In Two Weeks, New York City Will Commit Suicide

Story Stream
recent articles

In two weeks New York City residents will choose a new mayor. The likely winner is Democrat Bill de Blasio, 40 percentage points ahead of rival Republican Joe Lhota in the polls. To fund more education programs, De Blasio wants to give New Yorkers even higher local tax rates, increasing the exodus of New Yorkers from the region.

Along with de Blasio's plans for a living wage and rent control, this will slow New York's already-sluggish economy.

Instead, de Blasio should persuade Governor Andrew Cuomo, a fellow-Democrat, to lift the fracking moratorium, in place since 2008, and allow Empire State residents in the 28 counties above the Marcellus Shale to explore for oil and natural gas. An energy boom would attract more manufacturing to upstate New York, generate more business tax revenue, and take the burden off personal taxes, especially for New York City residents.

The top state and local income tax rate in New York City is 12.7 percent, the second highest in America (after California). De Blasio wants to raise the New York City local income tax from 3.88 percent to 4.41 percent for 5 years, leading to a top income tax rate of 13.23 percent. This five-year surcharge would supposedly yield $530 million in new revenue-unless New Yorkers escaped to lower-tax locales.

With a top individual federal income tax rate of about 42 percent, including phaseouts of the personal exemption and itemized deductions, some city residents, already facing some of the highest taxes in the country, will see a total top marginal tax rate of about 55 percent.

Over the past decade, New York residents have been voting with their feet, leaving in droves. Candidate de Blasio's proposed policies would exacerbate the trend.

According to the non-partisan Tax Foundation, which compiles tax data from federal and state sources, from 2000-2010 New York lost residents and adjusted gross income to 46 states. These states gained from New York's policy of high taxes: they received a net influx of $45.6 billion dollars and almost 1.3 million people from New York. In contrast, New York gained net income and residents from only Illinois, Missouri, and Michigan over the past decade.

The Tax Foundation ranks New York last in the country in its 2013 State Business Tax Climate Index. The index weights corporate and individual income taxes, sales taxes, unemployment insurance taxes, and property taxes.

As well as a costly place to live, New York is also an expensive place to die. In 2009, New Yorkers paid over 10 percent of all federal estate taxes. State estate taxes are higher in New York than in all but three other states. This places New York at a particular disadvantage, since 36 states have no estate tax.

De Blasio wants to use $342 million of his projected $530 million in additional revenue to create universal pre-school programs and expand after-school programs for middle school students. But last year, New York's pre-school programs had 500 full-day and 3,300 part-day empty slots, suggesting that no additional spaces are needed.

An additional $190 million would be spent on after-school programs. Well-structured after-school programs can be most helpful in low-income communities, where the alternative is going home to an unsafe neighborhood with no one to encourage studying. But there are better ways to provide after-school programs than raising taxes.

New York's real gross domestic product grew by 1.3 percent in 2012, far below the U.S. real GDP growth rate of 2.5 percent. New York's unemployment rate stood at an average of 8.7 percent in 2012, above the national average of 8.1 percent. High taxes in New York drive out both businesses and residents, and will drive out more if taxes rise again. De Blasio will just make it worse.

Many academic economists, including Jonathan Gruber of MIT and Emmanuel Saez of the University of California (Berkeley), Nobel Prize winner Edward Prescott, William Gentry of Williams College and Glenn Hubbard of Columbia University, have shown that higher marginal tax rates discourage work, risk-taking, and entrepreneurship.

In addition to negative effects on output and employment, de Blasio's proposed tax increases would make it harder for women to work. The penalty would fall most heavily on married women who have invested in education, hoping to "lean in," as Sheryl Sandberg suggests, and shatter glass ceilings. New York has many such women. When single women work and are considering marriage, higher rates discourage marriage. High tax rates can result in women quitting the workforce altogether.

A better alternative for de Blasio would be to encourage New York Governor Andrew Cuomo to end the state's moratorium on hydrofracturing. Residents could tap natural gas from the Marcellus Shale, as has been the case in Pennsylvania. Additional economic activity would be created in the upstate region, attracting manufacturing due to lower energy costs. This could allow for a reduction in taxes New York City residents pay to Albany-leading to more residents staying in the city.
Between 2008 and 2012, New York State personal tax collections rose from $37 billion to $39 billion. But business tax revenues, including petroleum taxes, declined from $7.2 billion to $7 billion. Why not allow Big Oil to pay more?

Using Pennsylvania county data on number of wells drilled, output, and employment to project hydrofracking's effect on New York counties, I estimate that the income of residents in the 28 New York counties above the Marcellus Shale has the potential to expand by 15 percent or more over the next four years if the state's moratorium is lifted.
The data also suggest that had New York allowed its counties to fully exploit the Marcellus Shale over the past decade, those counties would have seen as much as 6 percent more economic growth than they have experienced.

If New York counties above the Marcellus Shale drilled the same average numbers of wells as Pennsylvania counties, New York State could reap another $4 billion in income over the next four years. This new source of revenue would enable New York to lower its income taxes, potentially attracting residents from neighboring high-tax states such as Connecticut and New Jersey.

In order to keep the Empire State the financial and cultural capital of America, New York needs to lower its taxes, not raise them.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

Show commentsHide Comments

Related Articles