Lowering Sales Tax Would Raise City Revenues
In 1974, New York City was in serious financial trouble. With slim prospects of aid from Washington, D. C. or anywhere else, New York state, by action of the legislature, raised the city portion of the sales tax from 3 cents to 4 cents on each $1 of goods sold. Of the 8.375 percent sales tax currently charged, 4 percent now goes to the state, another 4 percent to the city, and 0.375 percent is allocated to the Metropolitan Commuter Transportation District.
When the sales tax in the city was first increased to 4 percent from 3 percent in 1974, city and state officials promised it would last only one year. However, as the Manhattan Institute think tank recently cautioned, beware of anything billed as a "temporary" tax hike, because city history shows that such "temporary" tax hikes often become permanent. The 1 percent "temporary" tax hike that was supposed to end in 1975 has been in effect for 33 years.
The law that imposed a financial control board on the city will expire on July 1, 2008. At that time, the sales tax increase is also set to dissolve and the sales tax charged in the city will drop 1 percentage point, to 7.375 percent. If the tax cut takes effect as scheduled, New York City consumers would save more than $1 billion a year in toto. Mayor Michael Bloomberg, though, is asking Albany legislators to authorize a tax increase that would cancel out the reduction. The city sales tax would remain at 8.375 percent.
The city Office of Management and Budget projects a shortfall of $2.7 billion for the next fiscal year and City Councilmember David Weprin, chair of the council Finance Committee, noted that the city is bracing for a tight budget in 2008. The city sent a Preliminary Official Statement to prospective bond buyers on December 5, projecting that if the tax increase does not go through, sales tax revenues would drop by approximately $1.19 billion in Fiscal Year 2009, $1.25 billion in FY 2010 and $1.31 billion in FY 2011.
Weprin anticipates no widespread opposition to the mayor's request, especially as earlier this fall, city agencies were asked to find areas in their budgets to cut and the Bloomberg administration instituted its first hiring freeze since 2002. But while Weprin urged a cautious approach because of projected deficits in the city budget, he also said that taxes imposed as "temporary" and about to expire deserve a close and careful look. Some other people caution against turning temporary taxes imposed in times of fiscal crisis into permanent additions to the tax structure, maintaining that the city should let the extra penny of sales tax expire and learn to live without the extra revenue. City Council Republican Minority Leader James Oddo is among them. "If we can't find the means to control [city spending], then maybe we need an extraordinary event like this," Oddo said. He plans to urge his colleagues in the council to oppose the increase, but is not optimistic, since his past efforts to combat tax increases have not been successful.
We agree with Oddo. Several times in this space we have welcomed eliminating the city sales tax on clothing items under $110 and have urged extending the elimination of the tax on purchases totaling higher amounts. Even given the current limits on tax-free purchases, eliminating the sales tax on clothing has brought more money into the local economy, not less. Sales tax revenues might drop, as the mayor's figures predict, but the concomitant rise in sales volume and spending on associated goods and services would more than make up the difference. We who live here have to shop for necessities- and luxuries, too; we do not deny it- and would appreciate the freedom to buy more that the sales tax reduction would accord us. New York City is already a shopping mecca for out-of-town visitors; reducing the sales tax would see more people coming to the city to spend even more. This is a win-win situation.
Mayor Bloomberg is justly renowned for his financial acumen and his ability to impose fiscal discipline. In this case, though, he is seeking the wrong solution to the city's financial problems. A tax hike is a temporary solution and creates more problems than it solves. Allowing the 1 percent sales tax increase to expire and dropping the tax back to its pre-1974 level could only benefit New York City and its residents, who live, work and shop here.