The big job in tracking state and local government using data from the U.S. Census Bureau is making adjustments so that the comparisons between places and with the U.S. average are meaningful. One should to adjust, to the extent possible, for the varying structure of local government in different places, the division between state and local responsibilities, the amount of services contracted out, and the differences in the local cost of living and the ability of taxpayers to pay. One should also try to use comparable years, so the effects of booms and busts on the local tax base and social service costs can be excluded from the comparison. For a reasonable comparison with FY 2011, a year when most of the country was struggling to exit a recession but Wall Street and the rich were helped by cheap money and a related stock market –re-bubble, I have chosen the similar year of FY 2004.
Once all these adjustments are made, however, what is surprising is how slowly, and how little, things change. The big change in New York City is higher taxes, and higher taxpayer pension contributions. A spreadsheet with the data, and a discussion of what it shows on the revenue side, is after the jump.
To avoid repetition, I’m going to skip the full discussion of where the data came from and what I did with it. That can be found, along with a host of more detailed data and explanations, in the document Background Census Annual State and Local Finance Data on this page.
However, one can pretty much see what work was done by going through the different worksheets in this spreadsheet and examining the formulas.
I’ve set up the final, output spreadsheet to print on two 8 ½ by 11 pages in landscape format, though I can’t predict what your particular spreadsheet program and printer will do with it.
Examining the page of “Local Government Revenues Fiscal 2004 and 2011,” one sees that local taxes absorbed a somewhat higher share of people’s income in FY 2011 than in FY 2004. That was true in New York City, where the total local government tax burden is about double the U.S. average, in the rest of New York State, in New Jersey, and in the United States as a whole.
In all of these areas, local governments collected more property taxes for each $1,000 of their residents’ personal income in FY 2011 than they had in FY 2004. Although New York City is one of the few places in the country with a local income tax, in addition to the state income tax, federal income tax, federal payroll tax, and MTA payroll tax, the city’s property tax collections were also above the U.S. average as a percentage of income in FY 2011.
In New Jersey and the rest of New York State, property taxes are very high relative to the U.S. average. Though the housing bubble was already deflating by FY 2011, it may still have been responsible for the increase in the property burden relative to people’s incomes. When real estate prices were soaring, local governments were able to keep their property tax rates unchanged and collect – and spend – a windfall as assessments rose. When housing prices and thus assessments subsequently fell toward normal, those governments had to raise rates to keep property tax revenues from falling, in order to pay for spending increases that had been locked in when revenues were rolling in.
Sales taxes are the most important revenue source for state governments; in many states there is little if any local sales tax collected. For example, there were no general sales tax revenues in New Jersey. In New York State, however, the state government only receives about half the sales taxes collected, with the other half passed on to local governments. One issue in the news has been the role of the Internet in straining state budgets, since those buying online could often (though increasingly less so) dodge sales taxes. But despite growing online sales, local government general sales tax collections increased as a share of taxpayer incomes in the U.S., New York City, and New Jersey from FY 2004 to FY 2011, presumably due to rate increases and more goods and services being made taxable. Sales tax revenues fell as a share of taxpayer incomes in the rest of New York State; my guess is that is due to decreasing auto sales.
A greater long-term threat to sales taxes is falling consumer spending in general, as it becomes more and more difficult for business to sell people more than it is willing to pay them as workers. In FY 2004, Americans in general were going deeper and deeper into debt to spend more despite falling inflation-adjusted incomes. After the financial collapse of 2008, that soaring indebtedness was shifted to the federal government to keep the consumer economy alive, but it can’t continue forever.
The effect of the housing bust is also seen in the “Other” tax category. The most prominent taxes in the category are taxes on oil, gas and mineral extraction in some states, and taxes on real estate transfers elsewhere. The real estate bubble temporarily inflated real estate transfer taxes, particularly in New York and New Jersey, with some buildings selling multiple times within a few years with taxes collected each time. Not just homes, but apartment buildings and office buildings were flipped at soaring prices, with taxes paid to record the deed and mortgage each time. In New York those taxes are high, and in general all that money was spent rather than saved.
The resulting bust left a large share of the nation’s real estate worth less that its mortgage, thus requiring a cash payment at closing or foreclosure and bankruptcy. Often, banks just extended loans and pretended things were OK, rather than admit to their losses and face insolvency. Real estate sales – and local government tax revenues in the “other” category – plunged as a share of taxpayer income, by more than half in New York City and even more New Jersey, the Rest of New York State and the U.S. as a whole. More recently, the volume of real estate sales has returned to something like the pre-bubble normal in New York City. Thanks to soaring energy production and prices, meanwhile, states such as Alaska, North Dakota and Wyoming got windfalls, as discussed in the prior post.
New York City, as mentioned, is one of the few local governments in the U.S. with a personal income tax and a corporate (and unincorporated business) income tax. Because the personal income tax is “progressive,” and takes a higher share of one’s income the higher that income is, the city’s revenues in this category are highly dependent on the incomes of the rich. Despite the financial crisis, and thanks to the government bailouts, the rich did pretty well in the recent recession, with New York City personal income tax collections falling only slightly as a percent of the income of all city residents from FY 2004 to FY 2011.
New York City’s corporate income tax revenues are highly dependent on Wall Street profits. Thanks to bailouts, subsidies and monopoly power, corporate income tax revenues – which like the energy tax revenues in places such as Wyoming and North Dakota most city residents don’t have to pay – increased from FY 2004 to FY 2011, as a percent of the income of city residents. This despite the fact that many low and middle-income self-employed workers who were forced to pay two local income taxes in FY 2004 were only forced to pay one in FY 2011, if their income was under $100,000. (Public employee pension income is not taxed at all by New York’s state and local governments).
In his last budget presentation, Mayor Bloomberg assumed that revenues from “economically sensitive” taxes would grow strongly after this year. To have assumed otherwise would have been admitting that his administration was leaving an even bigger fiscal disaster behind. But should the city assume that the distribution of income will continue to grow more unequal, that the share of national income going to profits and not wages will continue to rise from record levels, and that corporate profits will continue to rise even as sales are constrained by consumers/workers with falling wage income? What if that doesn’t happen?
The New York State and New York City tax bases are dependent on the financial sector and others at the top pillaging to a far greater extent than 20 or 30 years ago. It is these “economically sensitive” revenues that have prevented the fiscal meltdown in New York from being as bad as in most other states, which is why New York politicians are twisted into pretzels by the question of whether Wall Street and those who work there need to offer the world a better deal. If the rich and Wall Street offer the world a better deal, New York’s personal and corporate income tax revenues may fall, or grow less than inflation. If they do not, New York’s financial services industry may collapse as consumers and investors come to take their business elsewhere.
Charges for services, and fines and other miscellaneous revenues, are nearly as important as taxes in paying for public services in the U.S. as a whole. In FY 2011, for example, local government taxes equaled $44.41 per $1,000 of U.S residents’ personal income, compared with nearly $36.00 in fines, fees, etc. per $1,000 of personal income. Charges for services increased slightly as a share of U.S. residents’ personal incomes from FY 2004 to FY 2011. Fines and other miscellaneous revenues decreased. The net was a slight increase for the two categories combined. Looking at the U.S. as a whole, therefore, U.S. local governments were extracting more of their residents’ personal income, in taxes and fees, in FY 2004 than in FY 2011.
In FY 2011, despite having an unusually extensive public transit system, public hospital system, and public housing system, and public water and sewer system, New York City’s fee and fine revenues were only slightly higher as a share of its residents’ income than local governments in the U.S. as a whole. In part because New York City does not charge for solid waste collection and disposal. As in the U.S. as a whole, New York City’s fee revenues increased slightly as a percentage of city residents’ personal income from FY 2004 to FY 2011, while its fine and miscellaneous etc. revenue fell as a share of income. Despite the “nannystate” reputation of the Bloomberg Administration, and its efforts to put advertizing revenues on public property all over the city.
The third major source of local government revenues, one about equal in importance to local taxes and fees and fines in the U.S. as a whole, is federal and state aid. Most federal aid passes through state governments, and is thus counted with state aid in data on local governments. Although the 2009 federal “stimulus package,” which provided increased aid to state governments and in particular for public schools, did not expire until the end of 2011, state aid to local governments was lower in the U.S. as a whole, as a percentage of personal income, in FY 2011 than it had been in FY 2004. State taxes also fell as a percentage of personal income in the U.S. as a whole, more than offsetting the increase in local taxes. In the U.S. as a whole, therefore, states were taking less in taxes as a share of the income of U.S. residents, and sending less on to local governments, than they had been in the past.
In New York State, on the other hand, state taxes were increased substantially as a percentage of the personal income of the state’s residents, adding to the small increase in local government taxes. Among the causes were the new MTA payroll tax, counted as a state tax by the Census Bureau even though it is only collected in the downstate region, and an increase in the state income tax, which was initially considered temporary but was then made permanent. As a result of rising state and local tax burdens relative to incomes, New York City’s state and local government tax burden, which had been 43.3% above the U.S. average in FY 2004, was 52.6% above average in FY 2011. In the rest of the state, the increase was from 23.0% above the U.S. average to 31.0% above average, as a percent of income.
Despite the rising state tax burden, New York State (and federal via state) aid to local governments did not rise as a share of state residents’ personal income from FY 2004 to FY 2011. It fell slightly, both in New York City and the rest of the state. The state’s own direct spending was cut even more. So where did the extra state tax collections go?
For one thing, the amount of money the State of New York requires local governments to collect in local taxes, and then send to the state government as local to state aid, was reduced. This can be credited in part to Tom Suozzi’s “Fix Albany” campaign, and limits on the extent that the state can increase Medicaid spending and force local governments to foot the bill. The state was forced to pay for more of its own state Medicaid spending, limiting the increase in the local government tax burden from FY 2004 to FY 2011.
Along with Medicaid, the largest state expense is aid to local government elementary and secondary education. Nationally, state to local education aid fell as a percentage of the income of U.S. residents from FY 2004 to FY 2011, a small decrease that may be explained by a combination of falling enrollment and falling state taxes as a percentage of income. In general states and the federal government tried to protect public schools from the fiscal effects of the Great Recession and public pension and debt crises, at least at first. State education aid fell slightly as a percentage of income from FY 2004 to FY 2011 in New Jersey and the Rest of New York State, and rose slightly in New York City. Local government contributions to public education fell relative to personal income in the U.S., New Jersey, and the rest of New York State. In New York City, local contributions to education were only slightly higher in FY 2011 than in FY 2004.
According to another Census Bureau data source with more detailed data on public schools, however, New York City’s own local tax contribution to its schools has soared. What is the difference? In the general public finance dataset that is the subject of this post, spending on pensions and other benefits for the retired is counted separately rather than for each government function individually. Thus almost all the increase in public school funding in New York City from FY 2004 to FY 2011, relative to the income of city residents, went to the retired and not to current education. So it does not show up here.
I’ve put in a couple of rows on the Local Government Revenues table to measure the extent to which state and local tax revenues were being sucked into the past, in interest payments and pension contributions, making then unavailable to pay for services and capital investments in the present. In New York City, state and local pension contributions and interest payments equaled 4.1% of the income of city residents in FY 2011, a huge amount given that in the U.S. as a whole the total state and local tax burden was only 10.3% of personal income that year. These state and local government costs from past absorbed far less of the personal income of residents of New Jersey, the rest of New York State, and the U.S. than in New York City in FY 2011.
Despite rising debts, however, the burden of state and local interest payments on New York City residents increased only slightly as a percentage of personal income from FY 2004 to FY 2011. This is the benefit of historically low interest rates as a result of Federal Reserve policies to aid the financial sector. When interest rates rise to normal, let alone above normal, levels the burden of refinancing the city’s (and MTA’s) huge debts will crush public services. Rising rates will also cause the purported value of pension fund investments to fall enormously, but it might help the pension funds in the long run. Right now, the best estimate of typical investment returns over the next ten years is far less than 5.0 percent. The city is assuming 7.0%, and not fully funding its pension funds based on that assumption. I’ll talk more about pensions in the next post.
The bottom section of the “Local Government Revenues” table shows what share of FY 2011 spending in each category was paid for by something other than general local government taxes. For example most local government health, hospital and welfare expenditures are paid for by some other level of government. So their burden on local taxpayers is smaller than the level of spending in the category would imply. In the rest of New York State, local governments often pay for medical services not covered by the state’s Medicaid program, pushing up the local share of spending in this category.
New York City’s transit fares, tolls, motor vehicle fuel taxes and transportation aid revenues are high enough to cover almost 90 percent of its current transportation spending on operations and capital investments. This does not even include the dedicated MTA taxes, or general sales taxes on motor vehicle and bicycle sales and other items related to transportation, or traffic and parking tickets. It is likely that with these other transportation-related revenues included, New York City’s total transportation-related fees and taxes would far exceed actual spending on transportation. But remember, in this database interest on debts and pension contributions are not included as spending on specific services such as transportation. And that is where a rising share of the transportation revenues in New York are actually going – back into the past.
With regard to the city’s water and sewer system, charges covered just 62.9% of total spending in FY 2011. The rest was paid for by borrowing, and that borrowing will mean that someday water and sewer charges will have to exceed spending on water and sewer operations and maintenance, to pay the money back. That was already the case in New Jersey in FY 2011. Hopefully the need to build additional water and sewage treatment plants, build new and replacement aqueducts, and build massive holding tanks for combined sewage overflows, will eventually slow down.
While New York City’s parks and recreation fees covered an unusually low share of spending in the category, fees collected by the non-profit organizations that have been set up to run city park and cultural organizations may not be included. Thus, the fees city residents have to pay to use facilities at parks or go to museums and zoos may not be as low as this data implies. In addition, the city’s extensive park expansion – and some of its maintenance – has been paid for by bonds.
As noted on the “Local Government Expenditures” page, to be discussed on the next post, New York City’s state and local government debts equaled 45.1% of the personal income of city residents in FY 2011, up from 38.6% in FY 2004. That burden was more than double the national average and the average for New Jersey, and nearly double the average for the rest of New York State.