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Bloomberg’s Budget for NYC: Sales Tax Higher, Income Tax Unchanged

3 min readBy: Josh Barro

On Friday, Mayor Mike Bloomberg’s administration released a preliminary fiscal 2010 budget plan. The plan includes sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases and expansions to raise $894 million annually, while leaving the income tax untouched—though some politicians, including city council Speaker Christine Quinn and Comptroller William Thompson, are encouraging a look at higher income taxes in lieu of the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. changes.

When I previewed the mayor’s plans in November, they included higher property taxes (since enacted) with the possibility of future sales or income tax hikes. Bloomberg is “willing” to substitute an income tax hike for the sales tax increases, if that’s more palatable to the state legislature, which would have to approve either move. As unappealing as higher sales taxes are, switching to a higher income tax would be a major mistake.

While New York City has a high sales tax, its income tax is already astronomical: the top city-state rate of 10.498% is higher than any other jurisdiction in the country. Further increases as previously outlined by the mayor could push the rate as high as 11.375% (including a proposed regional payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. for transportation). Such a move would be much more damaging than the sales tax rate increase.

Just last month, arguing against a proposal for higher income taxes at the state level, Mayor Bloomberg said the following: “Raising taxes on those with the flexibility to move their businesses—as was done in previous crises—will lead to an exodus that will hurt us for decades and have devastating consequences for the entire state.” The same logic applies to the city income tax. Here’s hoping Mayor Bloomberg holds the line against those who would make NYC even more of an income tax outlier.

Details of the Mayor’s tax proposal

The proposed revenue increase of $894 million for fiscal year 2010 comes from three sources: elimination of the sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for clothing ($394 million); a rise in the city sales tax rate from 4% to 4.25%, thus increasing the total rate to 8.625% ($302 million); and sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. expansions that Governor David Paterson has proposed at the state level, which if enacted would automatically apply to the city sales tax ($198 million).

Last month, I discussed Governor Paterson’s proposed sales tax base expansions. Paterson-plan sales tax base expansions that would carry over to New York City’s sales tax include a narrowing of the tax exemption for capital improvements to real property, and expansion of the sales tax to certain entertainment services (movie admissions, sporting event tickets) and transportation services (taxis, limos and buses). Other services that Paterson has proposed to tax at the state level (including personal services like barbering and massage) are already subject to NYC sales tax.

Generally, extending the sales tax to more consumer goods and services is an improvement in the tax code’s structure. Unfortunately, while proposing to eliminate the tax exemption for clothing, Mayor Bloomberg has decided to match Governor Paterson’s call for two, one-week sales tax holidays for clothing. New York’s own Department of Taxation and Finance studied the state’s 1997 clothing sales tax holiday and found it didn’t generate economic activity—so why repeat the mistake?

Unlike the base expansions, the rate increase is a clear negative that will put the city even further out of step with its neighbors on tax burden. With the increase, NYC’s 8.625% rate will tie Nassau and Suffolk Counties for the highest sales tax in the region. Sales tax is 7.375% in Westchester County, though it’s higher in some cities, including White Plains; the rate is 6% throughout Connecticut and 7% in New Jersey, with a special 3.5% rate in designated “Enterprise Zones.”