Another Hole in the Budget Plan

Posted by Eldar Beiseitov, April 27, 2009

While the Mayor has focused much attention in recent weeks on the municipal unions’ reluctance to agree to more than $700 million in savings outlined in the Preliminary Budget, there’s another big hole to fill in the budget plan. Piggy-backing on proposals made by Governor David Paterson, the Bloomberg Administration’s Preliminary Budget included plans to eliminate the city’s current sales tax exemption on clothing and shoes costing less than $500 and to extend the sales tax to a variety of goods and services that aren’t now taxed. But with much of this falling by the wayside in the state budget, the city may well be down nearly $600 million in new tax revenue the Mayor had expected.

The state budget adopted late last month extended the state’s sales tax to certain types of transportation, such as taxis and limousines. But it didn’t incorporate the Governor’s original proposals to extend the state sales tax to digital goods, entertainment-spending, cable TV, capital improvement construction work, non-diet soft drinks, and other items. Nor did it alter the existing state sales-tax exemption for clothing purchases under $110 that had been proposed.

Since the types of goods and services subject to city sales tax generally follow the state, the Mayor is likely to limit his base-broadening proposals to what already passed in Albany. Consequently, instead of being worth nearly $200 million, as the Mayor estimated in January, the reduced list would generate a more modest $23 million in revenues in 2010.

With the state also abandoning repeal of the clothing exemption, city retailers would be placed at a competitive disadvantage with suburban retailers if the exemption were ended for the city portion of the tax. So the Bloomberg Administration may well jettison this portion of its plan as well—along with the nearly $400 million in additional revenue the Mayor had expected from it.

The Mayor has also proposed increasing the city’s sales tax from 4.0 to 4.25 percent. He estimated in the Preliminary Budget that the increase would be worth about $300 million in new revenue in 2010. Given fiscal realities, the Mayor is likely to hang on to that proposal in the Executive Budget to be released later this week.

The sales tax rate increase, which requires approval by the state Legislature, is a common move in fiscally turbulent times. New York, like other cities, often looks to sales tax rate increases when revenues are falling because they are relatively straightforward to implement quickly and usually generate less outrage from taxpayers because they pay it in small amounts with each purchase rather than a lump sum as with property taxes.

But sales taxes tend to be regressive because purchases take up a larger share of income for less affluent households. For example, data from the 2007 U.S. Consumer Expenditure Survey indicate that a household with an income of roughly $35,000 spent about 46 percent of it on taxable purchases, while a household with about $125,000 in income spent just 30 percent. As a result, a 0.25 percentage point tax increase would cost the lower-income household $40 a year, but cost the higher-income household—which has over three times the income—only $93 a year.

Even with the revenue previously expected from these various sales tax increases, IBO projected a $1.4 billion shortfall in the Mayor’s 2010 budget. With another $600 million hole to fill, New Yorkers can expect more revenue raisers and service cuts in the Mayor’s upcoming budget plan.

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