When Cities Go Broke, the Options Are Few
By SAM ROBERTS
In the 1980's, the Swedish government doubled its stock transfer tax. Revenue, however, rose only about 15 percent, since traders simply fled to London exchanges.
Fearing a further exodus of stock trading and tax receipts, the Swedish government quickly rescinded the tax altogether.
It's rare that a line so directly connects the dots between cause and effect in government policy, but this is exactly the connection that officials in New York City and State — and their counterparts across the nation — are pondering as they debate what would harm the local economy more: raising taxes or reducing the public services that those taxes support.
Is there a tipping point at which taxes become so onerous that the individuals and businesses who pay the government's bills leave? Or might those people and corporations flee even faster if the failure to raise taxes results in a reduction of services that degrades the quality of everyday life?
No one knows for sure. Or as Diana Fortuna, president of the Citizens Budget Commission of New York, said with some perplexity, "It's a really good question." The commission is largely financed by businesses and has generally opposed tax increases. It contends, for example, that mayors could maintain vital services by squeezing more productivity out of municipal unions.
Seeking to close a gap estimated at $4 billion in his proposed $44.5 billion budget for the fiscal year beginning July 1, Mayor Michael R. Bloomberg has been lobbying, unsuccessfully so far, to wring about $600 million in productivity concessions from organized labor.
New York's mayor, unlike the governor, must balance the budget as a matter of law. Besides reducing spending and raising taxes, there are essentially only two other ways to do it. One is to borrow. The city has already gone down that road this year, and as the fiscal crisis in the mid-1970's demonstrated, it is a dangerous long-term strategy. The other way is to go hat in hand to Albany and Washington, pleading for a larger share of the revenue that city taxpayers export to the state and federal governments. With the governor refusing so far to raise taxes and the president insistent on cutting them, neither capital has given the mayor much encouragement
Which brings Mr. Bloomberg back to either taxes or reductions in services, which he can threaten to impose if those taxes aren't forthcoming.
"Part of what every mayor will do is seek to frighten people," former Mayor Edward I. Koch said last week. The theory is that if enough people are frightened about layoffs or closing firehouses or even shuttering zoos — all of which Mr. Bloomberg has threatened — their representatives will become emboldened to raise taxes.
These days, the city probably delivers services more efficiently than it has in years, and self-taxing business improvement districts and other public-private partnerships have taken up some slack left by earlier bouts of austerity. Still, successive service cuts have left the mayor with fewer options to economize, without cutting into bone.
So Mr. Bloomberg has been seeking to win authority from Albany to impose taxes on his constituents and also to pressure Gov. George E. Pataki to reimpose, and even raise, an unpopular commuter tax. (On its own, the city cannot do much in the way of raising revenue, except to increase the tax rate on real estate, which it did earlier this year by an astounding 18.5 percent.)
So far, Mr. Pataki has resisted the mayor's entreaties, branding tax increases as job killers that threaten economic development — a characterization that he did not apply to earlier "revenue enhancements" that he or his appointees have winked at or actually voted for, including higher tuition for the state's university system.
Many people forget that one legacy of the 1970's fiscal crisis was, temporarily at least, lower taxes to lure business and to demonstrate that the city was serious about living within its means. And since the terrorist attack of Sept. 11, 2001, which drove jobs out of New York, "the tax trigger, the tipping point at which people might decide too much is too much," is lower than it was, said Fred Siegel, an expert on urban affairs who teaches at Cooper Union.
Of course, tax increases and service cuts affect everyone differently. "There's not some Everyman who's affected the same way," said Charles Brecher, research director of the Citizens Budget Commission. "There are different constituencies. The question is, who do you want to offend the least?" It's also sometimes true that a temporary tax, or one dedicated to a specific goal, like the income tax surcharge for hiring more police officers imposed a decade ago, may be more politically palatable.
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Some taxes take on a symbolic value even beyond economics. The steep increase in the hotel occupancy tax in 1990 prompted threats of a boycott of New York City. There was the slow burn in California over property taxes that culminated in passage of Proposition 13. The anger over "bracket creep" helped lead to the Reagan Revolution. For that matter, there was the Stamp Act, imposed by the British Parliament, which eventually precipitated a revolt against taxation without representation.
THE consensus in New York today is that if crime goes up, as one expert on the city said, "all bets are off" when it comes to spending discipline. A rise in crime could have a profound effect on how the city is perceived. And perception creates its own political reality, regardless of any economic strictures. Arguably, the business climate improved in the 1990's because crime went down, and one reason crime declined was because the city imposed taxes to hire more police officers.
"Tipping point sounds like something a good social science ivory tower person would be able to propound on with great certainty," said Richard P. Nathan, director of the Nelson A. Rockefeller Institute of Government at the State University of New York in Albany. "I'm dubious. I think that there are an awful lot of economic forces that influence why people come to and stay in the city of New York — even in these uncertain times."
Ronnie Lowenstein, director of the city's Independent Budget Office, said: "Yes, taxes ultimately affect economic activity, but so do services. Finding the balance is the most difficult part of the job."
nytimes.com |
