageous public subsidies. The Independent Budget Office pointed out in January that the city's exemptions and subsidies for the new Yankee Stadium will cost the city $362 million over 40 years. Including federal and state exemptions and subsidies as well, the total public cost will be $855 million. In fact, as the mayor proposes a billion dollar increase in the sales tax for New Yorkers, the Yankees are enjoying a city sales tax exemption he granted them on construction materials, which costs the city over $20 million.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.