The City Council and the Bloomberg administration have reached an agreement on a tax revenue package, which will increase the city's sales tax by 0.5 percent and put a tax on clothing purchases over $110.
The move represents the first step toward a budget agreement at City Hall. The administration and the council have not yet agreed on a spending plan, which could reduce the city's workforce by 13,541 positions and slash spending at all city agencies, from the Police Department to the Fire Department. The council must approve the budget -- revenue and spending -- by July 1.
In addition to the increase, the administration and the City Council have agreed to expand the sales tax to customers who purchase energy from non-utility companies, which currently are exempt from the tax. The administration and City Council Speaker Christine Quinn also have proposed a number of business tax proposals, expected to generate $167 million. These would close loopholes and bring the city's tax code in line with state policy.
"While we have been forced to make some unpopular choices, this package has a silver lining -- significant tax relief for 44,000 local businesses that will help create and retain jobs for New Yorkers and grow the city’s economy," said Mayor Michael Bloomberg in a prepared statement. "After a lot of collaborative work with the City Council, we now need the state legislature to act quickly."
These proposals are part of an effort to close a $6.6 billion budget gap caused by plummeting tax revenues and the financial crisis on Wall Street.
All of the proposals in the revenue package announced yesterday require approval from the state legislature in Albany. Their fate upstate is uncertain.
When asked whether the administration was confident in support from Albany, administration spokesman Marc LaVorgna said, "We think that everyone is aware of the urgency and the needs created by the financial collapse."
Excluded from the revenue package were several proposals the administration has lobbied for since last year, including a requirement for the city's unionized workers to pay for some of their health-insurance costs. Most unions currently contribute nothing.
LaVorgna said the administration was continuing to work with the city's labor force to reach an agreement.
As part of the deal between the mayor and the council, the administration agreed to shelve a five-cent plastic bag tax it had been pushing for since late 2008. The idea was politically unpopular among the council's 51 members, many of whom argued the fee would disproportionately affect poor New Yorkers. Others thought the tax would spur city residents to trade plastic bags in for more environmentally friendly canvas ones.
The decision not to pursue the tax is "definitely a disappointment," said Dan Hendrick, communications director for the New York League of Conservation Voters. But, he added, "There is definitely momentum behind this issue. If there is a chance to get revenue for the city, this isn’t the last we are going to hear of it."
The city had estimated it would receive $100 million in revenue from the plastic bag tax.
In total, the tax revenue package, announced at 6 p.m. last night with no press conference, would generate $887 million. The sales tax, if approved by Albany, would increase to 8.875 percent and would bring in the bulk of the new revenue at $518 million. The sales tax on clothing over $110 is expected to generate $119 million in revenue, while the tax on energy customers would bring in $83 million. The new sales tax on energy customers, according to the administration, would affect mostly large, commercial customers.
The business tax proposals would generate $167 million in the coming year, but over the long term the changes would be "revenue neutral," according to the administration. Those proposals include doing away with the unincorporated business tax, which can double tax freelancers and small business owners, and revising the city's corporation tax to keep businesses in the five boroughs, according to the administration.
According to the administration, the city's general corporation tax currently bases its formula on a company's property, payroll and sales. This proposal, which could reduce taxes for 27,000 businesses and benefit those that are headquartered in the city, would just use a company's sales to determine taxable income.
"Switching to the single sales factor will encourage more companies to create jobs here and lead to greater diversification of our economy," said Quinn in a prepared statement.
In this agreement, the council successfully lobbied for the administration to also table a tax on clothing sales under $110, which the administration proposed earlier this year.
Though this agreement is relatively early and could be taken as a sign the administration and the council are ready to reach a consensus, advocates say that the battle is far from over. Not only does this revenue package rely on state approval, which can be a tricky course to navigate at times, but it is also less than the $1.1 billion in tax revenue proposals the administration proposed earlier this year.
"This is a very tight revenue scheme," said Carol Kellermann, president of the Citizens Budget Commission. "None of the (proposals), except the sales tax, is really very large. It's great that they came up with an agreement, but they still have a lot of work ahead of them."
Also yesterday, the city's Comptroller William Thompson Jr., who is the leading Democratic mayoral contender, released a report calling the mayor's budget proposal "risk-laden." The report, which was released before the mayor and council speaker announced their revenue package, predicts the city's budget deficit will grow to $4.578 billion in fiscal year 2011. Thompson does not support an increase in the sales tax.
Twenty aged, blind or otherwise disabled New Yorkers sued seeking supplemental local benefits to make up for federal benefits they cannot receive because they are legal residents of the United States, but not citizens. The state's highest court recently handed down a decision in the case.
As noncitizens, the plaintiffs are not eligible for Supplemental Security Income (SSI). In its decision, the court -- the New York Court of Appeals -- ruled they also are ineligible for Additional State Payments to make up the difference.
The specific question presented to the court was whether, under the state and federal constitutions, the plaintiffs and others in the same situation are entitled to receive from the state benefits similar to what aged, blind or disabled persons who are U.S. citizens receive from Social Security. As reported in The New York Times, the ruling affects between 9,500 and 37,000 people. As result of the decision, the state Office of Temporary and Disability Assistance will save approximately $100 million to $270 million that otherwise have needed to be added to it $1 billion budget.
Reversing two lower courts, Judge Theodore Jones' majority opinion in Khrapunskiy v New York State Commission of Temporary and Disability Assistance ruled that the denial of the benefits did not violate any constitutional rights. The case name refers to plaintiff Boris Khrapunskiy, who came from the Ukraine when he was 90. He was 97 and living in Brooklyn when his SSI benefits were reduced.
Prior to 1996, that might not have happened. But that year, Congress enacted the Welfare Reform Act, officially known as the Personal Responsibility and Work Opportunity Reconciliation Act and the centerpiece of the Clinton administration's "end to welfare as we know it." Under that law, legal aliens, by virtue of not being citizens, no longer qualified for SSI and Additional State Payments. Congress restricted eligibility to people who became U.S. citizens within seven years. It later extended that by two years.
As Congress tightened federal requirements, New York amended its law to conform to the federal standard. It only provided noncitizens with safety net assistance of about $352 per month for shelter and a heat/energy allowance, while SSI benefits would have been $761.
The plaintiffs argued that the state Constitution mandates that the state has a duty to "provide for the aid, care and support of the needy, whether or not they are citizens of the United States."
The government countered that New York's Constitution requires the state to "provide for the needy in a manner and by such means as the legislature may from time to time determine," but that it does not have to provide aid to any particular group. "Equal protection does not compel the state to create a public assistance program to provide benefits discontinued by operation of federal law," the state maintained.
In his opinion, Jones, writing for the five-judge majority, agreed. The Constitution, the court held, "does not command that the state always meet in full measure the legitimate needs of each public assistance recipient."
The Constitution, the decision continued, "does not compel the state to assume the federal government's obligation when an elderly or disabled person becomes ineligible for continued SSI/ASP benefits. ... Nor does it require the state to remediate the effects" of federal welfare law.
Jones also pointed out that New York once had a special assistance program for the needy, aged, blind and disabled but discontinued it more than 30 years ago, when the federal government began providing SSI benefits to that population.
In her dissent, Judge Carmen Ciparick, joined by Chief Judge Jonathan Lippman concluded that denying benefits based on immigration status was unconstitutional. In agreeing with the two lower courts that had decided in favor of the plaintiffs, Ciparick and Lippman concurred that the state has "an affirmative duty to aid the needy [and] preventing the Legislature from simply refusing to aid those whom it has classified as needy."
Some affected individuals, Ciparick wrote, did not attain citizenship within the required period because of "long delays in the processing of their applications as a result of hardships caused by age and poor health or lack of English-language skills."
According to the minority view, the social services law is "need-based." Basing aid decision on citizenship status, rather than financial status, "is incongruous to the plain meaning of the term 'standard of need,'" the two justices said.
In their strongly worded dissent, they found, "The majority today has turned its back on the history of New York's commitment to protect its most fragile and vulnerable populations."
The plaintiffs were represented by the Legal Aid Society, the Empire Justice Center and the New York Legal Assistance Group. The State of New York was represented by the state attorney general.
Emily Jane Goodman is a New York State Supreme Court Justice
The one big change in Mayor Michael Bloomberg's executive budget for fiscal year 2010 is his proposed increase in the city sales tax from 4.0 percent to 4.5 percent, double the increase he proposed in January's preliminary budget. The increase is, as the New York Times put it, the "centerpiece" of $1 billion in new taxes. Added to the state's 4.0 percent sales tax and the 0.375 percent sales tax dedicated to the Metropolitan Transportation Authority, the total sales tax on goods bought in the city would be 8.875 percent.
The sales tax increase, the largest in 35 years, includes the elimination of the current exemption for clothing and footwear. It is apparently meant to be the death blow to any notion of a personal income tax increase, such as the $1 billion plan City Council Speaker Christine Quinn floated briefly in February, with new top rates for the tax (up to 4.65 percent), often called a "billionaire's tax." The mayor made his stance clear back then on the radio when he said of the Quinn plan, "The first rule of taxation should be you don't try to tax people who can move."
The Independent Budget Office in its February Budget Options report pointed out that, even when both the state and the city in 2003 temporarily raised their personal income tax rates, "There is no evidence that these affluent New Yorkers left the city." The state has again raised top state income rates this spring, to 7.85 and 8.97 percent.
The mayor's argument seems to have worked. The City Council's formal response on April 1 to the mayor's January budget plan makes no mention of the earlier Quinn plan.
The council's concession to the mayor's argument about peripatetic millionaires and billionaires is perplexing, given the pattern of tax policy since the city raised its sales tax from 3 percent to 4 percent in 1974 and top personal income rates first reached 4.3 percent in 1976.
Bloomberg himself has successfully used higher taxes in times of economic and fiscal emergency, with no known exodus. For instance, the top city personal income tax rate is currently 3.648 percent. Yet the mayor himself set the top rate at 4.65 percent in 2003 and kept it there through calendar 2005. And the top rate was 4.3 percent from 1976 through 1986, and 4.46 percent from 1991 through 1999.
Interestingly, in New York State from 1975 to 2008, the top personal income tax rate dropped steadily from a high of 15.375 percent in 1975 to 10 percent by 1981, 7.875 percent by 1989 and 6.85 percent by 1997, according to a recent report by the Fiscal Policy Institute. The top rate stayed at 6.85 percent from 1997 through 2008 with the exception of a temporary top rate of 7.70 percent from 2003 through 2005. The Fiscal Policy Institute points out that, were the highest state rate still in effect, the state would have about $20 billion more in tax revenues per year.
The two new top state income tax rates will restore some of the progressivity of the state's tax system. According to data from the Independent Budget Office, based on 2006 state tax data, high-income taxpayers in New York City will pay nearly $2 billion more to the state in calendar 2009. The 19,185 city residents who have more than $1 million in income will pay nearly 80 percent of that increase, with a average total payment of roughly $82,000 each. The 22,573 earning $500,000 to $1 million will pay 15 percent of the total or about $13,000 each on average.
The city, in contrast, continues to keep its own personal income tax rate, historically, quite low. In fact, as the mayor's own Tax Revenue Forecasting Document, published in September 2008, shows, the current top city income tax rate is (with the exception of only three years, 1988, 1989 and 2001) at its lowest rate since 1975.
The mayor has been quite specific in his reasons for keeping the income tax rate low. He noted in his radio interview that the top 1 percent of city taxpayers pay about 50 percent of total personal income tax revenues and added that if "a handful" of those, "about 40,000 people," moved out of the city it would wipe out any increase in revenue from the tax hike.
While a "handful" of the super-rich leaving could have such an impact, history, again, contradicts the notion. The IBO explored the question, at least in terms of the average-rich, in the February Budget Options report. A top rate of only 4.2 percent would raise $455 million in 2010 and would cost those making over $500,000 an average of $10,400 more in 2010. If 5 percent of those paying that average increase left the city, the new top rates would bring in $183 million less.
But what about the impact of the sales tax. Who pays that? As the mayor acknowledged on May 1, the sales tax is a "regressive" tax, a greater burden on lower than higher income taxpayers. He added, "Is it a good tax? No. None of these taxes are good taxes."
Well, that's a bit disingenuous. The personal income tax is certainly less regressive than the one-rate-fits-all sales tax. The personal income tax is "progressive" in the sense that higher-income taxpayers pay a slightly higher tax rate (3.648 percent) than do lower-income taxpayers (2.907 percent).
Since 1974 the city sales tax has been 4 percent (with the exception of an increase to 4.125 percent from mid 2003 through mid 2005). The mayor's proposal is thus a 12.5 percent increase in a sales tax that's been pretty much untouched for 35 years, presumably in large part because most people recognize its regressive impact.
In his executive budget, the mayor, who, according to the Times is "the wealthiest person in New York," not only claimed that the wealthy might flee an income tax hike; he suggested they would pay more with the sales tax increase, because "the people that have more money buy a lot more things, and they spend a lot more of it."
The notion that the wealthy spend a lot more than the less-wealthy breaks no new ground, but it dodges the big question: How much of the sales tax increase will the wealthy and the less-wealthy, in fact, pay?
We know that the wealthy pay the bulk of the personal income tax. In fact, the Tax Revenue Forecasting Document shows that, in the 2005 tax year, the 315,000 city taxpayers who had $100,000 or more in taxable income (only 9.2 percent of all filers) paid nearly 73 percent of the total personal income tax, even though they accounted for only 9.2 percent of all filers. Most significantly to the mayor's point, the 1 percent of filers who have incomes of $500,000 or more accounted for 49 percent of the total income tax.
Lower-income filers, of course, pay much less. The 1.64 million filers (48 percent of total filers) who have less than $25,000 of taxable income pay only 2.2 percent of total personal income taxes. That's the nature of a progressive tax system.
The sales tax presents a very different picture. A 0.5 percent sales tax increase will have a greater impact on lower- and middle-class taxpayers (and a lot of New Yorkers who pay no personal income tax at all) than higher-income residents.
The Times, using Independent Budget Office data, provided a partial answer to the impact question. The IBO estimates that a household making $35,000 a year would pay an additional $129 in sales tax, one making $125,000 would pay $356 a year more, and a household making $500,000 would pay $840 more.
Those numbers alone provide a good example of how regressive the sales tax is. For instance, the additional burden on the $35,000 household (measured by dividing $129 by $35,000) is 0.37 percent, more than twice that on the $500,000 household ($840 divided by $500,000), 0.17 percent.
The last time the mayor recommended an increase in the sales tax was in November 2002, when it was part of a $3 billion tax revenue package to fill the huge deficit created by a national recession and the impact of 9/11. At that time he actually proposed a 0.25 percent increase, but the council negotiated that down to the ultimate 0.125 increase, to 4.125 percent, which was in effect from June 4, 2003 to May 31, 2005.
The council this spring has thus far rejected the mayor's proposed increase, and if history is a guide, there might yet be a compromise that lowers or cancels any increase. (Mayors often find some unexpected, non-tax dollars to fill budget gaps between May and June.) But with the exception of the City Comptroller, Bill Thompson, who has proposed the more conventional and progressive alternative of a higher personal income tax rate for those making more than $500,000, there has been surprisingly little attention to the scope of the mayor's regressive proposal.
Of course, it's an election year. The political cooperation between the mayor and the City Council leadership that led to the sudden extension of term limits seems at the moment to be holding. Apparently neither the mayor nor the council leadership wants to tax higher-income New Yorkers this year.
But the notion that the 40,000 richest taxpayers - and especially the "handful" of super-rich so much on the mayor's mind - should be protected in these tough times, while some 8 million New Yorkers pay 12.5 percent more in sales taxes, remains a curious, if not cruel, re-writing of four decades of tax policy in this city.
Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.
If Mayor Michael Bloomberg's fiscal year 2010 budget proposal were a Broadway show, the sales tax would be headlining. Not far down the marquee, you might see $3.4 billion worth of slashed services, a city work force reduction of more than 13,500 and a five-cent tax on plastic bags. At curtain call, the audience gets a new pension tier aimed at new hires.
Cue the spotlight, the fiscal year 2010 budget is taking center stage.
But the set and the players seem strangely familiar. Little has changed in the mayor's executive budget for fiscal year 2010 since his preliminary budget in January. With the exception of the sales tax (a proposed increase the mayor would like to double from what he envisioned in January) and health benefits for unionized city employees (which won't be tackled until next year), the administration's proposal adds little new to this year's budget debate. In these tough economic times, Bloomberg is relying on the old standbys of tax hikes and service cuts to close a $4.8 billion gap.
(See if you can fix the city's fiscal woes. Play Balance.)
Fiscal year 2010 is no opening night. Most City Hall observers say it feels more like a revival. But now with an election six months away, how will the budget's critics -- from the City Council to Albany to unions to advocates -- react?
Act I: Enter stage left, Bloomberg dressed in a charcoal suit and red tie with a laser pointer in tow.
On Friday, the mayor released a $59.4 billion budget proposal for fiscal year 2010, which starts in July, slightly down from this year's $61.2 billion budget. At its core, the proposal relies on cuts to every city agency -- reductions that climb up to 29.5 percent in some cases, such as the Health and Hospitals Corp.
In total, the mayor is proposing to cut $3.4 billion in city spending. With every agency and department on the chopping block, Bloomberg said everyone has to make do with less.
"It's about keeping our streets safe for our kids, yours and mine," said Bloomberg. "It's about keeping New York, New York."
Despite the cuts, the mayor has committed to no layoffs for teachers and uniformed police officers. To cut back, the Police Department will see 395 members of its civilian workforce laid off and a reduction of 125 traffic management enforcement agents, mostly through attrition. The department's controlled operating expenses, which do not include pension, debt service or health care costs, will be slashed by 10.9 percent.
The Department of Education will see a 13.3 percent reduction in controllable spending, mostly from discretionary funds allocated to school principals, according to the mayor's proposal. It will most likely require "personnel reductions," the proposal states.
Most of the city's workforce reduction will come from attrition. Including the reductions the mayor proposed in November and January, the city's workforce would shrink by 13,541 positions. Of those, 9,782 would be from attrition. The largest layoffs -- 943 positions -- would come from the city's library system.
In total, this plan would layoff 3,759 city workers.
With the economy floundering and Wall Street still suffering, Bloomberg said the city's revenues are down by $5 billion since 2008. This fiscal year, revenues from the city's real estate transaction tax fell by 47.1 percent, while economically sensitive tax revenues on the whole, from the sales tax to the personal income tax, have decreased 14.1 percent.
Though federal stimulus funding, including $1 billion that would go toward Medicaid, has propped up the city somewhat, it is not enough to cover the revenue losses of the last year.
Much of what the mayor proposed will need approval from Albany. For example, the mayor has called for increasing the city sales tax by 0.5 percent to 8.875 percent (in January he proposed an increase of .25 percent). He wants to eliminate the sales tax exemption on clothing sales below $110 and implement a five-cent tax on plastic bags. These measures could raise $1.05 billion in revenue, if the State Legislature approves them all.
This fiscal plan also relies on $400 million worth of concessions from the city's unions, including the creation of a new pension tier, which would lower retirement benefits for new hires. The pension tier too would need Albany's approval.
Even with all of these actions, the mayor warned, the city still faces a $4.6 billion budget gap in fiscal year 2011.
Act II: Enter the City Council. All 51 members grimaced, primarily because of the sales tax.
Calling an increase in the sales tax "regressive," City Council Speaker Christine Quinn, a usual Bloomberg ally, has set the stage for a sales tax showdown between the two sides of City Hall. Most City Council members do not support an increase in the sales tax. Earlier this year, Quinn had proposed increasing the city's personal income tax on residents making more than $300,000. Because the state implemented a similar proposal, she has said the council will explore other revenue options. For now, it appears, the sales tax will not be one of them.
"I continue to believe that increasing sales tax is a regressive way to generate revenue because it places an unfair burden on those who have the least," said Quinn in a prepared statement. "The idea of eliminating the tax exemption on clothing only compounds that burden."
Finance Chairman David Weprin agreed on Friday and said that he was not ready to sign onto the proposal, even though he understood how tough times are. Also at issue for the council, said Weprin, are agency reductions. The council is concerned over cuts to fire engine companies and the amount of layoffs at city agencies.
Specifically, members of the council took issue with the mayor's plan to reduce the number of firefighters at 64 engine companies by one so that four individuals would staff each engine. The move would not close any firehouses nor would it layoff any firefighters. City officials said about 140 other engine companies already have the same policy. This and other cuts would reduce the department's controllable spending by 10.2 percent.
In addition, critics said that by laying off workers and cutting human services, the city would hurt those who need help the most.
"Once again, he's balancing the budget on the backs of poor people," said Councilmember Charles Barron, a perennial Bloomberg critic. "If you want to increase economic activity, you don't increase the sales tax."
As in most budget years, the council is expected to focus on cuts to social services and libraries. Weprin said this budget would do away with six-day service, which the council has fought to protect for the last year.
Act III: Advocates take the stage, and they aren't happy.
To them, these cuts are just an encore presentation of those that the city approved last year. Another round -- particularly from the human services sector -- has left many reeling.
So much so that they are taking to the airwaves. On Friday, the Coalition for the Homeless released an ad airing on NY1, which calls the mayor's new budget "ruthless." According to the coalition, the mayor's plan would close two drop-in centers for the homeless, Peter's Place in Chelsea and the John Heuss House in Lower Manhattan. Drop-in centers elsewhere could also see a reduction in operating hours from 24 hours a day to 13 hours per day, under the mayor's proposal, the coalition said.
"While the federal stimulus money provides vital funding to restore cuts to homeless prevention, the mayor's budget closes drop-in centers and contains cuts to family and adult shelter providers that will harm homeless New Yorkers," said Mary Brosnahan, the Coalition for the Homeless' executive director, in a prepared statement. "It's sad that at a time when we are seeing record family homelessness, New York City can find funding for gold plated stadiums but not for these vital services."
Elsewhere, advocates have said the budget would get rid of thousands of after-school slots and slash senior centers. More than 10,000 slots have been cut from a city after-school program, said Nancy Wackstein, the executive director of United Neighborhood Houses of New York.
"After school is something that supports working parents and gives kids opportunities," said Wackstein. "This will be a very, very serious impact on the community."
City officials said the city would not close any senior centers, but would reduce funding to them, possibly threatening some programs. The city also plans on saving money by cutting the time adolescents spend in foster care and scaling back youth summer programs. The vast majority of the $3.4 billion worth of agency cuts were announced in January.
Some federal stimulus money, advocates say, has helped save cuts to the city's meals on wheels program. But, the cuts that remain, they say, are severe.
Curtain call: The city's labor force marches on stage. Some are relieved, but others balk.
A crucial element of the mayor's plan in January was to require that unions contribute 10 percent of their health insurance premiums, which could have raised about $357 million (most currently contribute nothing). On Friday, the mayor announced he was not confident that the city's unions and the administration could come to an agreement in time for this budget cycle. In response, he said he would delay any change until fiscal year 2011 -- conveniently after this year's mayoral election.
Some saw the move as political.
"It's not a surprise he doesn't want to shake any cages in an election year," said Doug Muzzio, a professor at Baruch College.
Despite abandoning the health care benefits, the mayor still is relying on compromises from the city's labor unions, including the creation of the new pension tier and other health care reductions, in order to close the budget gaps. Some unions don't think the proposal is palatable.
"What remained unsaid is that the pension improvements the mayor wants to jettison were in fact negotiated by city workers many times in lieu of salaries," said United Federation of Teachers President Randi Weingarten in a prepared statement. "For working and middle class families, pensions are a very important part of retirement security."
Weingarten said her union would be willing to consider retirement incentives and savings from their health care benefits. Other unions, including the city's largest municipal workers group, District Council 37, released statements in opposition to the mayor's plan.
According to some reviews, this budget production could get a lot worse.
About $1.5 billion of the mayor's plan to close the budget gap relies heavily on Albany. This year -- and in plenty of years past -- the State Legislature has failed to act on a plethora of issues (see the recent debacleover the Metropolitan Transportation Authority bailout).
Relying on upstate to solve the city's fiscal woes may not be the strongest strategy, say critics. "I want to see a real plan," said Citizens Budget Commission President Carol Kellermann. The mayor's proposal is "grim," she said, but probably does not go far enough. "I think things may be more serious than this," she said.
In an election year, the mayor's options may be limited -- heeding the call of re-election rather than ruffling feathers. If Albany doesn't approve these measures, then there may be little else for the mayor to turn to.
"Who is he cutting?" asked Muzzio. "Are you hurting a powerful voting constituent? In a sense you cut on the backs of the weak because they don't vote."
And who knows in this economic climate whether anyone can get a standing ovation.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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."
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.
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.
Legislation ( Intro 953) introduced by Councilmember Peter Vallone would increase the city Police Department's mandatory retirement age from 63 to 65.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.