Taxes Foregone Shouldn’t Be Forgotten

Posted by Doug Turetsky, September 1, 2010

In July Deputy Mayor Stephen Goldsmith unveiled his initiative to eliminate inefficiencies in several areas of city government, from getting rid of unused office space to consolidating information technology operations. The Deputy Mayor aims to save money and improve services. That’s a laudable set of goals. Similar efforts to root through city operations are taking place inside and outside City Hall as policymakers and pundits champion ideas to balance the city’s budget. Interestingly, few seem to be poking at one fairly large corner of the city budget: tax expenditures.

Maybe this neglect is because tax expenditures are money foregone rather than money spent. But the taxes foregone are substantial—$4.6 billion in taxes administered by New York City in fiscal year 2010, according to the Department of Finance’s most recent report on tax expenditures. That’s almost double the $2.4 billion foregone in 2003. Neither figure includes millions more in tax expenditures Albany requires the city to make: for example by not allowing the city to levy property taxes on colleges and universities.

These foregone billions are the result of dozens of individual tax exemptions or abatements. Each exemption or abatement is connected to a policy or programmatic goal such as creating and preserving affordable housing or spurring job creation and retention. But not all of the tax exemptions and abatements may be delivering the intended results, their costs may be outweighing their benefits, or they may conflict with more recent policy goals.

Take one such abatement, the tax break for co-ops and condos. Created 13 years ago, this abatement was intended to take a first step towards reducing the property tax for co-op and condo owners and making their tax burden more like that enjoyed by owners of one- to three-family homes. The co-op and condo tax break cost the city $393.4 million last year, according to the finance department. Yet as IBO has previously noted a large share of the abatement goes to co-op and condo owners whose property tax burdens were already as low, or even lower, than those of other homeowners. How much did these “extra” benefits cost? About $192 million in foregone taxes in 2010—enough to pay the salaries of roughly 3,000 teachers or 1,500 police officers.

There are other examples. How many New Yorkers know that residents of Manhattan get a special tax break when they reserve a long-term garage space for their cars? Not only does it cost city tax coffers about $12 million in lost revenue but it seems to run counter to more recent policies discouraging car use in the city. And many New Yorkers, including elected officials, have questioned the logic of continuing to exempt Madison Square Garden from property taxes at the cost of $14.1 million in revenue foregone last year.

Mayor Michael Bloomberg proposed the elimination of two tax expenditures in January, on aviation fuel and on the recording of mortgage for co-ops and condos. But it was a brief consideration, abandoned in his Executive Budget.

As policy- and opinion-makers comb through the city budget and consider the effectiveness and affordability of all sorts of city spending, they should follow the Mayor’s original impulse and not forget about tax expenditures; though they are harder to see, a dollar of taxes forgone costs as much as any other dollar spent.