The One-Way Check Valve of New York City’s Fiscal Relationships

The tax revenues from the wealth of New York City are not only for the benefit of people who live in New York City.

That’s what Governor Andrew Cuomo said in 2014 when New York City was booming, Upstate the Downstate suburbs were declining, and newly-elected Mayor Bill DeBlasio wanted to raise the New York City income tax to increase revenues specifically for the city budget.  Cuomo has made the “temporary” higher “millionaires” state income tax rates permanent instead, and sent the money to the rest of the state.  

Money is fungible.

That’s what the Governor said when the “dedicated” MTA tax revenues, collected only in Downstate New York, were transferred to the state budget and spent, in part, in Upstate New York.  Even as the subway system went into deferred maintenance, and most of the MTA capital plan was unfunded and never took place.  The MTA still refuses to publish a 20-year needs statement, showing this planned decline, today.

There is plenty of money, it’s just in the wrong hands.

That’s what Mayor Bill DeBlasio said, before signing labor contracts that ensured that those who benefitted from one retroactive pension increase after another wouldn’t be asked to make any offsetting sacrifices to help to pay for it.  Those members of the political/union class in on the deals could take more without anyone else other than a small number of $billionaries being left with less, he wanted to pretend. 

No blue state bailouts.

That is the attitude of Kentucky Senator Mitch McConnell’s view of the federal money being sent to “fiscally irresponsible” declining Blue States, perhaps at the expense of “self reliant” Red States.   

All but the last of these statements were made at a time when educated and talented Millennials, and the businesses that sought to hire them at low wages, were pouring into a small number of large central cities, including New York, even as the cost of real estate soared and the standard of living fell, creating a gusher of federal, state and local tax revenues pushing outward.  The reversal of this started slowly in the mid-2010s, after subway service decline to a “state of emergency” level as inflation-adjusted rents and sales prices peaked in NYC – and then surged during 2020 in association with the pandemic.  

So now, will money flow in the opposite direction, from other parts of the U.S., New York State, and from the political/union class to ordinary New Yorkers?   Or are New York City’s fiscal relationships a check valve that only allows money to flow in one direction?

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https://en.wikipedia.org/wiki/Check_valve

I have described the attitude of others toward the needs of those New York City residents who are neither wealthy people in the executive/financial class, nor well-connected members of the political/union class, as falling into one of three categories.

1) You don’t deserve it, because you are parasites who are responsible for your own problems.  That’s the attitude of the national Republicans after NY-NJ was hit with Superstorm Sandy, and today when NYC was disproportionately hit by COVID-19. And the attitude of just about everyone toward NYC residents during the urban decline era of the 1970s, and the crack epidemic of the early 1990s, when the number of NYC welfare recipients twice exceeded 1 million.

2) You don’t need it.  That’s the attitude of Governor Cuomo during the 2010s, when NYC was booming, and Governor Pataki, during another NYC boom in the late 1990s, and just about everyone prior to the 1970s.

3) Sorry but we don’t have it, because resources are now scarce, and those already in on the various deals get to take money off the top, leaving the needs of everyone else to be met “when we can afford it.”  That’s the attitude of the special interests of the political/union class, many of whom live in the suburbs, who take more when the economy is up, but give nothing back when it turns down.  And Governor Cuomo, who has his own promises to just about everyone else to keep.

And here we are.  Let’s look at some graphs and weak attempts to do some maps to see the recent situation.  Household-based data on employment by place of residence from the New York State Department of Labor may be found in this spreadsheet e-mailed out by the DOL.

I modified one of their charts and added two more.

The data shows that as November 2020, the unemployment rate for New York City was 11.8%, whereas the unemployment rate for the Rest of New York State was just 5.4% — higher than it had been, but at a rate that would have been considered low during most of my 43 years of working.  

https://www.bls.gov/covid19/employment-situation-covid19-faq-december-2020.htm

The Bureau of Labor Statistics reports a national unemployment rate of 6.5% for December, but believes that due to problems conducting the survey and classification errors, the actual rate may have been 7.1%.   Still far lower than in New York City. 

Within New York City, the unemployment rate was highest in the Bronx and lowest in Manhattan, as it usually is, but the reasons have changed.

The number of employed residents of New York City plunged by 513,000 (13.1%), a massive drop that is probably the highest percent decline of at least the last 80 years.   This is a combination of 318,000 workers who remained in the city becoming unemployed, and 195,300 workers – who may have been employed or unemployed – leaving the city, or quitting the labor force.

The number of employed residents of the Rest of New York State – including suburbanites holding jobs in NYC – fell by just 276,300 (5.3%), a substantial hit for sure, but nothing close to what has happened to NYC residents.

The total labor force, including those working and those still looking for work, fell by 195,300 (4.8%) in New York City and by 198,300 (4.1%) in the Rest of New York State.

The narrative being pushed by some is that employed young workers who had been living in the NYC have purchased houses in the suburbs, and are working from home, now that “New York City is over.”  And that affluent employed city residents have moved to their second homes, now that they can work at home as well.  And that rich city residents have permanently relocated to low-tax Florida or Texas.  This ignores other, probably more important factors.

Many young college-educated NYC residents who grew up elsewhere, having lost their jobs, can no longer afford high New York City rents, and have returned to wherever they came from, perhaps to their parents’ house.  

A majority of young adults in the U.S. live with their parents for the first time since the Great Depression.

And the young adults who might have normally moved to NYC for college or graduate school, or for jobs after college or graduate school, never arrived in 2020.  So there would have been no one to take the place of those who moved out, even if the number that moved out didn’t increase.  Most young adults from elsewhere live in Manhattan, where the labor force plunged by 64,700 (7.1%), the most of any borough, or Brooklyn, with a decrease of 51,800 (4.7%).

Meanwhile many older workers have ended up retired, voluntarily or involuntarily.  That probably explains the 6.8% labor force decrease on Staten Island, nearly as large a percentage decline as Manhattan, and the 3.6% decrease for the Rest of New York State, despite the young workers who might have moved there from NYC.

On the other hand in the Bronx, the poorest borough, the labor force only decreased by only 8,500 (1.4%) even as the number of borough residents with jobs fell by 74,300 (13.1%).  These folks don’t have the option of retiring or moving away, and continue to look for jobs that aren’t there anymore.  The same situation New York’s poor found themselves in during the 1960s and 1970s, before they gave up and went on welfare.

The bottom line is, New York City is hurting much more than the Rest of NY State right now, and with the relative situation after the pandemic ends is uncertain.

Now let’s take a look at how high the state and local government tax burden was in New York’s 54 counties as of FY 2017, during the most recent Census of Governments.  And how big government spending was as a share of the economy in 2019, as measured by the earnings (wages and salaries plus benefits) of federal, state and local government employees working in each county, plus total transfer payments (welfare, unemployment, SNAP, Social Security, Medicare, Medicaid, etc.), as a percent of the total personal income of everyone living there.  

I tried to map it using Tableau because it is hard to do a readable bar chart with 54 bars – although I aggregated NYC into one place by using the same number for each of its constituent counties.

As expected NYC’s state and local government tax burden, at 15.2% of its personal income, was far above the statewide average, at 13.8%.  The only place higher, at 26.1%, was Hamilton County in the Adirondacks, where most of the local taxes are paid by second homeowners whose income is recorded elsewhere – it is excluded from the mapped data.  The tax burden was lower in the suburbs than the city, and lower Upstate than it is Downstate, as a percent of personal income.  That shows that NYC is the wasteful, big government part of the state, right?

When one looks at where government money was spent, as a percent of the income of people who live there, the picture changes completely. 

Government employee earnings plus transfer payments equaled 27.0% of the personal income of NYC residents in 2019 – even including substantial earnings of government workers who were worked in the city but lived in the suburbs.  As most of the highest paid – cops, firefighters, teachers, managers – tend to do.  That is below the 28.3% for New York State as a whole, and the 28.0% for the U.S. as a whole.  

Within NYC, government spending varied from a low of 16.4% of the income of Manhattan residents to a high of 48.5% of the income of Bronx residents. For quite a few poor rural Upstate counties, however, government spending is higher as a percent of personal income than it is in the Bronx.  Meanwhile, only in affluent Nassau, Westchester and Saratoga Counties is the share of personal income accounted for by government spending lower than the NYC average.

This explains why New York City has become so much worse off compared with the Rest of NY State during the past 12 months.  New York City residents rely on private sector economic activity, which has been crushed by a combination of the pandemic and a recession that was already underway when it hit.  The Rest of NY State benefits far more from government spending, which has remained high thanks to federal and state government borrowing.  Even as the City of New York cut its budget, its police officers, firefighters, teachers and managers – those more likely to live in the suburbs – were mostly exempted.

So now what?  We know the price New York City residents paid back when “money was fungible.” A big increase in the tax burden, mostly through higher property taxes, as state aid fell as a percent of personal income and the city’s budget, and a big degradation in mass transit service. So will residents of the rest of the state be made worse off to improve the quality of life in New York City? Will New York City be the only locality that gets municipal aid from the state, the way it was the only municipality that didn’t getmunicipal aid for perhaps 15 years, going way back to the Bloomberg Administration?  Is money only “fungible” in one direction?

One finds the same thing comparing New York State with the other states.

If you look at a map of the state and local tax burden…

As of FY 2017 the higher tax states were those one might expect, based on their reputation.  Except that New York State’s state and local government tax burden was so much vastly higher, at 13.8%, than any other state (DC is at 13.6%).  

New York’s tax burden is uniquely high.  Among supposed high tax states, this compared with the 10.3% for California, the 10.6% for Connecticut, the 10.7% for Illinois, the 9.6% for Massachusetts, and the 10.7% for New Jersey.   Actual high tax states include North Dakota at 12.7%, where a large share of the tax revenues comes from oil and gas revenues and not state residents; and Vermont at 11.6% and Maine at 11.4%, where second homeowners provide most of the revenues.   In reality the state closest to NYC was Minnesota at 11.2% — not that close.  The U.S. average was 9.8%.  It has been close to 10.0% for decades.

On the other hand, government spending – the earnings of government employees plus transfer payments – equaled just 28.3% of the personal income of New York State residents, only slightly above the average of 28.0% for the nation as a whole.  And some of NYC’s government worker earnings are in reality being paid to public employees commuting in form the suburbs, or being shipped to Florida and South Carolina, as retirement benefits for state and local government workers who are already retired with retroactively enriched benefits that were (therefore) not pre-funded while they were working.

Most of the other “Blue State Bailout” states have even less government as a percent of their residents’ personal income, with California at 25.4%, Connecticut at 21.2%, Illinois at 24.9%, Massachusetts at 22.7%, Minnesota at 25.3%, and New Jersey at 23.1%.  In these states a higher share of total personal income came from the private sector, and the pandemic and recession hit them far harder as a result.

Meanwhile, the lower average income, government-dependent Red States have taken far less of a hit.  Although admittedly so has Texas, where government earnings plus transfer payments equaled only 24.9% of state residents’ personal income in 2019.

Politicians from other parts of New York State have long been hypocrites with regard to government spending.  They told their constituents that they were the hard working self-reliant people being drained by the welfare bums of New York City, all the while working to pump up state aid for their own communities.  New York City Democrats were happy to go along, because that money would be going to Democrat-funding public unions at the expense of New York City residents, who they knew would vote for them anyway on tribalist grounds.  

Taking Downstate New York as a whole, the average earnings (including benefits) of state and local government workers has gotten higher and higher compared with the private sector workers who pay for them, and by 2019 had even exceeded the average for the high-paid Finance, Insurance and Real Estate sectors.

At the federal level, on the other hand, many delusional Republicans seemed to actually believe that the Blue States were the big government states. This delusion helped large older central cities twice.  From the 1940 through the 1970s, the federal money paid for much of the new infrastructure for suburban and Sunbelt development, even as cities were left with aging and deteriorated infrastructure they had paid for themselves.  At the time the federal government paid for the cities to build public housing, to accommodate a larger share of the nation’s poor and troubled who were displaced from the Sunbelt and excluded from the new suburbs, instead.

During the 1980s, however, the Reagan Administration cut back on federal development spending.  It isn’t a coincidence that most of the limited number of older central cities that recovered from the “urban crisis” era – New York, Boston, Chicago, San Francisco, etc. – started to do so at that time.

And during the early 2010s, Tea Party Republicans forced the Obama Administration to accept the “sequester,” ongoing reductions in both defense spending and in federal spending other than entitlements (transfer payments). Once again the Blue Cities and Blue States prospered compared with the rest of the country.  That wasn’t a coincidence either. 

From what I read, those in the rest of the country noticed the urban boom of the 2010s, and resented it.  They are rooting for the destruction of America’s cities today, just as they were during the 1970s.

With the advent of Trumpism, Red State politicians have settled into the same kind of hypocrisy that Upstate and suburban New York State legislators have long employed.  Government spending on subsidies for politically influential businesses, additional spending on senior citizens, and spending on public employees residing in their own areas come first, off the top, no matter how scarce money becomes. Actual public services and benefits for those residing in the Blue States, and in particular in the urban parts of them, comes last, and is “socialism” and “welfare.”

So now Trump is gone, no longer available for the blame, and NYC residents have been disproportionately hit by the recession and pandemic.  Now what, Senator Schumer, Governor Cuomo, Mayor DeBlasio?  Is money fungible in the other direction?   Is there plenty of money for New York’s serfs, with the political/union class ready to make sacrifices to provide it?  Will the economic decline of New York City not just hurt the residents of New York City, but also lead to shared harm in the rest of the state and country – the way the benefits of New York City’s boom went elsewhere?

All I hear is politicians maneuvering to shift the blame to someone else, as the same privileged interests take more and New York City’s serfs once again left with even less.  A fiscal check valve ensures the cash cows will remain cash cows even if more of them are sick and some of them are gone.