So Gov. Cuomo hikes the state’s top marginal-income-tax rate by 29 percent for three years, and the city’s business community says it’s terrific. Huh?
The business community — including many big banks — has long urged the state to cut spending and taxes. Yet the tax-hike deal takes heat off the Legislature before it’s made any headway on spending. Plus, Cuomo will use the new cash to hike education and health spending by 4 percent next year, even though those outlays have shot up for years.
And if spending keeps going up, the deal’s middle-class tax cuts will eventually disappear.
But Cuomo’s tax hike makes sense if you believe that the last few years have been an aberration, that it’s the two decades before that are “normal.” That is, Wall Street profits will soon soar again, year in and year out, just as they did in the ’80s, ’90s and early 2000s.
The industry did boom — especially relative to the rest of the local private economy. As late as 1994, the financial industry comprised 14.2 percent of city jobs but “just” 22.1 percent of city wage, salary, and bonus income; by 2007, it was down to 12.5 percent of jobs — but up to 33.4 percent of income.
Taxes on that income pushed state and local tax revenues in one direction: up, which let the politicians avoid making any painful decisions. They could keep up the unsustainable retirement packages for public-sector workers, and ignore the need to conserve resources for the present and the future.
Many think we can still avoid making decisions — that today’s state and city deficits are temporary; all we’ve got to do is wait for Wall Street to come through.
That was the reasoning behind the first plan to hike state income taxes for three years — the one enacted, urrr . . . three years ago. The idea was that by the time the tax surcharges expired, Wall Street would have roared back.
Instead, bonuses could be down 40 percent this year — and tax revenues are running lower than expected.
Wall Street honchos console themselves — and the city and state officials who will listen — by blaming the problem on regulation. If they can just convince President Obama to go easier, things will be fine.
Sorry. The new regs out of Washington are indeed bad, but the bigger problem is that Wall Street grew too much — too large to serve the financial needs of the US or world economies. Like any business that outgrows its market, it must get smaller.
A smaller industry would be better for the city in the long run. Without finance dominating New York, people in other industries could afford to work here. The new jobs don’t have to pay as much; a shrinking financial industry will drive down housing and other costs.
But New York can make this change work only if it understands the challenge. It must cut and rearrange its spending if it wants to police the streets and fill in the potholes. Otherwise, we won’t get those new jobs — and even Wall Street will shift more of its business elsewhere.
Perhaps the business elites are right, that it’s all a bad dream and that Wall Street will be roaring ahead soon. But is that a smart bet for the state and city to make? This is an industry that failed so spectacularly in its own “risk management” that it needed huge bailouts starting in 2008. Who’s going to bail out New York if Wall Street is wrong again?
In past decades, the local private-sector elite has prodded New York’s politicians out of many failed ideas. But now that elite is itself trapped in the faith that a shrinking Wall Street is unthinkable.
Actually, one elite citizen doesn’t sound sanguine: Mayor Bloomberg has been conspicuously subdued about the Cuomo tax package.
“Fundamentally, you cannot tax your ways out of problems,” he said. “You’ve got to get your expenses under control.”
Why so circumspect? Bloomberg’s company sells costly services to Wall Street. He knows how badly firms are struggling to control expenses — and that taxes and costs in New York are among the industry’s biggest expenses.
Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.