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Routing 
New York City has careened from budget crisisto budget crisis for decades. Each crisis has led toa ratcheting up of taxes and reduced economicfreedom for New Yorkers. As an entrepreneur,Mayor Michael Bloomberg might have broughtinnovative changes to the city’s fiscal policies, buthe has pursued anti-growth tax increases that thecity cannot afford in the increasingly competitiveglobal economy.New Yorkers have faced increases in property taxes, income taxes, sales taxes, and tobacco taxesunder Bloomberg. The mayor argued that taxhikes were needed to balance the budget. But themayor’s latest projections show that a large bud-get gap will open again in fiscal year 2006.Clearly, recent large tax hikes have not solved thecity’s deficit problem, yet some officials arealready pointing to the future budget gap as anexcuse for further tax increases.Bloomberg’s higher taxes have not solved thebudget problem because they have fueled highergovernment spending. That effect is evident inrecent budget revisions. Higher Wall Street profitsand other factors caused FY04 revenues to berevised upwards by $791 million. Not coinciden-tally, the new budget estimates include spendingfor FY04 that will be $800 million above the previ-ously budgeted level.Between FY94 and FY04, New York’s generalfund spending increased 53 percent. High spend-ing left the city with a debt load of $5,083 per capi-ta at the end of FY02. That compares to an averageof $2,262 per capita for 14 major cities surveyed by the New York City Comptroller’s Office.New York needs to downsize its governmentto cut the city’s high tax and debt loads. Some city services should be contracted out to the privatesector to save money and improve quality. Otherservices, should be privatized. The city workforceshould be shaken up to cut costs and increase tax-payer value. New Yorkers need to press their elect-ed officials to begin cutting spending to close theFY06 budget gap before the mayor claims thattaxes need to be increased once again.Budget cuts represent a formidable challengefor New York policymakers but are necessary if thecity wants to reestablish itself as a leading centerof growth and opportunity in America. The city can no longer coast on its impressive business his-tory and must cut taxes to attract new employers.Mayor Bloomberg and other officials need to findcreative ways to downsize the budget to increaseprivate investment in the city and the economicfreedom of New Yorkers.
 Budget Reforms to Solve New York City’s High-Tax Crisis
by Raymond J. Keating
_____________________________________________________________________________________________________
 Raymond J. Keating is chief economist for the Small Business Survival Committee and a resident of Long Island, New York.
Executive Summary 
No. 522August 17, 2004
 
Introduction
New York City has careened from budget cri-sis to budget crisis for decades. Each crisis hasled to a ratcheting up of city tax levels, which hasreduced economic opportunities for New  Yorkers. Reformers hoped that the arrival of Republican mayor Michael Bloomberg, a for-mer business executive and entrepreneur, wouldchange the city’s economic and budget direc-tion. But Bloomberg has turned out to be one of the biggest tax hikers in the city’s history.In his inaugural address on January 1,2002, Mayor Bloomberg declared: “We can-not repeat the mistakes of the past. We can-not drive people and business out of New  York. We cannot raise taxes. We will findanother way.”
1
Unfortunately, those senti-ments evaporated quickly as Bloomberg pro-ceeded to support a series of large tax hikesthat have increased burdens on virtually allNew Yorkers and New York businesses.Six months into his term, Bloombergsigned a bill raising the cigarette tax from 8cents per pack to $1.50—an 18-fold increase.
2
The cigarette tax increase caused job losses,fueled the black market and related crime,and did not bring in the predicted revenue.
3
The mayor and other city officials, in theirquest for more revenue, ignored the city’sexperience with past cigarette tax increases.
4
The
 New York Daily News
reported that ciga-rette black markets “began to explode . . . withcity and state taxes boosting the price of ciga-rettes, hundreds of streetwise hustlers are sell-ing cheap tax-free smokes—an illegal butlucrative trade that is becoming nearly as cut-throat as dealing drugs.”
5
The article notedthat three slayings in Brooklyn were linked tothe growing bootleg industry.The tax hikes continued. In 2002 the city faced large budget gaps for FY03 and FY04.
6
Rather than cut spending, Bloomberg pro-posed a large increase in property taxes to coverthe budget gaps. With the help of theDemocrat-controlled City Council, Bloom-berg signed into law an 18.5 percent property tax increase—the largest tax increase in thecity’s history—which took effect January 2003.
7
More tax increases were on the way in2003. Top personal income tax rates and theretail sales tax were hiked, and a 25 percentproperty tax surcharge was slapped ontoowners of residential rental property. Allnonproperty tax increases in the city must beapproved by the state legislature; theseincreases were passed by the Republican-con-trolled state senate and the Democrat-con-trolled state assembly, overriding vetoes fromRepublican governor George Pataki.Overall, tax hikes in the past two yearsincreased the city’s tax burden by $3.1 billionin FY04.
8
Tax revenues grew 7.5 percent inFY03 and 13.2 percent in FY04.
9
The recently passed FY05 budget offered no substantialrelief from high-tax policies other than a $400 property tax rebate. A rebate is the leastefficient form of tax cut because it stimulateslittle economic growth and investment.Instead, it would be better to cut property taxrates because that would spur new invest-ment by affecting marginal decisions by entrepreneurs.In recent years city politicians claimed thattaxes needed to be increased because spendinghad already been cut as much as it could be.But city spending has not been cut. Figure 1shows a continuous rise in city expendituresduring the past decade. Expenditures wereprojected to rise to $47.8 billion in FY04, up7.9 percent from $44.3 billion in FY03.
10
Tax increases will not solve the city’s budgetproblems because they have the effect of fuel-ing higher spending. Indeed, Mayor Bloom-berg’s budget noted that revenues for FY04had been revised upwards by $791 million,partly due to rebounding Wall Street profits.
11
Not coincidentally, the budget says that spend-ing had been increased by $800 million abovethe previously budgeted level. Thus, as soon asthere is a rise in revenues, the city has rushed tospend it. This is the same mistake that the city made during the 1990s’ boom when risingspending was financed by the transitory boomin profits on Wall Street. The New York City Independent Budget Office noted: “Ongoingoperating expenditures grew faster than sus-tainable revenues. Extraordinary Wall Street
2
In his inauguraladdress on January 1, 2002,MayorBloombergdeclared: “Wecannot repeat themistakes of thepast. We cannotraise taxes.”
 
profits helped fuel revenue surpluses thatenabled the city to prepay some expenses forthe next fiscal year, effectively masking theunderlying imbalance.”
12
The city has projected that deficits will be$3.7 billion in FY06, $4.5 billion in FY07, and$3.7 billion in FY08.
13
The gaps are expectedto occur even though the city’s tax revenuesare expected to rise from $27.4 billion in FY04to $30.0 billion by FY08.
14
New York’s comp-troller has called for a new commuter tax toclose future budget gaps.
15
But that wouldsimply drive more businesses out of the city and shrink the tax base. Since the source of future budget gaps is rising spending, thesolution should be to restrain budget growth.Mayor Bloomberg’s budget noted that key problems were Medicaid and employee pen-sion and benefit costs growing at “explosive”rates. The budget implied that, since those are“nondiscretionary” costs, nothing can be doneabout them. That is not true. Ultimately, allgovernment costs can be controlled and allspending cut by changing the law. For exam-ple, the city and state can reduce coverage of nonessential health services in order to cutMedicaid cost growth.The key to getting New York’s budget ona sound footing is to reduce spending to lev-els that can be sustained by a moderate taxburden no higher than that in other majorcities. This report will examine New York’scurrent tax and spending levels and then pro-pose reforms that would decrease the cost of government and allow a reduction in taxes.
New York’s Big Budgets andTheir Consequences
Lavish spending, high taxes, and too muchdebt drove New York to the brink of bank-ruptcy in the 1970s, but the city still followsmany of the same bad budget policies. Despiteclaims that the city’s budget has been cut inrecent years, spending has been rising steadily.Between FY94 and FY04, New York’s generalfund spending rose from $31.3 billion to $47.8billion.
16
That 53 percent increase was abouttwice the increase in general prices (27 per-cent) during the period. Spending in FY04 isexpected to rise by 7.9 percent over FY03.Those increases have occurred despite a more than 50 percent drop in the city’s wel-
3
Between FY94and FY04, New  York’s generalfund spendingrose from $31.3billion to $47.8billion.
19941995199619971998199920002001200220032004
Figure 1New York City General Fund Expenditures and Gross Debt
   B   i   l   l   i  o  n  s  o   f   D  o   l   l  a  r  s
Sources: City of New York, “Executive Budget FY2005,” April 26, 2004 (as updated June 28, 2004); and City of  New York, Office of the Comptroller, “Comprehensive Annual Financial Report of the Comptroller for the FiscalYear Ended June 30, 2003,” October 31, 2003.
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