New York City
Ending with a Good Start?
Mayor Bill de Blasio dubbed his first business initiative of 2015 a major tax reform to bring more jobs to New York City. Much of the fix is good. But it should be the first step, not the last. The problem is that real tax reform involves tax cuts, or, at least, fixes to the city’s spending so that tax rates can stay the same. But de Blasio’s earlier budget decisions make these goals harder to achieve.
The biggest part of de Blasio’s fix was to cut through red tape. (Albany is likely to approve the measures; Gov. Andrew Cuomo signed into law similar changes for state taxes last year.) The city and state codes will now agree on “the most important areas of tax computation,” according to the city. That change will save small businesses having to pay someone to do their taxes twice.
Another good feature is a tax cut for manufacturers and small business. Companies that make stuff will no longer pay the city’s 8.85 percent business income tax. Manufacturers with less than $10 million in income will pay 4.425 percent. Other small businesses—companies with less than $1 million in income—will pay 6.5 percent.
In theory, it’s bad practice to use the tax code to favor certain businesses over others. But in practice, manufacturers and small businesses struggle against far larger firms in more lucrative industries to find affordable real estate and to pay New York salaries. It’s worth giving them a break, especially if it keeps some middle class jobs.
Moreover, manufacturing is not as negligible as people might think. Manufacturing firms comprise 3.1 percent of city business taxpayers, according to the latest figures, but pay 8.6 percent of business income taxes. That’s nowhere near the 22.1 percent of business taxes that the financial industry pays. But it’s higher than what construction firms pay—7.6 percent.
Another change should encourage bigger companies to create jobs in New York. The city will now determine a corporation’s tax based on where the company’s customers and sales are, not where the company’s operations are. It’s kind of like how states have forced Amazon to pay sales tax on behalf of its customers to level the playing field— but this time, it’s a business tax.
This move will increase taxes on larger firms, by curtailing their ability to use tax havens such as Delaware. It’s in line with what Western governments around the world are trying to do to close ridiculous tax loopholes. Companies are hardly going to give up access to some of the richest consumers on the planet— New Yorkers—to preserve this tax avoidance.
The problem is just how modest these changes are.
The city’s business income tax for bigger companies is still 8.85 percent—insanely high, considering that most cities don’t levy any business income tax. As E.J. McMahon of the Empire Center wrote last fall, the city tax rate “effectively doubl[e]s the total corporate [state] tax for businesses in the state’s economic heart.”
Plus, business-income and banking taxes only comprise 8.1 percent of the city’s $49.4 billion in annual tax revenue. Most city revenues come from property levies, personal income taxes and sales tax. Our state and local personal income tax rates as well as our sales tax rate are still close to the top of the charts.
It would be good—and progressive—for the mayor to cut sales taxes, in particular, which would help poorer consumers and smaller retailers.
It would be good, too, to cut taxes for market-rate apartment owners (and ensure savings are passed through to tenants).
An income tax cut, too, would help entrepreneurs who compete with Wall Street for office space as well as housing.
But de Blasio can’t do big tax reform—because of his spending.
So a good start may be the end.
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