Gotham's Congressmen v. Gotham

By STEVEN MALANGA, City Journal
January 20, 2006

Nothing has fueled New York City's post-September 11 financial recovery more than the dividend and capital-gains tax cuts that Congress passed as part of its overall 2003 tax-reduction package. The cuts ignited the stock market, rocketing Wall Street profits and salaries upward and filling city coffers with unanticipated revenues. But those reductions will soon expire, and sentiment has grown in Washington to let them die.

In December, the House of Representatives only narrowly re-authorized the cuts, but the Senate's proposed extension of the 2003 tax package actually excludes them. If the Senate version prevails, the ensuing rise in investment taxation rates will stall Wall Street's recovery and constitute a serious blow to Gotham's economy and to its budget, which has come to rely disproportionately on Wall Street tax revenues to support soaring spending on social programs, Medicaid, and public-employee costs.

As in 2003, New York City's congressional delegation is on the wrong side of the tax-cut issue. All of the city's Democratic representatives, as well as New York State's two senators, joined the majority of their party in voting against re-authorizing the investment tax cuts, because - in the Democratic story line - they chiefly benefit the rich.

City reps should take a closer look at recent history. Mayor Bloomberg's fiscal plan for New York, released in January 2003, projected "an unprecedented decline in wage income" for the city because of Wall Street's then-18-month slump. Securities-industry profits had plummeted by two-thirds since 2001. The shrinking income would mean some $1.2 billion less in tax revenues, the city projected.

But that spring, as Congress began debating the tax package, the markets - anticipating investment tax cuts - took off. And they kept rising after the president signed the reductions into law. The Standard and Poor's 500 increased 22% for the year. Wall Street earned $17 billion - $10 billion more than the city projected. Tax collections, instead of declining, improved by more than $1 billion for 2003 alone. Wall Street's revival buoyed corporate tax revenue, as well as personal income-tax collections and even the realty-transfer tax, which gained from a revved-up real-estate market. Since 2003, city tax revenue has continued to swell. In the third quarter of 2005, personal income-tax collections were up nearly 9% over the previous year, thanks to a big jump in interest and capital-gains income.

None of this is coincidental. Previous capital-gains tax cuts, in 1978 and 1997, similarly energized Wall Street and helped the city. In the three years after the 1997 reduction, for instance, Wall Street firms pulled in $45 billion in profits and created 25,000 new jobs. And it isn't just the rich who benefit from such cuts, whatever the Democrats say. About six in 10 tax filers who report dividend income earn less than $75,000 a year.

All this should be enough to get city congressmen beating the drums in the halls of the U.S. Capitol for a renewal of the 2003 package instead of parroting the Democratic Party's anti-Gotham, class-warfare line.

Mr. Malanga is the author of "The New New Left" and a contributing editor of City Journal, from whose Winter issue this is adapted (www.city-journal.org).