It is likely that the Financial Plan Mayor Bill de Blasio is scheduled to release in February will significantly increase municipal spending beyond the amounts previously planned by the Bloomberg Administration. De Blasio's agenda calls for new commitments to prekindergarten education, affordable housing, the City University system, wage increases for municipal workers and other initiatives that together would cost billions. Some of these funds may be raised by achieving savings in other parts of the budget and through his proposed higher personal income tax on 'millionaires,' but additional revenue measures will be needed to implement the full agenda.
There are three options for paying for these initiatives with little harm to the city's economy. First, so-called "corporate welfare," tax breaks for businesses given in the name of economic development, is widely criticized as unnecessary to attract or retain the jobs that employers promise in exchange for subsidies. In the last fiscal year, the cost to the City of these business property tax expenditures was about $930 million. The catch is that not all of this money can be reclaimed immediately; although more can be done to "claw back" money from firms that fail to deliver on promised jobs, many of the credits given in the past for multi-year periods extending as long as 25 years must be honored. Thus, in the short run cutting corporate tax breaks would yield relatively little new money, perhaps no more than about $30 million annually. Wasteful subsidies should be ended, but they will not immediately solve the funding problem.
The biggest source of new revenue should be the property tax: reforms to its structure can redress inequities without raising tax rates across the board. What property tax reforms would both make the tax fairer and raise substantial new money? The answer is significant modification of arcane provisions that give some owners breaks in the form of "caps" and "phase-ins" of tax increases due to appreciation in their property's value. While people whose incomes go up pay more income tax, some (not all) people whose property increases in value are shielded from appropriate increases in property tax liability. Some jurisdictions protect lower income households from abrupt property tax increases via "circuit breaker" provisions that give relief tied to income levels, but New York City gives big breaks regardless of income. This reduces the tax bills of those with the most rapidly appreciating properties and keeps the bills of better-off homeowners low while moderate-income renters see their housing become less affordable due to bigger tax burdens on their apartment buildings. The system lacks transparency and fairness, and sacrifices about $4 billion in annual revenues. It cries out for reform, and the next administration should take the lead in fixing a broken, inequitable and often inscrutable system.
In the past mayors have used property tax rate increases to raise substantial new money because only City Council approval is needed. Mayor Bloomberg raised $1.8 billion this way beginning in fiscal year 2004, and that tax hike is now worth $3.1 billion annually due to appreciation in property values. But fixing the property tax, rather than just raising the rate, requires State legislation. Mayor de Blasio is already committed to pursuing tax changes in Albany (a millionaires' tax needs State approval), and he should make property tax reforms a key element of advocacy.
A third source of new revenue could be found by broadening the base of the sales tax. Mayor Bloomberg raised about $440 million annually by raising the sales tax 0.5 percent in 2009, but a less regressive approach is to subject more non-essential items to the sales tax. Examples include a variety of services from dry cleaning to kitchen renovations; a reasonable list of added items could raise more than $1 billion annually for the City. Since the State and City sales taxes should be aligned for ease of collection, de Blasio may find allies in State government who would also support broadening the state sales tax.
Each of these approaches is preferable to the millionaires' tax. Undoubtedly, the higher income tax would raise new money; more millionaires will stay and pay than will move out of town. But some unknown number will avoid the tax by spending more than 183 days in their second (and third) residences. There are better ways to raise even more revenue, and they are worth the battle in Albany by a mayor who needs new money to implement his vision.