Mayor Bloomberg’s announcement that he will give New York City $1 billion in tax relief headlined reports of his State of the City speech on Wednesday. But New Yorkers still face some of the highest taxes in the nation, lowering incentives to work and discouraging entrepreneurial activity.

Mayor Bloomberg will cut New York City property taxes by $750 million, or approximately 5%, which would give $322 to the average condo owner and $160 to the average homeowner. In addition, he would continue the prior $400 rebate to homeowners.

The mayor also proposes to eliminate the city’s sales tax on clothing and shoes, leaving New York City residents with only a 4.375% state tax on clothing over $110. He plans further to lower taxes on small business through deductions and credits.

These cuts, however, are only a drop in the bucket for overtaxed city residents. According to a recent study by the District of Columbia government, New York City ranks third in the nation — after Bridgeport, Conn., and Newark, N.J. — in terms of state and local taxes paid by a family of four with a $75,000 income.

More than 21 million people live in the Census Bureau’s “consolidated metropolitan statistical area” stretching from southwestern Connecticut to northern New Jersey. But little more than 8 million people actually live in New York City itself. The remaining 13 million people, many of whom visit and work in New York, live in neighboring cities and suburbs. They know what New Yorkers know: New Yorkers pay too much in taxes. Those who don’t like to pay high taxes usually choose to live elsewhere.

For most New York families, the largest and most onerous of taxes is the income tax, and that is what Mayor Bloomberg needs to cut. Other New York City taxes are not particularly burdensome relative to those of other cities. Among American cities, New York is ranked 10th in terms of property taxes and only 18th in terms of sales taxes.

But income taxes are a different matter, where New York ranks second only to Philadelphia. New York City residents are taxed over 11% for earnings above $100,000 compared to 9% for Washington, D.C., and 5% for Boston.

Of course, lowering any tax will help the city. Lower property and sales taxes will help many families and encourage businesses to settle in New York, but not to the same extent as lowering income taxes would. Many eminent economists, including Princeton’s Harvey Rosen and Columbia’s Glenn Hubbard, have shown that lowering individual and corporate income taxes is the key to increasing incentives for Americans to work and for businesses to invest. Unfortunately, under Mayor Bloomberg’s plan, income taxes remain unchanged.

Moreover, temporary tax cuts are less beneficial than permanent cuts. Mayor Bloomberg’s temporary cuts are no exception. To persuade potential residents and businesses to invest in New York City rather than elsewhere, property tax reductions should be permanent. The mayor’s tax cut is for one year only. Mayor Bloomberg said, “It would be great if we can extend this in the years to come, but we can’t know that we’ll be as fortunate in the future with our revenues and expenses so right now it would not be fiscally sensible to commit to doing so.” Homeowners or businesses will reasonably view temporary tax cuts as an unwelcoming invitation to the city because taxes might very well rise the following year. Perhaps a good many more New Yorkers will simply leave for the suburbs themselves.

Of course, what the homeowner will do is walk out of his condo with his $322, or walk out of his house with his $160, and go shopping — perhaps for clothes, since they’re now tax free. This will give New York’s economy a temporary boost, in terms of a temporary increase in consumption. But this will have no longlasting economic effects.

Just yesterday, testifying before the Senate Budget Committee, the chairman of the Federal Reserve, Ben Bernanke, said that “Policies that promote private as well as public saving would also help us leave a more productive economy to our children and grandchildren.” Removing sales taxes do precisely the opposite — they encourage consumption. A tax system that encourages saving gives tax breaks for saving and taxes spending.

Low taxes and less regulation are vital to American international competitiveness. They encourage entrepreneurial habits that can wither away through disuse. Improvements in our tax system will help us keep up not only with the rest of the country, but also with the rest of the world. Property and sales taxes are a first step. Then, Mayor Bloomberg should reduce income taxes.

Ms. Furchtgott-Roth, a former chief economist at the U.S. Department of Labor, is a senior fellow and director of Hudson Institute’s Center for Employment Policy.