The city's adopted budget for 2001 included a program of ten tax cuts; the accompanying financial plan included one additional proposal. Due to uncertainties associated with enabling legislation needed to enact most of the tax package and with other state legislation that would affect city pension costs, the tax package was seen as a menu of options. Items from this menu would be chosen once the impact of state actions and their fiscal costs were known. While questions remain, it is now likely that the tax program will be more modest in scope than what had been incorporated into the 2001 budget.
The adopted budget. The ten tax reduction proposals included in the adopted budget, with their estimated costs in city fiscal year 2002 are:
- cutting the personal income tax (PIT) surcharge, effective July 1, 2000 - $361 million;
- phasing out the commercial rent tax (CRT) - $97 million;
- repealing the $2 flat fee portion of the hotel occupancy tax - $39 million;
- establishing a dependent care credit against the PIT - $23 million;
- establishing a rent credit against the PIT for senior citizens - $20 million;
- exempting first-time homebuyers from the mortgage recording tax (MRT) - $20 million;
- establishing a credit against the PIT for resident owners of S-corps paying the city's general corporation tax (GCT) - $15 million;
- establishing an earned income tax credit against the PIT - $8 million;
- enhancing tax abatements and credits, such as the Relocation and Employment Assistance Program (REAP), for firms located outside of Manhattan - $5 million; and
- increasing the existing PIT credit for city residents paying the unincorporated business tax (UBT) - no cost estimate reported in the budget.
In addition, the financial plan accompanying the adopted budget called for extending the coop/condo abatement of the real property tax, at a cost of $181 million in fiscal year 2002 and greater amounts in the out-years.
The Mayor's Office of Management and Budget (OMB) estimates that the total cost of adopting all eleven proposals would be $444 million in 2001, $771 million in 2002, $914 million in 2003, and $1,175 million in 2004, though slightly smaller amounts were included in the adopted budget and financial plan.
Enabling legislation. In any year, there is uncertainty regarding the adopted budget's tax program because most changes in city taxes, even if they are agreed to by both the Mayor and the City Council, are contingent upon enabling legislation being passed by the New York State Legislature and signed into law by the Governor. Such state legislation gives the city the authority to amend local tax law, often detailing precisely what changes the city may make. Alternatively, enabling legislation may be more broadly worded, allowing the city to take a range of actions concerning a specific tax. For example, the enabling legislation that allowed the city to establish a credit for city residents against their PIT liability for unincorporated business tax payments established a range of credit amounts that the city could enact on its own.
Of the eleven items on the tax program menu, only phasing out the CRT and increasing the UBT/PIT credit could be effected by the city without state enabling legislation. To give city lawmakers as much leeway as possible to construct a tax program out of the adopted budget options, the city sought broad enabling legislation in Albany.
To date, only some of the needed enabling legislation has been signed into law. At the end of July the Governor signed into law legislation that enables the city to reduce or eliminate the PIT surcharge, including the ability to vary the reduction by income bracket. But due to stipulations contained in the enabling legislation, the Governor's signature did not come in time for the city to reduce the surcharge for the current calendar year. As a result, city legislation can now reduce or eliminate the surcharge but no sooner than the beginning of calendar year 2001.
In addition, legislation expanding the city's business tax credit and abatement programs to all sections of the city other than Manhattan south of 96th Street-not just the outer boroughs as had been envisioned in the adopted budget-passed both the Assembly and Senate and on August 4, 2000 was delivered to the Governor for his signature.
However, an omnibus state bill covering many of the proposals-the four new PIT credits, the MRT exemption, and the hotel tax cut-has been stalled in Albany because the Senate and Assembly passed different versions and then adjourned without reconciling the bills. In contrast to the bill passed by the Senate, the Assembly's enabling legislation excludes the hotel tax cut and does not require the use of TANF funds to pay for the earned income tax credit.
State actions affecting pensions. This year there was an additional uncertainty at the time of the city's budget adoption: the possibility that Albany would approve automatic annual increases in pension benefits for current and future government retirees, thereby increasing city costs. Indeed, soon after the budget was adopted, the State Legislature passed and the Governor signed into law annual cost-of-living adjustments for state and local government retirees, equal to 50 percent of the increase in inflation, effective September 2001, plus a catch-up adjustment for current retirees, effective September 2000.
A reduced tax program. In response to these additional pension costs and general concerns about the projected size of the city's future budget gaps, the Mayor recently announced plans to trim the tax reduction program, along with other measures to reduce the gaps. The Mayor called for reducing the tax program by $312 million (75 percent of the amount budgeted) in fiscal year 2001, and between $262 million and $277 million (36 percent to 24 percent of the amounts budgeted) in each of the out-years. He did not, however, provide a detailed plan as to which of the tax cuts should be delayed, scaled back, or rescinded.
Achieving the proposed dollar reduction in the tax program for 2001, however, would entail greatly cutting back, if not entirely forgoing, the plan to cut the PIT surcharge, which accounts for the bulk of the adopted budget tax cuts in 2001. Even if the city proceeds to cut the PIT surcharge in the near future, the fiscal year 2001 cost will be much less than what had been included in the adopted budget because the legislated deadline for reducing calendar year 2000 PIT burdens has been missed.
If the Assembly and Senate do not reconvene later this year to enact the omnibus enabling legislation, the menu of tax cuts available to city lawmakers for fashioning a tax program in the near term will be limited to the cutting PIT surcharge (starting in calendar year 2001 or later), cutting the commercial rent tax, deepening the existing UBT/PIT credit, and/or offering greater business tax credits and abatements through REAP and other programs. Extending the existing abatement of coop/condo property taxes, a proposal accounting for 20 percent of the adopted budget tax program from 2002 to 2004, would also require state enabling legislation, but this has not yet been introduced because the current abatement remains in effect until the end of fiscal year 2001.
For more information on this topic, please contact Michael Jacobs, Senior Economist, at (212) 442-0597 or email@example.com.