The city’s tax system is heavily dependent on high earners.
New York City is highly dependent on a small and shrinking tax base. Just 17 percent of taxpayers earning six-figures or more account for 80 percent of the city’s income tax revenue, according to the city’s Independent Budget Office. Wealthy New Yorkers leaving the city would have an outsized impact on the ability for City Hall to keep the lights on. And 2020 has given them a lot of reasons to leave.
In fact, the Big Apple’s population was shrinking for three straight years before a pandemic killed 24,000 people in New York City and counting. But that out-migration was largely driven by the high cost of living, meaning the rich were some of the people most able to stay. Now, with white-collar work disaggregated from the office, the rich are leaving in droves for roomier pastures with lower taxes. This year, there were nearly 300,000 change of address requests from fleeing New Yorkers, and cell phone data showing more than 50 percent of residents ghosting Manhattan’s wealthiest neighborhoods.
And then the second-order effects of COVID-19 became clear: polls showing falling quality of life combined with rising crime, shuttering schools and a subway system on the brink of collapse.
Just how big is the threat of tax base erosion? According to scenario modeling I conducted with Don Boyd of Rockefeller College at SUNY-Albany, just a 5% one-time net increase in out-migration from New York City among those earning $100,000 or more would result in a loss of $933 million in income, sales, and unincorporated business tax revenue. That sum, nearly a billion dollars, is roughly the amount the city uses to fund its Department of Health and Mental Hygiene, tasked with being on the front lines of the coronavirus pandemic. A smaller 3% percent net decline in high-earners would mean $576 million in lost revenue, while a 1% one-time decline would mean losing out on $220 million.
Admittedly, New York City’s tax revenues are expected to total nearly $60 billion in fiscal year 2021. But the city still badly needs revenue, and these are not worst-case scenarios – we know that many of the city’s wealthy have already left New York City. When the pandemic is over, many will come back, but many others have already bought houses in the suburbs and fully moved out. The total loss could be even greater than 5% of those high earners.
So, these figures are a way of understanding what’s at stake for a city budget that is desperately in need of revenue. Even a small share of the workforce staying remote following the pandemic would have a large and lasting impact on the makeup of knowledge-driven economies such as New York’s. If such increases in net out-migration were sustained the city’s revenue losses would grow—and our estimates do not even begin to consider the cost to other tax revenue streams or to the broader economy from high-earners heading for the exits, such as the corporate income tax and property tax, or other spillover effects on the economy.
New York City’s tax base is already highly dependent on wealthy households, and thus it is uniquely sensitive to the whims of their fortunes – or departures. The city’s income tax, which accounts for nearly a quarter of total tax revenue, was established in the 1960s to be highly progressive, becoming evenmore so in the ensuing decades. In 2002, New York City income tax revenues fell by $1.2 billion largely due tocapital losses from a tiny share of wealthy investors. The city’s growing reliance on personal and business income taxes means tax revenues are more volatile and sensitive to tax base erosion than in the Big Apple’s last fiscal crisis of the 1970s, when they depended more on property and sales taxes.
The federal income-tax cap on state and local tax deductions – known as the SALT cap, instituted in 2018 as part of President Trump’s tax bill – amplifies the effects of New York City’s high taxes. The high cost of taxes combined with the rise of remote work means the risk of out-migration is all too real. Our survey of high-income earners conducted with the Siena College Research Institute found that 37% say it is at least somewhat likely they will not be living in New York City within the next two years. An even higher share of six-figure earners, 44%, had considered leaving the city in the past four months of the pandemic. The reasons they gave may sound familiar, such as the high cost of living and crime, in addition a drop by half in quality of life since the onset of the pandemic.
While Gotham’s pricey rents and costly living aren’t going away overnight – after all, New York City spent the past decade adding 3.9 jobs for every one new housing unit – they could dip, due to reduced demand. Eventually, one person’s vacated Greenwich Village apartment may eventually be another hopeful’s chance to live their New York dream. The question isn’t whether the city will die, but when it will recover, and if the return of better days is to be measured in months, years, or decades. That will in large part be determined not by a virus, but by choices in governance, such as whether the subway’s finances are derailed or crime allowed to rise even further. Not every chunk of the Big Apple will recover in the same way, and the costs of policy failure and lower tax revenue will likely fall, as they tend to, on those least able to afford them.
Regardless of one’s opinions on the city’s wealthy, their taxes represent a disproportionate share of public revenues at a time of severe budget constraint and great need for city services. As such, New York City’s ability to attract and retain high earners will be crucial to the city’s recovery. Our study’s estimates of the enormous sums of tax revenue at stake from an exodus of the city’s high-income earners are a major first step toward understanding the possible consequences of tax base erosion in New York City.
Post-coronavirus, New York City’s leaders should emphasize growth – a Big Apple growing into a Bigger Apple, with a thriving economy, healthy finances, and increasing competitiveness. Such policies help those of lesser means far more than the wealthy – like adding more housing for rich and poor alike to wealthy neighborhoods like SoHo, to make New York a more affordable and therefore more appealing option to people who could choose to live elsewhere. With the right policies in place, New York City can build back bigger and better than ever.
This piece originally appeared at City & State
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Michael Hendrix is the director of state & local policy at the Manhattan Institute. This piece is based on a new report co-authored with Don Boyd, Modeling Tax-Revenue Erosion in American Cities. Follow him on Twitter here.
This piece originally appeared in City & State