Thursday, January 29, 2009

NYC and NY State Fiscal Problems

A Reuters story on Tuesday by Joan Gralla reports that New York City fears return to 1970s. The fear then was that the City couldn't get out from under its heavy load of short-term debt. In fact the City recovered as soon as the economy came back.

The more serious problem today is NY State's fiscal stress. Back in the 1970s NY State was not in such trouble, and it was able to bail the City out in conjunction with support from Sen. Richard Lugar (R-IN) to provide federal guarantees to the pension funds to buy the City's bonds (his help in getting these guarantees has never been properly acknowledged by the City).

Gov. David Paterson is now raising many taxes and cutting aid to local governments. The problems this creates for NYC are tacked on top of the City's own loss of tax revenue and rising requirements from the NYC employee pension funds for money to make up for their losses when an 8 percent annual return has been built into their actuarial assumptions. In addition, the volume of new tax abatements to spur development has contractually reduced the City's ability to raise taxes on some new developments. Gralla says:
While many U.S. cities worry that their economies are deteriorating to the level of the 1930s Great Depression, New York City fears reliving a more recent decade that features strongly in city lore.
But the better comparison is with 1989-1992. Gov. Paterson’s array of tax increases is reminiscent of the 22 forms of NYC tax increases during these recession years. The large number of increases, and the nuisance nature of some of them, were the subject of many news stories at the time.

A major advantage that NYC has over the state today is that property tax revenues are more stable than other taxes during an economic decline because NYC's assessed values are averaged over five years. NYC's property tax revenues continue to rise for a couple of years into a recession even though market values of property are falling. Property owners may sell and move away, but the property continues to be paid by the new owner.

All the taxes can be avoided by moving completely out of NYC. Charles Tiebout introduced the concept of “foot voting” or “voting with feet”. IU would argue that it's more serious when businesses leave town than when individuals arbitrage among residential options based on differences in property taxes.

The two explanations I have heard most widely regarding the exodus of businesses in 1989-1992 are (1) high crime rates and (2) higher taxes on incomes and businesses. It would have been better, in retrospect, to have increased NYC property tax rates more during those years to avoid increasing other taxes and to beef up spending on the police earlier than the City did. NY State doesn't have a property tax to rely on, although I am advised by a former employee of the Assembly Ways and Means Committee that NY State used to have a statewide property tax and there would be no constitutional problem with reintroducing it.