The threat of tax increases seems to be bearing down on New Yorkers like an on-rushing train. The budget deal that brought Mayor Bloomberg control of the schools was outdated the moment it was announced; given the failure of the budget to address the city’s huge payroll, the pressure to raise more money is going to mount with each week in the year. Mr. Bloomberg himself has spoken of the need down the line for new revenue sources, which — given that he hasn’t been talking about selling the airport or the subways — can only mean tax increases. This is a time to revisit the celebrated study by Edmund McMahon of the Manhattan Institute on the impact on New York’s economy of the tax reductions put through in the 1990s.

The study* used an econometric model called NYCSTAMP to seek answers to the question of what, if anything, did lower taxes have to do with the boom in the city in the 1990s, and with the fact that private sector employment soared to record levels, and what are the implications for future tax policy. The answers, as Mr. McMahon reported, were that reductions in personal income, sales, business, and property taxes generated more than 80,000 new jobs, or one of every four gained by the city, in the five years after 1997. It found that 15,000 more jobs could be added to the city’s employment base by eliminating what was then left of the personal income tax surcharge first adopted by the city a decade ago.

It was, Mr. McMahon reported, these additional jobs that enabled the city’s job growth rate to exceed the national average, the first time that happened during an expansion since 1950. Moreover, Mr. McMahon reported, the NYC-STAMP model could also be used to predict the consequences of reversing the tax cuts. Undoing the cut in the income tax surcharge, he warned, would reduce employment growth by more than 6,300 jobs. Restoration of the former 12.5% personal income tax surcharge would result in the destruction of nearly 25,000 jobs, he found. Restoring both of the Dinkins-era surcharges would cost the city 37,000 jobs, he said. Since his report, the city has fully restored a 14% surcharge that had been put in under Mr. Dinkins and was in the process of being phased out.

The work that Mr. McMahon cites also had a cautionary message for those assuming that tax increases would bring corresponding increases in revenues. The danger is static analysis. Mr. McMahon cited critics of tax cuts who point to official estimates that the broad-based tax cuts cost the city $2 billion a year in “foregone revenue.” Such analyses, he warns, “overestimate the true revenue impact because they are ‘static,’ in that they assume tax cuts have had no impact on taxpayer behavior.” Since economists agree that tax cuts generally stimulate economic activity, he points out, the true amount of foregone revenue is lower than the official estimates. A lot lower, to judge by his work — some 20% is the number he came up with using a “dynamic” model to do the estimating.

September 2001 was the date of the report being cited here, and, of course, a lot of water has gone under the bridge since then. But the economic principles that Mr. McMahon is illuminating have not changed. As the economy slows and the accumulated city budget surplus is depleted, he said, many fiscal monitors predicted multi-billion-dollar gaps for each of the next four years. “If history is any guide,” he wrote a year ago, “pressure may grow to derail planned tax cuts or even return to a path of increasing city taxes to pay for new or additional spending.” His words were so prescient as to be almost uncanny. He also pointed out that even with the tax cuts of the 1990s, New York remains by far the most heavily taxed big city in the country. Words to keep in mind as the threat of tax increases bears down upon the city.

* Available online at www.manhattan-institute.org/html/ cr_20.htm