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Raising Taxes Can Be Good for Business

By Moshe Adler and David Dyssegaard Kallick
Moshe Adler, left, is senior economist and David Dyssegaard Kallick, right, is a senior fellow at the Fiscal Policy Institute.

October 24, 2002

What's worse, in an economic downturn: cutting services or raising taxes?

Nobel Prize-winning economist Joseph Stiglitz has argued that it's worse to cut services.

The surprise is, New York's real estate industry seems to agree. The real estate interests called for a hefty hike in the taxes on Business Improvement Districts (BIDs); ranging from a substantial 10-percent to a whopping 45-percent increase. Last week, the mayor signed legislation that grants these landlords the increases they want.

Real estate interests are often the first to oppose an increase in taxes. Taxes will push people and businesses to move to the suburbs, they say, and will stifle economic development.

Why the change of heart? Because, unlike regular taxes that benefit the whole city, BID taxes are collected by the city from commercial tenants in chosen neighborhoods to be used only in those neighborhoods. The BIDs are controlled by the local landlords, and the revenues provide services that are good for business and for the value of real estate. In the wealthier BIDs there are decorative street signs and lamps and kiosks with neighborhood maps. Less wealthy BIDs may have special lighting on holidays. In all the BIDs, the trash cans rarely overflow because the garbage gets bagged by the BIDs' workers.

In a recent hearing before the finance committee of the City Council, some members asked what's wrong with letting neighborhoods that care about clean streets have them and letting other neighborhoods that do not want to incur the expense be dirty? And why not let some neighborhoods have holiday decorations while others go without? If people in a neighborhood want to volunteer to clean up a park or decorate a street, that's a welcome benefit to the city. This is not substituting for basic city services, it's providing an "extra" for the neighborhood. BIDs are not voluntary; their "fees" are actually taxes, mandated and collected by the city.

Narrowly focused districts won't solve the city's problems. When key neighborhoods are clean and safe, the political pressure on City Hall to provide clean and safe streets everywhere is greatly reduced. When business leaders see that they can bring the quality of services in their neighborhoods up while their city taxes go down, why would they ever support overall increases in general taxes and services? Rather than helping New Yorkers grow together, BIDs further Balkanize a city that has suffered from years of economic polarization.

If, in these tough economic times, clean and festive streets are good for business, surely businesses everywhere in the city need them. And if they are good for the neighborhoods, surely all neighborhoods deserve them. Instead of letting BIDs make improvements in select areas of the city while government cutbacks mean declining services in others, the mayor and City Council should make sure all neighborhoods get the basic services they need to improve their business climate.

But taking care of the streets is just one part of what's good for businesses and their workers. What landlords know, residents know as well. A recent study by Cornell University researchers Stephen Sweet, Phyllis Moen and Bickley Townsend showed that how families decide where to live is determined less by the level of taxation than by nine other factors, including safety, school quality, affordable housing, parks and recreation and nearness to work. And, where families want to live is closely related to where businesses want to be.

Some will argue that high taxes drove the city economy into the dumps in the 1970s. This opinion is based on ideological belief more than on empirical research. In the 1970s, job loss in New York was in fact right in the middle of the pack of eight large U.S. cities studied.

Road-construction programs, federal policy favoring new plant construction over upgrading older facilities, de-industrialization of the Frost Belt, and suburbanization were the major causes of job loss in urban centers n the '70s. Tax increases were needed because of urban job loss; they did not cause it.

During this economic slump, the last thing the city should do is cut services and let the streets get dirty. Politicians should bite the bullet and say the "T" word. Landlords know their business: Improved services paid for by higher taxes will increase economic activity and drive property values up, not down. The combination of higher taxes and better services won't push businesses to the suburbs, it will pull them to the city and help them flourish here.

Copyright 2002, Newsday, Inc.


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