When New York City tried local income taxes they accelerated its bankruptcy
From property to income tax
On Wednesday, I asked:
If you are not willing to forgo the goods and services property taxes pay for but want the property tax eliminated anyway, then the question is “How are you going to pay for them?”
One common answer is local income taxes. Such a proposal was made in the Star Tribune recently by Steve Brandt, president of the Minneapolis Board of Estimate and Taxation.
Such taxes are unlikely to generate the desired revenues. A 2020 paper by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva that: “review[s] a growing empirical literature on the effects of personal taxation on the geographic mobility of people and discuss[es] its policy implications” found that:
There is growing evidence that taxes can affect the geographic location of
people both within and across countries. This migration channel creates another
efficiency cost of taxation with which policymakers need to contend when setting tax policy.
More specifically:
This body of work has shown that certain segments of the labor market, especially high-income workers and professions with little location-specific human capital, may be quite responsive to taxes in their location decisions.
If taxes are a factor driving migration from one state to another or even from one country to another, imagine what the effects will be when all one has to do to escape the tax is move ten minutes down the road.
New York, New York
A look back at New York City in the 1960s and 1970s illustrates this phenomenon.
In 1965, Mayor Robert Wagner announced that the city could no longer balance its books. Nevertheless, “human needs are greater than budgetary needs,” he explained, and claimed, somewhat dubiously, that a “bad loan is better than a good tax.” So, New York City sold $256 million of bonds to finance current spending and began its long slide to bankruptcy.
An early attempt to stop the slide came in 1966 when newly elected Mayor John Lindsay successfully fought to impose a city income tax. This was proposed by a Temporary Commission on City Finances, appointed by Wagner. “The key to the proposal was a graduated personal income tax that would apply to commuters and residents alike” Charles R. Morris wrote in his excellent book “The Cost of Good Intentions: New York City and the Liberal Experiment, 1960-1975.”
“The proposals ran into heavy weather in the legislature almost immediately,” Morris writes. “The plan to tax commuters was particularly resisted by suburban representatives.” When the measure finally emerged from the legislative process:
…[t]he key change was the loss of equal treatment for commuters and residents: Commuters would be would still be subject to the personal income tax, but only at a fraction of the rate imposed on residents. Lindsay feared (again, correctly, judging by later events) that the differential tax burden would only hasten the flight from the city of the financially better off.
These “later events” referred to by Morris would include a hike in the top rate of the city’s income tax from 2.0% in 1970 to 4.3% in 1976 and a decline in its population of 10.4% between 1970 and 1980. Taxes were not the only factor behind this exodus — over the same period that the city’s population was literally decimated, the number of murders rose by 62.4% — but they were certainly a factor.
No city should be looking to repeat the mistakes of New York City in the years preceding its bankruptcy.