While New York City’s state and local tax burden is well above average overall, the extent of the difference varies for the different types of taxes. In fiscal 2005, state and local sales taxes (general plus selective) absorbed 3.8% of the personal income of New York City residents and 3.5% of the income of residents elsewhere in the state, assuming the burden of state sales taxes is distributed around the state in proportion to personal income. The national average was 3.8% of personal income, while New Jersey kept gas taxes low, exempted clothing, borrowed money and collected just 2.7% of personal income in state and local sales taxes. Property taxes absorbed 5.2% of the personal income of residents of the rest of New York State; if it were a separate state, only New Hampshire, Maine and Vermont would have been higher. New York City’s property tax revenue was slightly above the national average (3.3% of income) at 3.4%, New Jersey much higher at 5.0%. New York City’s state and local personal income tax revenues, on the other hand, were more than double the national average at 5.6% vs. 2.4%, with the rest of the state also above average at 3.6% and New Jersey below average at 2.2%. Note: see the spreadsheets attached to my prior post. The r8ny attachment program is still on the fritz, but the webmaster created a work around.
At the state level, New York’s taxes are only slightly above average overall. The State of New York has below average sales tax revenues relative to income, despite a high sales tax rate, because a large share of the tax rate goes to local governments rather than the state, and because the state has so many exemptions. New York’s state personal income tax revenues are high compared with the national average (several states have little or no state income tax), but are little higher than in Massachusetts which has lower rates but fewer exemptions. New York’s state corporate income tax revenues are average as a share of income of state residents, but with special tax deals they may be above average for a new firm that pays the full amount. They equaled 0.4% of the income of state residents in FY 2005, compared with a national average of 0.4%, 0.6% in low (personal income and sales tax) New Jersey, and 0.3% in Connecticut.
Interestingly, average business taxes bring extensive business complaint in Upstate New York State, but as I have read in the business press all around the country, businesses complain about taxes everywhere all the time. Some firms are moving operations from the Memphis area of Tennessee, a state with the second lowest total state and local tax burden in the country, across the border to Mississippi, which has a higher burden overall (with sky-high sales taxes) but is offering richer tax deals. And some Charlotte area businesses are moving from moderate-tax North Carolina, where corporate income taxes equaled 0.6% of income, for equally moderate-tax South Carolina, where they equaled 0.2% of income. The executives presumably live and shop in North Carolina, where total state and local property taxes and sales taxes are lower as a share of income.
It is in total local taxes that New York State distinguishes itself, with the highest local tax burden in the country (the District of Columbia excluded). Outside New York City that means high property taxes, which are the source of most complaints. Not that New York City homeowners don’t complain about property taxes — in the “passive aggressive” state it’s survival of the whiniest — but like the city’s seniors, they have nothing to complain about. The property tax bite rose from 2.7% of income in the city in FY 2000 to 3.4% in FY 2005, with the rest of the state scoring a smaller gain from 4.7% to 5.2%. The national average also rose from 2.8% of income to 3.2%, as incomes were affected by the recession earlier in the decade far more than property prices; like housing prices, property taxes have risen relative to income in many places. That includes New Jersey where the property tax bite rose from 4.5% to 5.0%.
Rather than high property taxes, New York City has a virtually unique local personal income tax on top of the state income tax, and it absorbed 2.0% of the personal income of city residents in FY 2005, compared with just about zero everywhere else. That’s up from 1.8% of income in FY 2000. The effect of the city’s lower property taxes and higher income taxes is that those in lower income categories tend to pay less overall than similar people in similar housing in the suburbs, while those at higher income levels pay more in the city. Overall, local personal income tax revenues plus total property tax revenues equaled 5.2% of personal income in the rest of New York State and 5.4% of income in New York City. Of course businesses pay property taxes as well, and likely a higher share of them in New York City than elsewhere in the state. Data is not tabulated, and probably cannot be tabulated, for business and residential property taxes separately, since many jurisdictions count rental apartments as commercial rather than residential property (since that is the way they are assessed, based on net income rather than comparable sales).
Some say that a reliance on income taxes makes the city’s revenues more volatile, but history proves otherwise. In the early 1990s recession property values collapsed, taking property taxes down with them, but incomes stayed up. In the recession earlier in this decade personal and business income plunged, taking personal and business tax revenues with them, but property values stayed high even in the face of a substantial property tax increase. Diversification has paid dividends for the city government, and city residents know that while they pay more in good years thanks to the local income tax, their tax burden will fall if they suffer a personal financial setback. Saying that property taxes are “less volatile” for the government is also saying that you have to pay the same amount even if you get sick or lose your job.
The city’s local corporate and unincorporated business tax revenues (the Census Bureau classifies the Unincorporated Business Tax in the “corporate income tax” category even though it is also paid by workers who happen to be self-employed) totaled 1.2% of city residents’ personal income if FY 2005, compared with zero just about everywhere else. That’s up from 1.1% in FY 2000. The UBT accounted for more than a quarter of that total, according to information from the NYC Comptroller’s office.
Interestingly, the extra 1.2% of income NYC collects from its unique extra local taxes on businesses and the self-employed is almost entirely offset by the extra 1.0% of income the city pays the state for Medicaid due to the state’s unique local matching share for that public benefit. Add in the local tax funded share of welfare and some other services that are state-funded elsewhere, and one might say that residents elsewhere in the state have elected to stick NYC businesses with the added bill for these benefits, given that the beneficiaries are concentrated in NYC. That hasn’t, however, induced any movement to Upstate, where the business tax bill is lower.
Recently, there have been reports issued objecting to New York City’s business and business property tax breaks. Those breaks are indeed objectionable, but not for the reasons the reports’ authors imply. It isn’t that New York City’s businesses have a low tax burden overall, and are ready source of revenues for more spending. It is that for businesses without the breaks, the relative tax difference is even greater than the 1.2% income vs. 0.0% of income overall implies.
Then there are New York City’s “other taxes,” primarily the Commercial Rent Tax, Mortgage Recording Tax, and Real Property Transfer Tax. These real estate-related taxes and other miscellaneous taxes swelled from 0.4% of the income of New York City residents in FY 2000 to 0.8% in FY 2005 — compared with 0.1% nationally. The Mayor proposes to save this windfall, and I agree since once the housing bubble is over these taxes — and to a lesser extent residential property taxes — are heading for a fall.
The city, however, may catch a break. Nationally, adjusted for inflation, for-sale housing prices are much higher than 25 years ago. According to national data collected since 1980 by the firm where I now work, however, residential rents are more or less unchanged, industrial and retail rents are lower, and office rents are much, much lower. So are (or, until recently, were) commercial property values, once inflation is taken into account. In a real estate finance course I took recently, the textbook’s authors explained this as a consequence of the suburbanization of office employment, with office space cheaper everywhere because no location commands much of a premium anymore. Perhaps. But it is possible that this effect is reversing, at least in part, for New York and a few other cities. This may limit the overall property tax decline, if the recent rise in commercial property values proves to be less of a bubble than that of residential property values, without high rents driving businesses out of the city.