Local Government Revenues: What Changed from 1972 to 1987, 2000 and 2007?

The spreadsheet attached below presents data similar to the local government finance data presented in this post and also written about in two others. But whereas the former spreadsheet contained local government finance data for fiscal year 2007 alone, this spreadsheet presents local government finance data for the years 1972, 1987, 2000 and 2007. These were all up years for the economy, beginning with the administrations of New York City Mayor John Lindsey and Governor Nelson Rockefeller, through the most prosperous year of the administrations of Mayor Ed Koch and Governor Mario Cuomo, the peak economic year for Mayor Rudi Giuliani and Governor George Pataki, and the peak economic year of Mayor Michael Bloomberg with Governor Pataki’s last budget.

The years were chosen to be fairly comparable with each other, to separate changes in local government finance due to long run policy changes from those related to economic booms and busts. Economic crashes and fiscal crises followed each of them, with the worst for New York City following 1972. The quality of life was substantially lower for nearly 25 years after that; in some cases the quality of public services in New York City has never fully recovered. Is New York heading into another era like that one? And did that era every fully end?

It is hoped that the print tables worksheet will print in six 8 1/2 by 11 pages, although I'm having trouble setting that up on an I-Mac. Sorry if anyone has had difficulties.

Once again, the tax revenues by type and expenditures by function are presented per $1,000 of the personal income of the residents of the area in question. In FY 1972, for example, New York City spent $2.60 on Parks, Recreation and Culture for every $1,000 earned by New York City residents. Data is provided for New York City, the rest of New York State, the U.S. total and New Jersey in the tables intended for printing, and is available for several other states in the worksheet with the data as downloaded.

Once again I made alterations where possible to adjust for varying state and local responsibilities, so the data would be more fairly comparable, but since I didn’t have data for the Port Authority of New York and New Jersey for past years, that agency’s data is stuck in “rest of New York State” rather than allocated between New York City and New Jersey. Unable to accurately allocate the Port Authority, I left data for the Air Transportation and Water Transportation functions out of the tables.

Let’s start with what appears to be news, but is not. State aid to both New York City and local governments in the Rest of New York State, was dramatically lower in FY 1987 than in FY 1972, as a share of the income of local residents. In Census Bureau government finance data, that state aid includes federal aid that passes through the states on its way to local governments. At the same time, however, there was a big decrease in local government spending on Medical Vendor Payments plus Public Hospitals, which is substantially financed by the Medicaid program, along with a soaring amount of local government aid payments to New York State from FY 1972 to FY 1987.

All these changes are due to a shift in the assignment of spending on private health care providers under the Medicaid program, from local governments to the State of New York, in the early 1980s. This had a substantial effect on the data, since instead of the federal and state governments sending three quarters of the Medicaid funds paid to private health care providers to New York City and New York State counties, which added their own quarter before “spending it,” the local governments sent their quarter to the state, which added three quarters before “spending it” by paying private health care providers itself. (Medicaid-funded spending at locally-run public hospitals and clinics is still recorded as local government “direct” spending funded in part by state to local government aid).

The practical effect of this seemingly huge shift was limited. In fact, from what I read in the newspapers much of the administration of the Medicaid program remains in local hands (at least for now), even if the state cuts the checks. And the share of Medicaid spending financed by the federal, state and local governments did not change at the time, despite the state “takeover.” New York remains virtually the only state where local governments pay a substantial share of Medicaid costs. New York is a state where vested interests that benefit from current arrangements are entrenched in the state legislature. This massive apparent shift with little real consequence shows that the state legislature’s presumed plan for next year, responding to rising pressure by pretending to make real changes but not doing so, has a pretty substantial precedent.

Another change that is real, but is easily tied to circumstances rather than policy, is the substantial drop in property tax revenues from FY 1972 to 1987, in New York City, the rest of New York State, the U.S. as a whole and in New Jersey, and the related substantial drop in public school spending, as a share of residents’ personal income. In 1972 a large share of the very large baby boom generation was still in school, and funding for its education required substantial property tax revenues. Out of a total 1972 U.S. population of 209 million, according to the Statistical Abstract of the United States, 52 million were age 5 to 17, or 24.8% of the total. By 1988 the total population had risen to 246 million, but the population age 5 to 17 had fallen to 45 million, or 18.3% of the total.

With fewer public school students relative to the number of people working and earning income, public school spending fell relative to that income and property taxes along with it. The flip side of this is rising federal spending on the growing number senior citizens, spending is that set to soar as that same baby boom generation reaches age 65. Whether the public will be as willing to pay far higher taxes to meet their needs remains to be seen. In the intervening decades, when their taxable income was at a peak, the baby boomers were among the most anti-tax generations.

Like families, America’s governments transfer resources from working age adults to children and the old. The good news is that while an aging population increases one set of burdens, it decreases the other. The bad news is that never before, and probably never again, will the overall “dependency ratio” – the ratio of dependent children plus seniors to working adults – likely to be as favorable as it has been for the past 30 years. At the federal level, instead of saving up resources during those 30 fat years, money was borrowed. We’ll look at how the future was served at the state and local level in later posts.

While the decrease in public school spending as a share of personal income from FY 1972 to FY1987 is easy to explain, the rest of the education spending data raises additional issues.

First, public school spending has always been very, very high as a share of personal income in the portion of New York State outside New York City, compared with the national average. It has always been low by that measure in New York City. The biggest crunch and the biggest difference was not in 1972, because the baby boomer school population was concentrated outside the city at that time because middle class families had fled to the suburbs, or in 1987 when the city’s school spending was at a very low point relative to income but so was its school age population. It was in the mid-1990s when the children of the baby boomers, and the children of immigrants, flooded into New York City’s schools but spending did not rise commensurately, in part due to the distribution of state school aid. Enrollment has subsequently begun to fall, in New York City and elsewhere.

State education aid as a share of personal income increased modestly as a share of residents’ personal income from FY 1987 to FY 2007, both to New York City and to the Rest of the State, while remaining much higher for the rest of the state than for NYC. Local resources for education, on the other hand, rose substantially NYC from FY 1987 to FY 2000 (with most of the gains very late in that period), and were flat thereafter. Local revenues for education, like state aid for that purpose, rose gradually in the rest of the state from FY 1987 to FY 2007, while remaining higher than in New York City.

Second, one can see the genesis of fiscal crises in New Jersey and (in the full worksheet) California. These were states with average state and local tax burdens in FY 1987 and FY 2000, but public school spending was very low as a share of personal income in California – among the lowest among states – and about average in New Jersey. With the children of the baby boom entering school, parents pushed to improve the quality of public education in California, where school spending in rich and poor communities was much more equal than in the Northeast due to Proposition 13 restrictions on property taxes and a shift in funding to the state level. Spending on education did rise as a share of income in California, to just slightly less than the national average (as in New York City), but the tax burden did not rise as much. Public referendums, in fact, mandated both restrictions on tax increases and more school spending; money was borrowed and costs deferred to bridge the gap.

In New Jersey, average public school spending became above average public school spending (but not as high as in the portion of New York State outside New York City) as the state attempted to provide a decent quality of education in older poor cities as well as in the state’s suburbs. Here the state and local tax burden did rise, but not right away, not until substantial money had been taken from the future through inadequate pension funding. In both states, in other words, an increase in education spending was not paid for at the time. Those states are facing higher costs today, even as spending falls, as a result.

From 1987 to 2007 property taxes fell somewhat as a share of personal income in New York City, as restrictions on assessment increases for one-to-four family homes limited the extent to which rising residential property values were reflected in higher taxes, and the value of commercial property lagged income gains. In the rest of New York State property tax revenues equaled just slightly more of residents’ personal income in FY 2007 as in FY 2000 and FY 1987. For all the noise, in other words, the actual burden of property taxes in the rest of the state hasn’t really gone up much relative to income, although it is far higher than in other places. The same small increase is observed for the U.S. average, but a far greater increase in property taxes as a share of personal income was recorded for New Jersey. That state’s average property tax burden as a share of income is now about even with the part of New York State outside New York City, after having been lower.

New York City had a property tax revenue boom in the period leading up to 1972, thanks to extensive high-end office construction in Manhattan. I would guess that commercial property taxes, as a share of the personal income of city residents, has never been as high as the early 1970s, as office rents have been falling behind inflation for decades nationwide. The decline in property values (relative to inflation) in the 1970s contributed to the city’s fiscal problems. A similar windfall occurred in the 2000s in the “other tax” category, due to massive real estate transfer tax revenues during the real estate boom. Revenues in this category increased from $4.22 per $1,000 of city residents’ personal income in FY 2000 to $7.91 in FY 2007. There has subsequently been a massive bust in real estate transfer revenues, with the biggest impact on the MTA, after FY 2007.

Business apparently bore the brunt of the New York City higher taxes coming out of the 1970s fiscal crisis, as a local corporate income tax (and unincorporated income tax) was added to the city’s local personal income tax between FY 1972 and FY 1987. Census Bureau data puts the date of the new tax as 1982, the last year of the administration of Governor Hugh Carey. So while New York’s state corporate income tax revenue fell as a share of state residents’ from 1972 to 2000 before rising slightly, those corporations in New York City faced a double tax. Somehow the change in the level of corporate business activity in New York City compared with the suburbs and upstate has not been what one would have expected based on the incentive effect of relative taxes alone, as the city’s share of the state’s private sector activity has in fact increased. Corporate income taxes also produced a windfall level of revenues for the city in FY 2007 at $16.59 per $1,000 of personal income, compared with just $11.17 in FY 2000, another good year for corporate profits.

If corporate and “other” taxes merely returned to their FY 2000 levels as a share of personal income since FY 2007, therefore, New York City’s tax revenues would have fallen by $9.11 per $1,000 of city residents’ income. Or about as much as NYC spent on the police department as a share of personal income in FY 2007. These business and real estate related revenues may have fallen even further. And like the commercial property tax revenues that were high in FY 1972, these are taxes that city residents do not have to pay.

Meaning that either spending on city services will have to fall as a share of the income of city residents, over and above any declines caused by the fall in that income itself, or the taxes that city residents do pay will have to rise as a share of personal income. Note that New York City’s local individual income tax revenues increased from $15.11 per $1,000 of city residents’ personal income in FY 1987 to $18.51 in FY 2000 and $19.10 in FY 2007. New York’s state income tax revenues were about the same as a share of state residents’ personal income during those three years.

Local general sales tax revenues increased as a share of city residents’ personal income from FY 1972 to FY 1987, presumably due to rising rates. After the 1970s fiscal crisis a substantial share of the city’s sales tax revenues never reached its coffers, and instead went to pay back debts the city incurred in the period leading up to the crisis. To avoid paying the last $2.5 billion of its Lindsay-era debts in the early 2000s, those debts was extended another 30 years – that cost deferral was a big part of what the rest of the state “did for” the city in wake of 9/11. Since FY 1987, New York City’s general and selected sales tax revenues have been falling as a share of city residents’ personal income, due to a falling share of personal income being spent on taxable goods, and more goods (such as clothing) being made non-taxable. Some selective sales tax rates, such as those on hotel stays, were reduced.

Tax rate increases have been pushing up local general sales tax revenues per $1,000 of personal income in the rest of New York State, which were higher than in NYC by FY 2007. The same gradual increase in sales tax revenues a share of personal income may be observed nationally, although in many states (as in New Jersey) all general sales tax revenue goes to the state government.

Many New Yorkers believe the have been nickeled and dimed with rising charges for public services, but as I showed in post based on the FY 2007 data alone, charges for services are a substantial source of local government revenue – almost important as taxes nationally – and no higher as a share of personal income in New York City than in the U.S. as a whole. This data over time shows that New York City’s revenue from charges for services is slightly lower, as a share of city residents’ personal income, than it had been in the past, at $24.51 per $1,000 of personal income in FY 2007 compared with $28.40 per $1,000 of personal income in FY 1972. Charges as a share of personal income have, in general, been trending slightly upward for the U.S. as a whole and New Jersey; the rest of New York State got a bump up from FY 1987 to FY 2000, probably a result of the Long Island Power Authority being tabulated as a local government agency that year (see direct spending on electric and gas utilities, which does not include interest).

There are several issues here. First, these were all good economic years, and New York’s politicians have made a habit of pandering to short term selfishness by pushing off fee increases or even reducing changes when tax revenues were rolling in, and jacking them during the state’s repeated fiscal crises when people could least afford it. It is likely that charges soared as a share of the (falling) personal income in the less economically strong years after these.

Second, some changes might have gone up while others decreased. What went way down for some time was mass transit fares, which in New York City fell from $12.73 per $1,000 of city residents’ personal income in FY 1972 to $9.83 in FY 1987 and $7.09 in FY 2000 (thanks to the addition of all those Metrocard discounts), before rising to $7.21 in FY 2007. Transit fare revenues went down as a share of the total personal income of New Yorkers even as more New Yorkers used transit, and even as politicians demonized the MTA for “unnecessary’ fare increases. The MTA borrowed to offset decreases in not just tax revenues but also fare revenues. To pay that debt, and pensions and retiree health care costs that were not fully funded, the MTA is now raising fares and slashing services. Repeating a cycle going back nearly 100 years.

Third, one legitimate objection to fees is that they are not in proportion to income, spending or wealth, like income, sales and property taxes. So as the distribution of income in the city becomes more unequal, fees may fall harder on the less well off, even if their share of the total income of all city residents added together does not increase. On the other hand, while rising inequality is a trend nationally, I’m not sure that is the case in New York City – which already had plenty of inequality after the 1970s, when its middle class fled to the suburbs.

A more detailed discussion of expenditures will follow in subsequent posts.