|
|
|
ONLINE FEATURES
Book Reviews
BW Video
Columnists
Interactive Gallery
Newsletters
Past Covers
Philanthropy
Podcasts
Special Reports
BLOGS
Auto Beat
Bangalore Tigers
Blogspotting
Brand New Day
Byte of the Apple
Economics Unbound
Eye on Asia
Fine On Media
Green Biz
Hot Property
Investing Insights
Management IQ
NEXT: Innovation
NussbaumOnDesign
Tech Beat
Working Parents
TECHNOLOGY
J.D. Power Ratings
Product Reviews
Tech Stats
Wildstrom: Tech Maven
AUTOS
Home Page
Auto Reviews
Classic Cars
Car Care & Safety
Hybrids
INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads |  |
JUNE 16, 2003
Taxes: What Other Cities Can Learn from New York New York City made a remarkable recovery from its brush with bankruptcy in the 1970s. Despite typical urban ills, New York thrived in the next two decades by reinforcing its position as the world's financial and media capital. But then came the 2001 recession, the bear market on Wall Street, and the September 11 attacks. To bridge an enormous gap in the city budget, Mayor Michael Bloomberg has pushed through increases in taxes on property, sales, and income. As the U.S. Conference of Mayors meets in Denver through June 10, mayors who once envied New York are regarding Bloomberg with sympathy. "He's been hit pretty good," says Boston Mayor Thomas M. Menino. The question: Will big tax hikes cause people and businesses to flee, returning New York to the bad old days? Cities across the U.S. are coping with similar smaller-scale fiscal crises. Unlike the federal government, they must balance their budgets. Most of their spending is on things that are hard to cut: police, fire, schools, social services, and interest payments. Hence, many are resorting to tax hikes. It's easy to see the allure of lower-tax burbs. Fortunately, as New York's experience shows, tax hikes don't have to be destructive. A city's economy can tolerate somewhat higher taxes under certain conditions: -- The city offers something special that justifies heavier taxation. -- The existing burden is moderate. -- Taxes are not increased on things already heavily taxed. -- Taxpayers believe the increases will be rolled back after the crisis. On the first point, research shows that taxes are not necessarily the key factor in where people and businesses locate. While researchers have shown that a suburb can get companies to move into it from a neighboring suburb by cutting property taxes, they've had a harder time demonstrating that suburbs can grab business from their core cities by cutting rates, says Timothy J. Bartik, senior economist at W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich. The message: Cities, like companies, can avoid competing strictly on price if they offer their "customers" some special advantage. New York, in particular, can charge somewhat higher taxes because people will pay to be at the center of the action. In sectors such as finance, New York is a "vortex" that sucks in the best and brightest, according to University of Chicago sociologist Saskia Sassen. Second, cities are more likely to get away with tax hikes if they're not already at the breaking point. On that score, the tax burden in New York isn't as heavy as it might appear. Even with the latest increases, the burden will be lower than during the early 1990s as a share of economic output. That's according to an analysis of data from the city's Independent Budget Office. Revenue from city taxes reached 6.3% of the city's gross product in 1993. It fell to 4.7% in the fiscal year ending this month. It's expected to bump back up in the next two years, but only to 5.1%. By comparison, Philadelphia's tax burden grew slightly during the past decade, while Chicago's was unchanged. One reason for New York's lower tax burden is that the city cut rates under Mayor Rudolph W. Giuliani. The latest increases only partially take back those cuts. Also, revenue from taxes on capital gains has plummeted because of the downturn on Wall Street. Even experts who argue that New York's taxes cost jobs and slow growth say progress has been made. A study by Andrew F. Haughwout of the Federal Reserve Bank of New York and three other economists found that compared to 1997 when rates were higher, the city economy would be less hurt by an income-tax increase today. If taxes must be raised, it's logical to raise ones least likely drive away homeowners and employers. Each city will have a different optimal strategy. The study by Haughwout and others estimated that as of 2002, New York had the most room to raise property and sales taxes, and the least room to raise income taxes. As it turned out, the city raised all three rates. Finally, cities can limit the exodus of taxpayers by persuading them that the hikes are temporary stopgaps -- and that the service cuts that would be necessary in their absence would be worse for the city. That's Bloomberg's message. Harvard University economist Edward Glaeser, while concerned about permanent tax increases, believes Bloomberg's argument makes sense. "The last thing you want to do is go back to a world of unpaved streets," he says. Tax hikes are never painless. But there's a right way and a wrong way to do anything -- and New York's experience bears lessons for other hard-pressed mayors.  By Peter Coy in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Policy |
Printer-Friendly Version
