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Commentary By Nicole Gelinas

Spike the Tax Hike

Cities, Economics New York City

New Yorkers are used to paying higher taxes under Mayor Bloomberg. During his first year in office, he (and the City Council) hiked property taxes. He followed up that hike months later with "temporary" hikes in the city's income-tax and sales tax rates. Unless the mayor acts fast to stem unsustainable growth in city spending, taxpayers may soon learn how long "temporary" can be.

Mr. Bloomberg recently allowed the sales tax hike, and a tax on clothing, to expire on time as promised. But the upper middle-class New Yorkers who labor under the mayor's nosebleed income tax surcharge may have to wait forever for their "temporary" tax surcharge to disappear, despite its stated expiration date less than five months from now.

Most cities don't even have a personal income tax. New York inaugurated its first in 1966, under Mayor Lindsay - the rate back then for top earners was 2%. Since then, the tax has increased as the city's budget has grown, to a top rate of 3.65% for six-figure earners by the time Mr. Bloomberg took office.

To shore up a nearly $3 billion deficit, the state Legislature allowed Mr. Bloomberg to hike that top rate in 2003 by a whopping 16%, to 4.25% for $100,000-plus earners. That's not all: The Legislature also allowed the mayor to charge a new top rate, of 4.45%, for New Yorkers who earn a half-million dollars or more each year. Those tax hikes were sold to voters as a necessary but short-lived measure to stem the fiscal fallout of September 11, 2001, and the stock-market slump; they were set to phase out gradually by December 31, 2005.

The income tax surcharge has funneled about $1 billion into the city's coffers over nearly three years - but that money came at a high price. First off, the tax hike hit New York's upper middle class hard. A two-income couple working overtime to bring home just over six figures, for example, has had to pay another $600 or so in city income taxes each year while also struggling to pay higher property taxes.

But the income-tax surcharge hit Gotham's economy just as hard as it hit Gotham's families. New Yorkers who earn a half-million each year and up are the same New Yorkers who create jobs for everyone else: They're wealthy lawyers and investment advisors who might be able to hire another assistant in a good year, or entrepreneurs who might add a few employees to a small shop, restaurant, or factory. More money for taxes means less money for investment - and fewer jobs for less affluent New Yorkers.

Indeed, since the end of the 2001 recession, New York's economic recovery, and its level of job creation, has lagged behind that of the nation. Last year, the city's economy grew by just 2.4%, after three years of economic contraction; by contrast, the nation's economy grew nearly twice as fast.

Gotham has finally begun to recover some of the jobs it lost after September 11. But, as the city comptroller, William Thompson Jr., noted in March, the city's modest job creation rate lags behind that of most other American cities and the national average. Mr. Thompson added that the job numbers from the end of last year were "alarming" in their weakness compared with job creation in much of the rest of the country - "especially in financial activities, professional and business services, and education and health services."

So Gotham lost economic opportunity with its income-tax hike. But Mr. Bloomberg (and the City Council) squandered one fiscal opportunity gained with the tax hike revenues: time.

Everyone, from the mayor to the City Council to the state Legislature, knew that the extra money wouldn't last forever - so they should have spent the breathing room the hikes bought them carefully cutting back the city's $51 billion budget.

The mayor could have worked with the council, the Legislature, and with Governor Pataki over the past three years to pare back unsustainable levels of spending on things like pensions and health care for public employees, Medicaid payments for the poor, and debt-service costs on the city's nearly $50 billion in bonds.

Instead, Mr. Bloomberg (and the rest of them) stood by as the budget grew. Over Mr. Bloomberg's first full term in office, city-funded spending has increased by 29% - eclipsing both inflation and economic growth. City spending as a percentage of New Yorkers' personal income has grown to 10.7%, nearly 13% higher than the average during the eight years of the Giuliani administration.

Growth in pension and health-care costs for public employees, and in debt service costs, continues to escalate wildly - and the state recently capped Medicaid spending at an already unsustainable level. That's why New York faces a $4.5 billion budget deficit next year - and why gaps in future years are now larger than those projected just a few months ago.

How to fund those gaps? Mr. Bloomberg could start to cut spending - better late than never. But that will take time: Time to educate the public, time to lobby legislators and our new lame-duck governor, and time to figure out what, exactly, can be cut.

Mr. Bloomberg has just a few months to get going - or upper middle-class New Yorkers will likely greet the New Year with a permanently higher tax bill.

This piece originally appeared in The New York Sun

This piece originally appeared in The New York Sun