FISCAL CAPACITY IN NEW YORK: THE CITY VERSUS THE REGION
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National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
FISCAL CAPACITY IN NEW YORK
FISCAL CAPACITY IN
NEW YORK: THE CITY
VERSUS THE REGION
*
HOWARD CHERNICK
Abstract - This paper addresses the public services, which is comparable in
difficulties in developing comparative quality to that of their suburban
measures of fiscal capacity for jurisdic- competitors, at a competitive price. A
tions with widely varying authority to key element in meeting this competitive
levy taxes, with particular reference to test is the fiscal capacity of the city. If a
New York City (NYC) and its region. It city’s fiscal capacity is weak or declining
compares income and property wealth relative to the region, it will be forced to
in the region and computes both make fiscal choices along a politically
representative tax system and income- and economically unattractive frontier of
with-exporting measures of capacity. In low public services or high tax rates.
terms of both income and taxable This paper presents initial estimates of
property wealth, NYC’s values per fiscal capacity for the largest city in the
household are low relative to the country and its surrounding region
region. However, taking account of the within New York State. The research is
City’s ability to export taxes to non- part of a larger project on fiscal equity in
residents, its fiscal capacity goes from 25 the New York metropolitan area.
percent lower than the median jurisdic-
tion in the region to approximately 20 The paper has three sections. The first
percent higher. discusses briefly the various measures of
fiscal capacity, with special attention to
the difficulty of applying these measures
to the nation’s largest city. The second
section applies the fiscal capacity
INTRODUCTION measures to New York City (NYC) and a
sample of jurisdictions in the New York
For central cities to remain competitive metropolitan area. The third section
with their surrounding regions, as places provides a brief conclusion.
both for residential location and for the
production of goods and services, they
must be able to provide a bundle of MEASURES OF FISCAL CAPACITY
Fiscal capacity can be defined as the
*
Department of Economics, Hunter College and the Graduate ability of a governmental jurisdiction to
Center, City University of New York, New York, NY 10021. translate economic activity within its
531National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
NATIONAL TAX JOURNAL VOL. LI NO. 3
geographic borders into public spend- on firms through gross receipts taxes.
ing. The concept is both hypothetical New York City has both a broad-based
and comparative, reflecting the differing personal income tax and a separate
amounts of revenue jurisdictions could business net income tax, the latter
raise, rather than what they actually imposed both on corporate entities and
raise. Any definition of fiscal capacity noncorporate firms. Adding an “other”
must start with a measure of economic category to represent miscellaneous
activity, such as income produced, small taxes, the general expression for
income received by residents, or RTS in jurisdiction i is given by
property wealth. The ability to transform
the economic base into public revenues
depends both on the type of taxes that 1
are legally available and on the eco-
nomic constraints facing the jurisdiction. RTCi = tPROP BPROP,i + tSALES BSALES,i
At the local level, both factors are very + tEARN BEARN,i + tCORP BCORP,i
important. Localities are legal creatures + tOTHER BOTHER,i
of their states, and taxing authority
varies both across and within states.
Ceteris paribus, the more restrictive the In equation 1, the subscript PROP refers
set of revenue instruments, the lower to the property tax, SALES to general
the fiscal capacity. Economic constraints and selective sales taxes, EARN to
are measured by the elasticity of the individual income or earnings taxes, and
jurisdiction’s tax base and depend on CORP to business income taxes. The
the extent of interjurisdictional and weight on each tax base is the average
interregional tax competition. If two tax rate on that base. The average may
cities have equal economic bases, but be across jurisdictions or it may be
one faces more perfect suburban weighted by the jurisdiction’s share of
locational substitutes than the other, the total population. The RTS is based
then it will also have lower fiscal upon the typical legal authority over tax
capacity. Measures of fiscal capacity instruments and the average fiscal
should take into account both the behavior of the sample. The drawbacks
statutory framework that shapes the of the RTS are well known (Ladd and
tax system and the economic base Yinger, 1991). If a particular jurisdiction
elasticity. faces a more (or less) restrictive legal
framework than the average—for
The two major approaches to measuring example, is not allowed to use a
fiscal capacity are the representative tax particular tax or faces a tight rate or levy
system (RTS) and income with export- restriction—its reduced ability to raise
ing. Under RTS, fiscal capacity is defined revenue will not be directly reflected in
as the weighted sum of the major tax its RTS. The only effect will be small and
bases potentially available to the indirect, through its influence on the
jurisdictions being compared (Advisory average tax rates used to compute each
Commission on Intergovernmental city’s RTS.1
Relations, 1981). At the local level, the
major taxes are the real property tax, The RTS measure also fails to capture
general and selective retail sales taxes, differences in the competitive fiscal
and the earnings or income tax. A small environment or the political economy of
number of cities impose separate taxes different jurisdictions. Thus, if the
532National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
FISCAL CAPACITY IN NEW YORK
average tax rate on any given base were tax instruments, we modify the RTS
imposed in a jurisdiction with a lower concept by defining a restricted tax
than average rate on that base, the capacity for the subset of taxes that
higher rate might induce a greater than are common to all jurisdictions. This
average reduction in the value of that approach has the advantage of not
base. The RTS will not reflect such a requiring data on tax bases such as
constraint. The RTS also ignores business income, which are not available
distributional constraints, which may for small jurisdictions. Since the property
limit a city’s ability to tax. Cities with tax is the only common tax in our
relatively unequal income distributions sample, this measure is simply the
must take into account the distribu- average property tax rate in the region
tional effects of taxes as well as the multiplied by each jurisdiction’s per
revenue productivity of different tax household property tax base. The
instruments (Inman, 1989). To summa- measure indicates the amount of
rize this critique of the RTS concept, the revenue that NYC could raise if it had a
less homogeneous are the jurisdictions tax authority similar to other jurisdic-
being compared, either in terms of tax tions in the region.
enabling authority or competitive fiscal
environment, the less satisfactory is the The income with exporting approach, as
RTS as a measure of fiscal capacity. developed by Bradbury, Ladd, and
Yinger (Bradbury and Ladd, 1985; Ladd
How can one adjust the RTS measure to and Yinger, 1991), is based on the
take into account the fiscal capacity of premise that fiscal capacity should
those jurisdictions that rely on a broader reflect the amount of revenue that
menu of taxes than the typical jurisdic- could be raised if each jurisdiction’s
tion? One way to do so is to use residents faced the same tax burden.
population-weighted average tax rates. However, resident income is augmented
Because larger jurisdictions tend to have by a jurisdiction’s ability to export a
more tax instruments available to them, portion of the taxes to nonresidents.
using population-weighted averages will Fiscal capacity is defined as
tend to give more weight to larger
jurisdictions in defining fiscal capacity. If
one were to apply this approach to 2
jurisdictions within the New York region,
it would undoubtedly raise the mea- FC = K*Y(1 + e)
sured tax capacity of the city in relation
to its suburbs. However, it would also
raise inappropriately the absolute In equation 2, K* is a standardized tax
measure of tax capacity for smaller burden, usually defined as the average
jurisdictions. From both a political and resident tax burden for all jurisdictions in
an economic point of view, it is highly the study. Also, Y is per capita income
unlikely that other jurisdictions could and e is the average export ratio. The
impose a tax resembling NYC’s corpora- export ratio, defined as exported taxes/
tion income tax. Hence, including such a local taxes, measures the revenue that
tax in the tax capacity calculation is not comes from nonresidents per dollar of
very meaningful. tax paid by residents. As shown in
equation 2, exporting enhances fiscal
As a compromise way of dealing with capacity, because it allows a portion of
the problem of restrictions on available the cost of public services to be paid by
533National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
NATIONAL TAX JOURNAL VOL. LI NO. 3
nonresidents. However, while exporting Both the exporting concept and the
lowers the cost of public services for revenue hill concept are conceptually
residents, for nonresidents, it raises the superior to RTS in that they are more
cost of doing business in the jurisdic- explicitly related to the economic
tion. Nonresidents may respond to this environment faced by any particular
higher price by relocating firms, place of jurisdiction. However, implementing
employment, or location for shopping. If either of the two concepts requires
this relocation occurs, there could be a more information than the RTS. To
decline in the jurisdiction’s fiscal base. In determine the revenue maximizing point
choosing their tax structures, localities under the revenue hill approach, one
must balance these opposing consider- must estimate an econometric relation-
ations. The observed value of e for any ship between tax rates and tax bases.
particular jurisdiction is assumed to be This estimation requires time-series data
the maximum export ratio that the city on tax rates in both the central city and
can sustain, implying that localities the various suburban locations, and
structure their tax systems so as to raises the issue of correctly identifying
maximize tax exporting, subject to the the causal relationship between tax
legal restrictions on taxation. rates and tax bases. This is difficult
because the tax rate is usually defined
A third and less well-known concept of as revenue/base. Therefore, the rate will
fiscal capacity is the maximum amount of be negatively correlated with the error
revenue a jurisdiction could raise with its term, thus biasing downward the
existing tax structure. Inman and others estimated tax rate coefficient.
have shown the existence of a revenue
hill for Philadelphia and several other To implement the tax exporting concept,
large cities (Inman, Craig, and Luce, one starts with an incidence model for
1994). At tax rates close to the summit of the various taxes and assumes that
the revenue hill, the value of extra public incidence is uniform across all jurisdic-
expenditures financed by a tax increase is tions. For example, Ladd and Yinger
more than offset by the decline in the tax assume that capital is perfectly mobile
base. If the majority of jurisdictions in the across cities, while labor and land are
sample are taxing at rates that are far immobile. As a result, capital is assumed
from their maximum taxable revenues, to bear none of the burden of local
then the revenue hill concept of fiscal taxes.2 The incidence assumptions
capacity should give a larger number produce varying export ratios because of
than the other two concepts. differences across cities or metropolitan
areas in the residential locations of
Our discussion of fiscal capacity has consumers, workers, and landowners,
ignored intergovernmental aid. How- the groups who bear the entire burden
ever, fiscal capacity from local sources of local taxes.
should in principal be augmented by
intergovernmental grants. In making The income with exporting approach
this adjustment, it is necessary to take has been applied mainly to comparisons
account of higher level tax burdens as of central cities and states. However, the
well, since a state that has both higher exporting assumptions that are appro-
taxes and higher state aid does not priate for most cities and for smaller
necessarily increase the fiscal capacity of jurisdictions must be modified to reflect
its municipalities. Grants will be in- the special circumstances of NYC. What
cluded in future work on this project. stands out in New York are the scope
534National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
FISCAL CAPACITY IN NEW YORK
and level of its taxes. In 1994, per capita able to shift a portion of taxes forward
tax revenues in New York were $2,470 to consumers outside of the region.
per capita. This amount was almost two
or more times as high as any other city In NYC, a relatively high proportion of
except Washington D.C. (U.S. Bureau of output is produced in sectors with
the Census, 1994). Though this differ- market power that extends beyond the
ence would be reduced if one were to region. New York is a center of national
take account of differences in govern- and world finance. The securities
mental organization—e.g., Los Angeles industry dominates the national market,
has an independent school district, with almost 42 percent of national
whereas New York does not—and New output produced in New York.4 About 17
York’s unusually high level of responsi- percent of wages and salaries in NYC
bility for welfare programs, taxes per comes from the securities industry, versus
capita would still be high in NYC. The only 4 percent of employment. About 38
city has a broad-based personal income percent of revenues from the unincorpo-
tax, a local sales tax, a corporation rated business tax and the general
income tax, an unincorporated business corporation tax comes from the finance,
tax, a commercial rent tax, and a highly insurance, and real estate sector.5
differentiated property tax.3 The RTS will
underestimate New York’s fiscal capac- Under the income with exporting
ity, because the average tax rate is close approach to fiscal capacity, it is also
to zero for a number of taxes used only difficult to adjust for significant differ-
by New York. For example, in 1994, ences in tax authority. Following Ladd
13.5 percent of NYC tax revenue was and Yinger, define the average export
derived from the corporation income ratio for any jurisdiction as
tax, versus zero in all other cities except
Washington, D.C.
3
The standard incidence and exporting
Σ ( REV) e
assumptions under the income with n
Revj
exporting concept will also underesti- e= j
j=1
mate NYC’s fiscal capacity. In particular,
the assumption that all taxes on capital
are shifted backward to labor and land
within the region seems inappropriate. where Revj is revenue from tax instru-
The traditional analysis of tax exporting ment j, n is the number of separate tax
classifies firms according to whether instruments available, REV is total tax
they produce for local markets or revenues and ej is the export ratio of
national markets (McLure, 1967; instrument j. Under a general or
Bradbury and Ladd, 1985). Firms unconstrained measure of income with
producing in local markets are assumed exporting, n would include all taxes
to be able to raise prices to the extent available to any of the jurisdictions,
that there are no untaxed alternatives. while REV would be hypothetical total
Thus, property taxes on rental housing revenue that could be raised if the
are shifted forward to tenants. Taxes on jurisdiction used all n taxes. Empirically,
firms producing for competitive national the problem is that such a hypothetical
markets cannot be shifted to consum- revenue concept is by definition never
ers, so they are borne by labor and land. observed, so it is difficult to construct an
Firms with national market power are empirical correlate.
535National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
NATIONAL TAX JOURNAL VOL. LI NO. 3
If instead of hypothetical revenue one individual income tax. The income
uses actual revenue, equation 3 will lead concept is New York adjusted gross
to an underestimate of exporting in income, which is reported at the school
jurisdictions with broad taxing authority. district level.6 For population, we use the
To see this, consider a jurisdiction that number of income tax filing units, which
can levy only a property tax, versus a should be a good approximation to the
second jurisdiction that gets 75 percent number of families in each jurisdiction.
of its tax revenues from the property tax Unfortunately, school districts and
and 25 percent from an earnings tax. towns are frequently not coterminous in
Suppose that both jurisdictions have an New York State. For towns that contain
export ratio for the property tax equal to more than one school district, we
1.0, while the second jurisdiction has a aggregated the income and property tax
0.3 export ratio for its earnings tax. data up to the town level. For school
Using actual revenues, e1 equals 1.0, districts that overlapped more than one
whereas e2 equals the weighted sum of town, we allocated the school district
0.75.1.0 and 0.25.0.3, or 0.825. It is totals to their respective towns.7 We
counterintuitive that the city with restrict our sample to towns and cities
broader taxing authority can export a with at least 5,000 filing units.
smaller fraction of its tax burden.
Table 1 shows income and property
To address the problem of outlier values for NYC and the region. As
jurisdictions with more taxing authority shown in column (2) of Table 1, despite
than the rest of the sample, we first the concentration of high-income
compute an intermediate case of tax individuals in some neighborhoods of
capacity under income with exporting. Manhattan, the data show that the
In this first step, we use only the relative income of persons residing in
property tax, which is the only tax NYC is low compared to the region.
common to all jurisdictions. To approxi- NYC ranks 33rd out of 38 jurisdictions,
mate the exporting ratio for NYC, we with a value equal to only 75 percent of
then compute a separate exporting ratio the median for the sample. By contrast,
for those taxes that are unique to the the richest jurisdiction in the sample,
city, and add this ratio to the property Scarsdale, has a per filing unit income of
tax exporting ratio. $192,000, almost five times that of
NYC.
RESULTS
Given the concentration of high-rise
We base our analysis on NYC and office buildings in Manhattan, one
jurisdictions in the five counties that would expect NYC’s property tax base to
make up the Metropolitan Transit be high relative to its resident income.
Authority region. The counties are Surprisingly, this is not the case. The real
Westchester, Nassau, Suffolk, Rockland, property base is about 3.1 times larger
and Putnam. The jurisdictional unit is than resident income in both NYC and
cities and towns. Data on market value the median suburban jurisdiction.
and property tax revenues are compiled Consequently, NYC’s property tax base
by the State Comptroller from surveys is low, equal to only 76 percent of the
conducted by the Office of Real Property median, ranking 34th in the region. The
Services (New York State Comptroller, fourth and fifth columns of Table 1
1997). Data are from the 1995 fiscal decompose the property tax base into
year. 1995 income data come from the its two main components, residential
536National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
FISCAL CAPACITY IN NEW YORK
TABLE 1
1995 INCOME AND PROPERTY VALUES IN NYC AND THE REGIONa
(PER NEW YORK STATE INCOME TAX FILING UNIT)
(1) (2) (3) (4) (5)
Number New York Market Value Market Value Market Value of
of Filing Adjusted of Real of Residential Commercial
Units Gross Income Propertyb Property Property
NYC 2,771,154 $38,901 $122,074 $66,909c $45,407
Median (of 38
jurisdictions) 506,178d 51,904 160,644 114,906 29,556
NYC/median — 0.75 0.76 0.58 1.54
NYC rank — 33rd 34th 37th 8th
Highest 8,620 192,053 345,128 319,620 10,893
Source: New York State Comptroller (1997).
a
Sample includes towns or cities with 5,000 or more filing units in NYC and Westchester, Nassau, Suffolk,
Rockland, and Putnam counties.
b
Excludes tax exempt property.
c
Calculated adjusting for undervaluation of Class 2 Cooperatives and Condominiums (see endnote 7).
d
Number of filing units in the rest of the sample.
and commercial.8 The importance of only about half of the RTS amount. The
Manhattan’s central business district is difference between actual and potential
shown in column (5), giving the city a revenues shows the extent to which
commercial tax base that is 54 percent NYC has substituted other taxes for the
higher than the median (per filing unit). property tax. The substitution reflects
However, as shown in column (4), NYC the combination of legal restrictions on
has a very low residential base relative property tax assessments in NYC and
to the suburbs. This difference is the fact that the city has much broader
probably correlated with the difference taxing authority than the suburbs.
in average income between NYC and
the other jurisdictions. Because the Columns (3) and (4) of Table 2 show
residential base is so much greater than fiscal capacity under the income with
the commercial base, the disparity in exporting approach. The export ratios
residential base dominates the overall used in calculating fiscal capacity, and
city-suburban comparison. the rationale for the ratios chosen, are
shown in Table 3. Column (3) shows
Tax capacity results are shown in Table fiscal capacity with only the property tax
2. The first column shows actual tax assumed to be exported. To calculate the
revenues in NYC. Column (2) shows the standardized burden, we allocated the
restricted RTS measure, based on the county sales tax total back to individual
property tax alone. This measure can be jurisdictions in proportion to the
interpreted as the revenue NYC could jurisdiction’s share of county adjusted
raise if it had the same rules on taxing gross income.9 Because of its high
authority as the suburban jurisdictions. proportion of commercial property, NYC’s
Under this measure, NYC’s rank is 34 fiscal capacity increases to $2,684 and its
out of 38, reflecting its relatively low rank moves up from 34th to 24th. How-
property wealth per filing unit. The ever, it is still below the median for the
number in parentheses shows actual region and is only 31 percent of the fiscal
property tax revenues in NYC, which are capacity in the richest jurisdiction.
537National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
NATIONAL TAX JOURNAL VOL. LI NO. 3
TABLE 2
1995 FISCAL CAPACITY IN THE NEW YORK REGION USING ALTERNATIVE MEASURES
(PER NEW YORK STATE TAX FILING UNIT)
(1) (2) (3) (4) (5)
Actual Tax Representative Income Plus Income Plus
Revenue from Tax Capacity Exporting Exporting;
All Tax Property Tax Onlya Property and Export Ratio
Sources (Actual Property Sales Tax for All Major Maximum
(1994) Tax Revenue) Onlyb Taxes) Revenuec
NYC $6,529d $2,070 $2,684 $3,757e $7,095
(1,074) (e = 0.58)
Median (of 38
jurisdictions) 3,183f 2,724 3,132 3,132 not available
(2,738) (e = 0.38)
NYC/median 2.05 0.76 0.86 1.20 —
NYC rank 34th 25th 15th —
Highest 7,583 f
5,853 8,786 8,786 not available
(5,329)
a
Calculated as (0.01695)*(property tax base per filing unit). 0.01695 was the average tax rate in the region.
b
Assumes that only the property tax is exported. Calculated as 0.0437*Y(1 + eprop). The scalar 0.0437 is the
average burden on residents of the property tax and the sales tax. eprop is the export ratio for the property tax.
c
Computed as the sum of estimated summits of NYC’s revenue hills for the personal income, sales, property, and
corporation income taxes (Haughwout, 1997).
d
Calculated by dividing NYC per capita tax revenue of $2,470 by 0.378, the ratio of tax filing units to population.
Per capita tax revenue comes from U.S. Census of Governments (1994).
e
Calculated as 0.0437*Y(1 + eNYC). eNYC is the average exporting ratio for NYC, assumed to equal 1.21.
f
Calculated as the sum of the local property tax plus the jurisdiction’s share of county sales tax revenues, allocated
in proportion to the jurisdiction’s share of county income.
TABLE 3
EXPORTING RATIOS
Property Taxa NYC Specific Taxes
Commercial Industrial property: Residential property: Personal income tax: 0.05b
property: 1.5 2.0 0.05 Corporation income tax,
unincorporated business tax: 2.0c
Sales tax: 0.42d
Commercial rent tax: 1.5e
a
These values are similar to those used by Bradbury and Ladd (1985).
b
Nonresidents comprise about 12 percent of taxable income and are taxed at a flat rate of 0.45 percent, versus an
average rate on residents of 3.5 percent.
c
Based on the degree of national and international market power of New York firms.
d
Based on an estimated 30 percent of taxable sales made to nonresidents.
e
Assumed to be the same as the exporting ratio for the property tax on commercial real estate.
Column (4) of Table 2 adds the average mated fiscal capacity now moves up to
exporting ratio for NYC’s unique taxes— a rank of 15th, 20 percent above the
business and personal income taxes and median. These results are of course
the commercial rent tax—to the sensitive to the exact exporting assump-
property tax exporting ratio in column tions chosen. However, it is clear that
(3). The overall exporting ratio for the greater ability to export taxes raises the
city under this approach is 1.21, City’s fiscal capacity substantially relative
implying that, for every $1of tax borne to the suburbs. Comparing columns (1)
by city residents, an additional $1.21 is and (4), actual tax revenues in NYC are
paid by nonresidents. The City’s esti- 37 percent higher than they would be if
538National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
FISCAL CAPACITY IN NEW YORK
New York imposed the region-wide assumptions in this paper. Given the big
average burden on its residents. difference between actual revenues and
fiscal capacity so measured, the results
For comparative purposes, in column suggest that very high exporting ratios
(5), we also show maximum fiscal would be required to close the gap.
capacity under the revenue hill ap- Thus, it seems likely that the actual tax
proach, estimated at $7,095 per filing burden on NYC residents substantially
unit for the four major taxes exceeds the standardized tax burden for
(Haughwout, 1997). While one should the region.
be skeptical about the exact numbers,
the revenue hill approach suggests that, While the tax capacity results are
in 1995, New York was close to the suggestive, to assess more fully the fiscal
economic limits on its ability to tax. competitiveness of NYC in its region, we
must expand the sample to include
Conclusions fiscal data for northern New Jersey and
Connecticut. We must also take account
Despite the concentration of commercial of state and federal aid, variations in
activity in Manhattan, as of 1995, NYC expenditure responsibility, and variations
had a low level of economic resources— in the cost of providing public services.
personal income and property wealth— The next stage of this project is devoted
relative to other jurisdictions in the to this task.
region. Both its income and its property
wealth per filing unit are 25 percent less
than the median. While the City’s ENDNOTES
relative position has probably improved
This paper draws upon work done with the New
slightly since 1995, the long process of
York City Independent Budget Office. I thank David
urban decentralization has left the Belkin, George Sweeting, and Luan Lubuele for
largest city in the United States impover- their considerable help with both data and
ished relative to the region. concepts, and Ronnie Lowenstein, chief economist
for the IBO, for encouraging me to consider the
issues. I would also like to thank Andy Reschovsky
When we translate economic resources for detailed and insightful comments on an earlier
into measures of revenue raising capacity, draft. The views presented are those of the author
New York’s relative position improves and should not be attributed to the IBO.
1
somewhat. Taking account of a If each of the n jurisdictions whose fiscal capacity is
being compared is weighted equally in computing
jurisdiction’s ability to export a portion of
the average tax rate to apply to a given base, then
the property tax on nonresidential real each jurisdiction’s influence on the average tax rate
estate, NYC’s fiscal capacity is 86 percent will be proportional to 1/n. If jurisdictions are
of the median. When we allow for the weighted by their relative population in computing
average tax rates, then the effect will be
City’s additional ability to export a
proportional to popi / ∑ pop.
portion of taxes on business income, 2
This assumption would seem to be inconsistent
estimated tax capacity is 20 percent with the Mieszkowski result that it is the
greater than the median. However, actual differential rate of taxation of capital that is borne
taxes in NYC were substantially higher by the locality (Mieszkowski, 1972).
3
The NYC ratio of effective property tax rates on
than the level implied if NYC imposed a non-residential to residential property is on the
standardized burden on its residents. order of four to one, as opposed to a national
average differential of 1.15 to one (Chernick and
Reschovsky, 1997).
The income with exporting measure is 4
The data source is the U.S. Department of Commerce,
of course sensitive to the exporting Bureau of Economic Analysis, CA05 Series, Regional
assumptions used. We have used middle Economic Information Series Data Base, 1994.
539National Tax Journal
Vol 51 no. 3 (September 1998) pp. 531-40
NATIONAL TAX JOURNAL VOL. LI NO. 3
5
The data source is the Executive Budget of the City Bradbury, Katherine, and Helen Ladd.
of New York FY 1999: Message of the Mayor, “Changes in the Revenue-Raising Capacity of
pages 57 and 63. U.S. Cities, 1970–82.” New England Economic
6
Because the tax-based income concept excludes Review (March–April, 1985): 20–37.
most transfer income, and the proportion of Chernick, Howard, and Andrew Reschovsky.
income from transfers is likely to be higher in “Urban Fiscal Problems: Coordinating Actions
central cities than in suburban jurisdictions, the among Governments.” In The Urban Crisis:
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NYC relative to the other jurisdictions. Weisbrod and James C. Worthy. Evanston:
7
The residential property value data for NYC were Northwestern University Press, 1997.
adjusted to reflect the treatment of Class II
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property classification law. Under Section 581 of the City: An Examination of the Long Run
law, these types of residential property are valued at Implications of Rate Increases for Bases and
the same rate as comparable rental units subject to Revenues.” Princeton University. Mimeo,
rent regulation. Because rent regulation lowers the preliminary version, 1997.
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The value of this reduction is substantial, with true 1989): 455–92.
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state estimate of $38 billion to $95 billion. Ailing Cities: Fiscal Health and the Design of
8
In the six county New York region, these two types Urban Policy. Baltimore: The Johns Hopkins
of property comprise about 90 percent of total University Press, 1990.
market value. Mieszkowski, Peter. “The Property Tax: An
9
However, because we had no data on nonresident Excise Tax or a Profits Tax?” Journal of Public
shopping patterns for the suburban jurisdictions, Economics 1 No. 1 (April, 1972): 73–96.
we assume that the tax is not exported.
McLure, Charles E., Jr. “Tax Exporting in the
United States: Estimates for 1962.” National
Tax Journal 20 No. 1 (March, 1967): 49–77.
REFERENCES
New York State Comptroller. Overlapping
Advisory Commission on Intergovernmental Real Property Taxes, Tax Levy and Tax Rate
Relations. Measuring the Fiscal Capacity and Statistics: New York State Local Governments,
Effort of State and Local Areas. Washington, Fiscal Year Ending in 1996. Albany, May,
D.C.: ACIR, 1981. 1997.
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