The story of the Unincorporated Business Tax shows how it is nearly impossible to get rid of a tax once it is put in place, even if it is a bad one.

In 1993, then-candidate-for-mayor, Rudy Giuliani, promised to eliminate the UBT. Fast forward to 2007 and Gotham business owners are still wrestling with the UBT. But there is some hope on the horizon. Mayor Bloomberg has incorporated into his proposed budget a $1 billion tax cut that includes $44 million in UBT relief through expanded tax credits.

While potential relief is debated, the UBT remains a significant burden. In the latest year of available data, tax year 2003, 28,419 partnerships and proprietorships paid over $890 million in UBT. More disturbingly, the UBT steals productive time and money from small businesses — the lifeblood of New York City’s economy. Small businesses that pay less than $10,000 in UBT account for only 8.6% of revenue yet account for 71.4% of all returns.

Beyond the tax liability itself, the UBT also violates the four principles of a good tax system: Transparency, Neutrality, Simplicity, and Stability.

Transparency: Taxes are the price of government. There are too many different types of taxes, however, to determine what the tax price is. Imagine the confusion if you walked into a store where every shopper faced a different price because of differences in income, age, occupation, where they live, etc. That is New York City’s tax code.

Business taxes, like the UBT, are not transparent because businesses do not pay taxes, people do. We either pay them in higher prices, leading to a higher cost of living, or higher business costs, leading to lower profits and/or wages. Ultimately, the tax price of government becomes so obscured; many taxpayers begin to feel that many government services are provided for “free.” And politicians really like that.

Neutrality: Paying taxes is an involuntary action. As a result, taxation pushes taxpayers to alter their behavior ways that minimize their tax bill. This can be done legally, such as using the mortgage interest deduction, or illegally, such as not reporting income. In either case, the taxman and the economy both lose. The most pernicious form of non-neutralities occurs when many taxes conspire to create a situation where income is taxed multiple times. The UBT is double-taxation since taxpayers pay the UBT and the personal income tax on the same stream of income. And when the UBT also interacts with the sales tax, the property tax, and the estate tax, that double-taxation can become ultimately quintuple-taxation.

Simplicity: In addition to paying the tax, taxpayers must also spend time and money planning, complying with, and filing their taxes. A complex tax code creates a “tax compliance surcharge” on taxpayers. For the unfortunate businesses subject to the UBT, there are potentially up to 18 different tax forms and instructions for complying with the tax that total 68 pages.

So how much is the UBT tax compliance surcharge? Well, supposing it takes one hour per page to file a partnership/proprietorship UBT form; in 2003, it costs taxpayers over 121,481 hours at a monetized value of $4,362,383, based on the average hourly wage of an accountant. This is a conservative estimate given that so many small businesses pay the UBT and are often ill-equipped to handle all of the tax complexities.

Ironically, half-hearted efforts to eliminate the UBT have actually increased the tax compliance surcharge in two instances. First, rather than simply increase the existing exemptions to drop businesses from the tax rolls; a new UBT credit was created instead. A serious problem with the tax credit method is that many businesses go through the UBT hassle only to discover that they have no tax liability.

In fact, commissioner of the New York City Department of Finance, Martha Stark, recently stated that ” … of the 122,000 proprietors who filed UBT returns with the City, 100,000 did not owe taxes … but many people who are not required to file still find comfort in filing returns in order to be on record as complying with City tax law.” Many of these zero-tax filers are small businesses who file out of fear of City Hall.

Secondly, in order to partially mitigate the double-taxation of income between the UBT and the personal income tax, yet another new tax credit was created. Making matters worse, policymakers chose a complex credit phase-out for higher income taxpayers requiring a two-page form and a two-page instruction sheet to explain it.

Stability: Taxpayers make many long-term decisions in the face of an uncertain world, such as the decision to have children, buy a house, or start a business. If the tax code is constantly changing, has temporary tax provisions or, worst of all, is changed retroactively, planning for taxes becomes more complex. In the case of the UBT, taxpayers simply do not know if it is coming or going.

The flaws of the UBT are so well-known, that an exasperated Freelancers Union has repeatedly stated that “Independent workers should not have to pay more taxes than traditional workers because of an arbitrary distinction between traditional and alternative work arrangements. The independent workforce deserves more equitable tax treatment and a streamlined tax code.” Let Mayor Bloomberg prove his good will by fighting harder against this tax.

Mr. Moody is president of Economic Analysts, Inc., a public policy consulting group, and has over 10 years of tax policy experience at the federal, state, and local levels.