A recent report of the Federal Reserve Bank of New York outlined how, since the 1970s, the city budget has become more reliant on personal income and general corporation taxes, and less reliant on property taxes. The income and corporation taxes are more volatile in economic downturns, the study says, concluding, “Today’s tax system places considerable challenges before New York City officials, who must impose sudden and large tax increases or budget cuts when the local economy contracts.”

The Federal Reserve study focused on the city, but the state budget has similar problems, as we pointed out in a June 4, 2002,editorial under the headline “Mortgaged to the Rich” and in an October 28, 2002, editorial, “Mortgaged to the Rich, Part II.”

The real import of the Federal Reserve study becomes clear when you look at it not from the perspective of “New York City officials,” but from the perspective of a New Yorker looking for a job. One of the authors of the Federal Reserve study, Andrew Haughwout, is also a co-author of a working paper out last year from the National Bureau of Economic Research. That study found that changes in New York City’s income tax rate were “statistically significant and quantitatively important” as a determinant of the city’s share of the nation’s jobs.

In 1970, the study reported, New York City had 5.28% of the nation’s jobs; by 2001 that had decreased to 2.88%. During the same period, the city’s top marginal income tax rate soared. In 1970, it was 2%.By 2001,it was 3.592%.This year, after tax increases imposed by Albany, Mayor Bloomberg, and the City Council, the top marginal city income tax rate was 4.45%. The study found that for New York city, “tax increases reduce city jobs” and that “lowering city taxes is likely to be a cost-effective way to increase city employment.” It’s advice to keep in mind as the city and state budget negotiations head to their conclusion in the coming months.