I. Introduction II. 'An Intellectual Journey' III. A Package Deal

IV. How New York Can Save Money V. What New York Should Do With the Savings VI. The End of the Road

INTRODUCTION

New Yorkers have been slouching toward the millennium with little faith in their future. Every day, it seems, another water main bursts, another child falls through the cracks of the social services system and is hideously abused, another company moves to greener-and cheaper-pastures out of state, Albany misses yet another budget deadline, and New York City slips deeper into debt. Every year, gaping deficits force the State and City governments to choose among raising taxes, cutting services and engaging in dubious fiscal dodges that burden future generations with the cost of current operations. Often they end up doing all three.

But does it really have to be this way?

Imagine, for a moment, reducing the Two New Yorks' annual spending by nearly $13 billion-almost a fifth of the State's and the City's combined budgets.

Imagine saving three of every ten dollars spent on social welfare services-as much as $8.1 billion, including federal funds-without sacrificing programs for the poor.

Imagine using these savings to balance New York State's and New York City's budgets, achieving genuine structural budget reform so we're no longer depriving our children and future New Yorkers of the resources that should rightfully be theirs.

Then imagine having so much money left over that we could choose among cutting State and City taxes drastically, making major investments in our public infrastructure, and improving services dramatically. With a little bit of luck and some cooperation from the federal government, we might end up doing all three.

This is what THE WAY TO A BETTER NEW YORK proposes, and the Citizens Budget Commission's Budget 2000 Project is no modest proposal.

The billions of dollars THE WAY TO A BETTER NEW YORK bandies about may seem staggering, but that's only because the government waste, inefficiency and redundancy to which we've become inured are staggering. Over decades, New Yorkers have become addicted to policies and practices that are anticompetitive and, ultimately, anticompassionate. That is the habit THE WAY TO A BETTER NEWYORK hopes to kick.

THE WAY TO A BETTER NEW YORK offers a radically new paradigm for governmental reform in New York. It rejects the viewpoint that what's good for New York City is bad for the rest of the state, and viceversa. The recommendations of the Budget 2000 Project would help New Yorkers as a whole. Our fortunes would be improved whether we live "upstate" or "down state." The fortunes of our children, be they in the Bronx, Buffalo or Babylon, would be brightened by no longer balancing the City and State budgets on their backs. There is a better way for all New Yorkers.

THE WAY TO A BETTER NEW YORK would spur the creation of new jobs throughout the state while protecting those who are unable to hold them. It's important to note that the Budget 2000 Project does not call for reducing cash benefits to the poor. It would transform the management of New York City's public schools and direct more dollars and more of teachers' time to classrooms. It would lead to better public services by forcing bloated government bureaucracies to be competitive and to give New Yorkers good value for their tax dollars. And it would put money back in the pockets of New Yorkers by not demanding so many of those tax dollars in the first place.

Two years of research by the Citizens Budget Commission's staff and debate among its Trustees have culminated in a consensus and a conviction that New York State and New York City can balance their budgets, make significant progress toward improving services and infrastructure, and cut taxes-all at the same time.

Pulling off this political hat trick will not be easy. It will require teamwork and sacrifice on the part of all New Yorkers. Businesses, for instance, will have to forgo the special tax breaks that New York City and other localities have given firms that threaten to leave. Affluent and middle-class New Yorkers will have to assume more of the cost of caring for their elderly and infirm parents. New York City employees will have to contribute to their health insurance premiums, as most other workers already do. And, like government agencies, the nonprofit providers of health and social services to the poor will have to adapt to competitive pressures.

State and local government operating expenses equal 22 percent of New Yorkers' total personal income, more than one-third higher than the average for the nation.

But these costs pale before the toll of continuing on our current course. New York trails the rest of the nation increasing privatesector jobs, and leads it in imposing taxes on businesses and individuals. We spend over 50 percent more of our personal income than the rest of the country on social welfare and one-quarter more on basic governmental services. If we continue to beggar ourselves at this rate, the slippery slope of economic decline could become a sheer cliff in the next century.

Gloomanddoom prognostications are nothing new to New Yorkers. We shrug at the umpteenth warning that the sky-or a bridge-is falling. (New York leads the nation in the percentage of its bridges deemed structurally deficient.) What distinguishes THE WAY TO A BETTER NEW YORK is its optimism, its faith in the Two New Yorks' future, and the facts, figures and ideas it marshals to help lead us there.

Budget 2000 in Brief, the summary that follows, begins with an account of the origins and development of the Budget 2000 Project. Then it summarizes the Budget 2000 Project's Final Report, which is in turn a synthesis of five reports that recommend better ways to meet the challenges of restructuring government services, public education, social welfare, State and local taxes, and capital investment. After outlining how we can save between $12.8 and $19.7 billion a year, Budget 2000 in Brief shows how we can use these recurring savings to eliminate New York State's and City's structural budget deficits and apply the remainder to infrastructure investment, service improvements and tax cuts.

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'AN INTELLECTUAL JOURNEY'

Early in 1995, the Trustees of the Citizens Budget Commission (CBC) concluded that the Commission should develop a longrange vision of how the governments of the Two New Yorks should be financed and managed in the next century. They were concerned about the debilitating effects of the State's and the City's perennial structural deficits. They also felt concern that the Two New Yorks were becoming less competitive economically with many other cities and states. And they were convinced that if something were not done quickly to reverse both these trends, our decline might become irreversible. Thus began what CBC Chairman Lawrence B. Buttenwieser describes as "an intellectual journey," as the Commission's staff and Trustees took a long, hard look not only at State and local government, but at their own assumptions as well-not all of which held up under two years' scrutiny.

The process of examination began with the formulation of some basic principles. State and local governments must be competitive. That is, they cannot afford to impose regulations and taxes that drive people, capital or jobs to other jurisdictions. But there's a lot more to competitiveness than simply lower taxes-otherwise we'd all move to Tennessee or Alabama, where taxes are the lowest in the nation. Superior services, be they excellent highways or an outstanding school system, can give a state or locality a comparative advantage over other jurisdictions that requires and justifies higher taxes. And, finally, the mix of taxes a state or locality imposes and the services it provides should reflect the local values of its residents, be they environmental, educational, or multicultural.

These principles led in turn to the articulation of 12 guidelines for financing and managing state and local government. These ranged from the importance of viewing state and local taxes as part of a single system, and ensuring that those taxes are economically impartial, to the key roles competition, technology and human resources can play in improving the quality and efficiency of government services.

These ideas were debated at a twoday conference attended by CBC Trustees and other influential New Yorkers in May 1995. Recognizing that inadequate services and onerous taxes had conspired to reduce New York's competitiveness and to undermine its comparative advantage, three Budget 2000 Project subcommittees then were formed to translate principles into practical recommendations: Restructuring (cochaired by Evan A.Davis and Eugene J. Keilin), Economy & Revenues (cochaired by Deborah A. Buresh and David R. Greenbaum), and Social Welfare(cochaired by Paul Dickstein and Edward L. Sadowsky). For a year and a half, these subcommittees and CBC staff and consultants worked on five reports-on restructuring government, public education, social welfare spending, tax policy, and capital investment and debt service. Based on their findings, the Final Report is a comprehensive atlas for reform, a road map for THE WAY TO A BETTER NEW YORK.

Debate was spirited and sometimes sharp. Although most of the CBC's Trustees come from the business community, their interests and expertise are diverse. Getting two lawyers to agree on anything can be hard enough, but how about a lawyer, a banker, a real estate developer, and former State and City budget directors? In meeting after meeting, participating CBC Trustees took issue with each other, and learned from each other. That they were able, finally, to resolve their differences is attribute to the concern they feel about current conditions in New York, and to the commitment they share to helping create a better future.

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A PACKAGE DEAL

Although it would be disingenuous to claim that every proposal in the Final Report must be adopted on an allornothing basis, the recommendations are intimately related. Not only do they spring from the same basic principles, but many of the steps they urge must be taken together, in coordinated sequence, or New York will stumble.

Only if New York State assumes the entire nonfederal cost of public assistance and Medicaid, for instance, can the savings and efficiencies be achieved that will reduce total expenditures and enable local governments to balance their budgets and cut taxes. And only if those taxes are cut can New York City and other localities stop giving tax breaks to firms that threaten to leave-because then extra tax breaks will no longer be necessary. But reform and restructuring must accompany reduced expenditures on social welfare, because it would be unconscionable to cut government spending without wringing the waste and inefficiency out of the system. It's the fat in government that needs paring, not the flesh and blood of the poor.

Less than 15 percent of the $26 billion New York State and City spend on social welfare programs puts cash directly into the hands of needy New Yorkers.

Recommendation after recommendation, THE WAY TO A BETTER NEW YORK is a package deal. The savings from the actions recommended in the reports are more than sufficient to eliminate the structural deficits of both the State and the City. There could be no greater gift to New Yorkers of the next century than to bequeath them balanced budgets so they don't have to pay for our fiscal sins. But the Budget 2000 Project suggests how we can endow future generations with even more-with the stronger infrastructure, better services and lower taxes that make a productive, competitive economy.

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HOW NEW YORK CAN SAVE MONEY

In order to identify the recurring savings that would make it possible to balance the budgets of the Two New Yorks and restore their economic competitiveness, the CBC studied five major categories of state and local spending:

Social welfare. Nearly one of every three dollars spent by State and local governments goes to income maintenance, medical care and social services for New York's needy. Relative to the size of our economy, New York's social welfare spending is 55 percent above the national average.

Public education. More than one-fifth of all State and local spending is devoted to elementary and secondary education. Relative to the size of our economy, this is 18 percent more than what other states spend.

Debt service. Repaying the bonds that finance large capital projects and other types of debt accounts for about 7 percent of State and local spending. Relative to the size of our economy, this is 44 percent more than the national average.

Other services. These range from refuse collection to higher education, from police to public transportation, and amount altogether to roughly four of every ten dollars State and local governments spend. Relative to the size of our economy, this is 29 percent above the national average.

Tax expenditures. These consist of revenues that State and local governments forgo by granting tax deductions or exemptions to encourage a variety of activities, such as housing construction and job retention. There is no aggregate accounting of such expenditures on the State and local levels, and thus no way to compare them to other states', but they represent a considerable sum.

The astonishing results of the CBC's research are summarized in the table below. New York State could save at least $4.8 billion annually and the City could save at least $8.0 billion, for a total of $12.8 billion-and that does not include the savings other local governments in New York could realize. Moreover, if government services were restructured aggressively, and if Washington cooperated in social welfare reform by letting New York keep the federal funds such reform saved, total savings could amount to $19.7 billion.

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                                        TABLE 1
                    Sources of Savings for New York State and City
                      (billions of dollars in fiscal year 1995)

                           New York City     New York State         Total

  Social Welfare               $3.6          $(0.6) - 4.5      $3.0 - 8.1
    Programmatic Reforms         -                    3.0             3.0
    State Assumption            3.6                  (3.6)*           0.0
    Federal Cooperation          -                0 - 5.1         0 - 5.1

  Public Education               -                   $0.4            $0.4

  Debt Service                 $0.3                  $0.2            $0.5

  Other Services            $3.6 - 4.5         $4.8 - 5.7      $8.4 - 10.2           

  Tax Expenditures             $0.5                   -              $0.5
  ________________________________________________________________________
  TOTAL                     $8.0 - 8.9         $4.8 - 10.8     12.8 - 19.7

  *This is the added expense to the State of assuming current local
   government expenses. The amount is less than combined city and county
   expenses under current policies because the State would benefit from
   the savings associated with the programmatic reforms.

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These dollar amounts, it is important to note, are based on the savings the Two New Yorks could have achieved in fiscal year 1995 if all of the Budget 2000 Project's recommendations had been fully implemented. They do not rely on any assumptions or projections about future economic conditions or social welfare needs, and thus they are actually conservative.

Social Welfare Savings

The Budget 2000 Project's report on Social Welfare Spending recommends four broad approaches to reducing the $26 billion New Yorkers spend annually on social welfare. Less than 15 percent of that $26 billion consists of cash payments to the needy. Because the CBC believes firmly that THE WAY TO A BETTER NEW YORK is not over the backs of the poor, its recommendations concentrate on the $22 billion remaining. Their focus is not on reducing services to the needy, but on reducing the cost of delivering those services, and on scrutinizing more closely who the really needy are.

While assistance payments to New York's needy are 1.5 times greater than the rest of the nation's, our administrative expenses are 2.4 times higher-$1,285 per case compared with $532 elsewhere.

Streamlining administration. If New York State assumed total nonfederal financial and administrative responsibility for public assistance and Medicaid, as most other states do, it would provide relief for localities with high concentrations of poor, disabled and elderly residents, diluting the costs by spreading them among more affluent areas. Consolidating redundant welfare agencies and programs on the State and local levels would significantly reduce those costs, too.

Centralized social services could more readily take advantage of advanced computer technology. When child abuse or neglect is reported, for instance, easy access to comprehensive computerized records could save lives as well as time and money. Sophisticated technology on a statewide level also could improve the lives of many children by making it easier to track down "deadbeat dads" and recover child-support money. It also could make it easier to recover payments from the estates of recipients of long-term care under Medicaid.

Applying and expanding managed care. Medicaid is by far the biggest component of New Yorkers' social welfare spending-$19.6 billion in 1993, more than six times the sum spent on Aid to Families with Dependent Children. Although Medicaid recipients are admitted to New York hospitals at a rate roughly comparable to the national average, they're kept there twice as long-for an average of ten days compared to five days elsewhere. No wonder we spend 58 percent more than the national average on acute care per Medicaid beneficiary. Managed care-paying health-care providers, including hospitals, fixed sums or "capitation" rates per person enrolled in their programs and determining those payments by competitive bidding-should reduce hospitalization costs by encouraging less expensive and more expeditious medical treatment.

But managed care should not be restricted to acute care. We also spend 168 percent more than the national average for longterm care for Medicaid recipients, either in nursing homes, where the daily rate was 72 percent above the national average in 1993, or in their own homes with homecare visits that are considerably more costly than elsewhere in the country. Managed care could lower these rates, too.

Capitation payments and competitive bidding should also be extended to services other than health care. Spending for foster care in New York State, for instance, exceeds the rest of the nation's by a wider margin than for any other social welfare program. Managed-care concepts would encourage foster-care agencies to reduce their administrative rates and the time it takes to find children permanent homes.

Redesigning counterproductive practices. The Budget 2000 Project identifies several social welfare programs that, however well-intentioned, entail costs far out of proportion to their benefits.

One of these is kinship care-placing children in the foster care of their own relatives, who are paid as if they were utter strangers. Kinship care consumes the lion's share of New York's extraordinary spending on foster care, and provides little incentive for children to be reunited with their parents or placed with adoptive parents. The practice should be curtailed to cases in which responsible relatives complete proceedings to become permanent guardians of the child within two years.

New York's high costs and lax eligibility rules enable 58 percent of nursing home admissions to qualify for Medicaid, while the average nationally is an estimated 35 to 40 percent. And 33 percent of New Yorkers who initially pay privately for nursing home care eventually become eligible for Medicaid, compared to 10 to 23 percent nationally.

Medicaid costs could be reduced significantly if they did not include long-term care for so many New Yorkers who are not poor-or were not poor until they transferred or "spent down" their assets in order to qualify for Medicaid. Many of these "needy" are the parents and spouses of relatively wealthy individuals, who expect their neighbors and every other taxpayer to help support their nearest kin. Eligibility rules for Medicaid should be tightened so that middle-class and affluent New Yorkers pay a fairer share of the cost of long-term care, and government should provide incentives for the purchase of private insurance to help cover this expense.

Aligning benefits to national norms. As noted before, the CBC does not endorse reducing cash payments to the poor. Even though benefits under AFDC, Home Relief for childless adults, and Supplemental Security Income (SSI) for the indigent elderly and disabled are higher in New York than in most states, they are necessary to meet humane standards. But there are other social welfare programs whose benefits, adjusted for cost-of-living differences, should be brought more closely in line with the rest of the country's. New York's relatively generous payments to foster-care families are one example.

The key to implementing all these reforms is transferring to the State responsibility for the $3.6 billion New York City spent on social welfare in 1995 (plus the social welfare spending of other localities). This makes sense in terms of taxes (broadening the base) as well administration (consolidating services). In addition to saving New York City $3.6 billion, the shift would facilitate reforms that would cut social welfare spending by 30 percent. Consequently, the increase in State expenditures required to assume local costs would be only about $3.6 billion. And if Washington allowed New York to keep the federal dollars it saved in social welfare spending-a greater likelihood as federal funding shifts to block grants-the savings to the State and City, once again calculated on the basis of 1995 expenditures, could mount as high as $8.1 billion. We would be well on our WAY TO A BETTER NEW YORK.

Public Education Savings

In the aggregate, New York State's public school children, the next century's work force, are C students. They score 22nd on national reading and math tests. And New York City kids perform more poorly than children in the rest of the state. That's one reason the Budget 2000 Project insists that spending on New York City public schools not be reduced by one penny. Indeed, it may eventually be necessary to increase spending on New York City's public schools, though not before the system is thoroughly overhauled, in ways Budget 2000 in Brief will outline later, to guarantee the extra money is well-spent.

Expenditures in New York City are not out of line with national norms, but they are in some other districts in the State, which as a whole spent more per public school pupil than all but two states. The extra State taxes such spending requires make New York uncompetitive economically without making us competitive educationally, at least on the evidence of test scores. The CBC recommends holding harmless the most needy school districts while reducing State aid to more affluent districts by 20 percent, for an annual savings of about $400 million. If districts with above-average tax bases wish to spend more on their schools, they can invest additional local resources by raising property taxes-a move that may be easier if other tax cuts the CBC proposes are enacted.

Debt Service Savings

New York State and local governments and their public authorities invest about $10 billion annually in capital projects. We probably need to spend even more on our infrastructure, but before we do it's essential to get more bang for the bucks we borrow, especially as debt service consumes more and more of our scant resources. Debt service is projected to rise from 6 percent to 8 percent of State revenues in just four years, from 1995 to 1999, and from 14 percent to 20 percent of New York City's revenues.

The easiest way to reduce this burden is to reduce the time and money it takes to complete capital projects. No step toward more costefficient capital investment is more important than repealing the Wicks Law. This statute compels local governments to divide all contracts exceeding $50,000 into at least four separate contracts. The cost overruns and delays in completion fostered by the Wicks Law inflate the price of every capital investment enormously-estimates range from 8 percent to more than one-third. If repealing the Wicks Law reduced expenses by only 10 percent, it would have saved New York State and City about $720 million in capital costs in 1995.

According to one study, capital projects built under the Wicks Law cost 27 percent more per square foot than projects exempted from it, take nearly two years longer to finish, and average 65 percent more defects.

Additional savings would be realized if New York State and public authorities followed New York City's lead and improved their capital planning processes to keep closer track of their needs and their myriad projects, identifying problems and expediting completion. The City's greatest shortcoming is its failure to maintain its facilities. In 1996, for example, the City allocated funds for only 9 percent of its libraries' estimated maintenance needs, and none for its fire stations. By spending more money on maintaining its infrastructure today, the City would spend far less money repairing and rebuilding it tomorrow.

Over time, repeal of the Wicks Law and the implementation of other measures recommended in the Budget 2000 Project's report on Capital Investment and Debt Service could save the State more than $200 million annually and the City nearly $300 million.

Savings in Other Services

As a share of personal income, New York's State and local governments spend twice as much as the rest of the country on housing and community development, over 90 percent more on transportation and transit, 60 percent more on government administration, and 30 percent more on public safety. If New Yorkers were twice as well housed as other Americans, or if their State and local governments were 60 percent more effectual, it might justify paying 62 percent more in State and local taxes per capita. But few would argue that our money has been spent effectively. The more compelling case is that we are wasting our resources and those of future generations. In the economic competition among the states, the biggest trophy we're taking home is the booby prize for profligacy.

New York's state prisons employ 35 percent more correction officers and 11 percent more administrators per inmate than the national average; our local jails employ 80 percent more officers and 22 percent more administrators per inmate. And we pay correction officers 26 percent more than the national norm.

Three ways to get back in the running are outlined in the Budget 2000 Project's Report on Restructuring Government Services, which considers the nearly $50 billion New York State and New York City spend for purposes other than social welfare, primary and secondary education, and capital investment and debt service.

First, we need to establish clear priorities for government activity and eliminate the items at the bottom of the list. Low priorities might include Staterun golf courses, for example, or the hotel the City is in the process of selling. If golf courses and hotels are important, let the private sector provide them.

The second strategy is to introduce competitive contracting wherever possible in the delivery of services that government still must finance. In Phoenix, it's custodial services; in Indianapolis, it's pothole repair and trash collection; in Chicago, parking ticket administration and adjudication; in Massachusetts, highway maintenance and prison health care. Across the nation, localities and states are contracting out services to the most competitive bidders, and realizing savings of 17 to 61 percent. New York has got to start playing catchup-and then leap ahead of the pack.

The most competitive bidders, by the way, often turn out to be government workers. Who, after all, knows their jobs better, or how to do them more effectively? Much of the time the constraints on their performance have been bureaucratic regulations they played no role in making, and which they may be as eager as anyone to shed. In Phoenix, public employees have won 39 percent of the contracts competitively bid.

Operations where competitive contracting might be profitably introduced include the City and State transportation departments and the New York City Department of Sanitation. Support services such as data processing, maintenance, and billing and collection for many State and City agencies also are prime candidates for competition.

The third strategy for restructuring government is to increase productivity in every operation where government is essential by instilling better management and installing better managers. Agencies and functions should be consolidated, new technologies introduced, and old civil service work rules and union agreements revamped. For example, the federal government, fortythree states (including New York) and twothirds of the nation's large businesses require their employees to pay a portion of the premium for family health insurance, yet New York City picks up virtually the entire tab for its workers and their dependents.

Or take New York City's Police Department: New technologies such as video teleconferencing and computerbased arrest processing would dramatically reduce the time police officers spend pushing paper instead of fighting crime. Such a "paperless arrest processing" system would free up the equivalent of 400 officers, a productivity enhancement worth $20 million annually.

Fifty percent of retired New York City firefighters collect costly disability pensions, while in Buffalo 22 percent do, and in Syracuse, just 9 percent.

How much money would such a dramatic restructuring of government services save? The evidence from other states and cities suggests typical savings of about 35 percent. Allowing for the difficulties of implementation in New York suggests a more conservative estimate of just under 30 percent. Had these reforms been in place in 1995, New York State would have saved from $4.8 billion to $5.7 billion, and New York City from $3.6 billion to $4.5 billion.

But such reform will require strong executive leadership that changes the way State and local governments deal with public employee unions. In order to encourage and reward government workers, the Budget 2000 Project recommends a policy of gain sharing, whereby employees enjoy some of the savings that result from redesigning work rules and compensation practices. The report on Restructuring Government Services suggests that some savings from such restructuring be reserved for this purpose. This would amount to between $1.1 billion and $1.5 billion.

Tax Expenditure Savings

The keen competition among the states for jobs and the un competitive burden of New York State and local taxes have encouraged New York City and other localities to grant tax breaks to companies that threaten to relocate. In exchange for promises to remain or expand within its borders, New York City granted real property tax exemptions totaling more than $521 billion in 1993, up from $180 million in 1987. Additional exemptions have sometimes been given from State and local sales taxes on purchases by the favored firms, and from their utility taxes.

Singling out some companies for special treatment is unfair to their competitors but, more importantly, such discretionary tax breaks would be unnecessary if taxes were reduced and services improved. Then the Two New Yorks would offer an attractive, competitive economic environment to all businesses.

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WHAT NEW YORK SHOULD DO WITH THE SAVINGS

Thirteen billion dollars is a lot of money. Twenty billion dollars, the approximate high-end estimate of potential recurring savings, is even more. Realizing these savings will require hard work and sacrifice on the part of nearly every New Yorker, but success will transform today's gloomy resignation to inevitable service cuts and budget gaps into tomorrow's optimistic discussion of how best to invest in our future. Informed, earnest public debate should determine what we do with the money we save. The CBC does not claim to have all the answers, but it does have a clear set of priorities.

First, the Two New Yorks' structural deficits should be eliminated, and our budgets balanced without recourse to "one-shot" measures and other fiscal gimmicks that saddle the next generation with the bill for our services. In 1995, closing the State and City structural budget gaps would have required $2.4 billion.

Second, a gain-sharing pool of from $1.1 billion to $1.5 billion should be created to reward productive public employees.

Third, the State must assume the cost of social welfare programs now borne by local governments.

The cost of State assumption already is factored into the savings estimates; the other two priority items would consume between $3.5 and $3.9 billion of the estimated $12.8 to $19.7 billion in potential savings. The Budget 2000 Project does not presume to dictate what to do with the remaining $9.3 billion or more, but it outlines three alternatives-lowering taxes, investing in our infrastructure and improving public services. None of these courses are mutually exclusive; as savings materialize, we can decide how to apportion them. And all of them would make New York a better place to live and a more competitive place to work.

How New York Can Cut Taxes

The waning of New York-the nation's most prosperous and populous state less than fifty years ago-has been attributed to everything from interstate highways to airconditioning. But high on the list of culprits must be the country's heaviest tax burden. For decades, businesses and individuals have voted with their feet, figuring if they lived in California (or Kansas-anywhere but New York), they'd be better off. This exodus has seriously depleted New York's human and economic resources.

From 1950 to 1995, privatesector jobs grew 150 percent nationally, while in New York State they increased just 32 percent, and in New York City they declined nearly 8 percent.

Attempting to stanch the outflow of jobs and job-holders, New York State already has enacted reductions in the personal income tax. But the taxes the State imposes on corporations, banks, insurance companies, real estate transactions, gross utilities receipts and personal estates are still out of line with what the rest of the country collects. The cost of living (and dying) and doing business in New York remains uncompetitively high.

To make matters worse, New York's local governments-most notably New York City-impose the highest local tax burdens of any state in the nation. Not only does New York City, for example, levy property taxes plus its own versions of the State's taxes, but in addition it taxes financial corporations, unincorporated businesses and commercial rents.

These local taxes are not distributed evenly across jurisdictions or even within them. Overall, local taxes in New York averaged 8 percent of personal income in 1994, but ranged from less than 6 percent in Rensselaer County to 10.5 percent in Sullivan County. New York City had the seventhhighest burden, 9 percent, below Sullivan, Suffolk, Oswego, Greene, Delaware and Essex counties.

To make New York State and its localities competitive, most state and local taxes need to be lowered, and some local taxes need to be eliminated. To make New York equitable, the taxes that remain must be imposed widely and impartially.

Because of high taxes, manufacturing firms in New York City suffer rates of return 6 to 13 percentage points lower than firms in upstate New York, and lower still than manufacturers in California and Texas. New York City's taxes reduce service firms' rates of return from 3 to 18 percentage points below those elsewhere.

Thus, in addition to ending discretionary tax breaks for businesses that threaten to relocate, New York City should stop giving special treatment to small homeowners, who pay disproportionately low property taxes. All property-commercial, manufacturing, large apartment buildings and small single-family homes-should be treated equally and taxed at the same effective rate. Just as businesses denied tax breaks will remain in the City if the tax burden on all businesses is reduced, small homeowners will remain if the increase in their property taxes is offset by the decrease in their State and City income taxes. In the relatively few instances where lowerincome homeowners might be deleteriously affected, the CBC recommends transitional "circuitbreaker" rebates.

The recommendations in the Budget 2000 Project's report on Tax Policy add up to a significant, some might even say radical, change in the financing of the Two New Yorks. State personal income taxes would be cut 20 percent, business income taxes 29 percent, and inheritance and gift taxes 40 percent. City personal income taxes would be cut 78 percent, City business income and real estate transaction taxes eliminated, and its real property tax altered in a way that would raise the bills of some currently undertaxed owners while cutting the bills of most others.

Of course, the cost of such dramatic tax cuts would be substantial. If enacted in 1995, they would have cost New York State and City a total nearly $11.7 billion-more than the low-end estimate of $9.3 billion in savings left after eliminating structural deficits, creating a gain-sharing pool for public employees and transferring New York City's social welfare costs to the State.

It should be noted, however, that some of these tax cuts have already been enacted. Additional cuts can be made as savings in expenditures materialize, so that the Two New Yorks' budgets remain structurally balanced. Although lowering taxes will unquestionably make New York more competitive, we must bear in mind that two other courses of action can also contribute to reaching this common goal.

How New York Can Invest in Infrastructure

New York's competitiveness hinges on more than just taxes. From massive bridges to school buildings to local roads, the public infrastructure is crucial to making New York an attractive place to conduct business or raise children. A viable infrastructure in good condition is a cornerstone upon which our comparative advantages can be built.

Unfortunately, big cracks have appeared in the foundation. Our two major airports, Kennedy and LaGuardia, are among the most congested in the U.S. Nearly half the 25,000 miles of highway in New York are rated fair to poor. One of every twelve bridges is considered functionally obsolete, and another seven structurally deficient. More than eight of ten New York City public school buildings need complete renovations or the replacement of major systems. (A recent report of the Citizens Budget Commission, School Buildings for the Next Century: An Affordable Strategy for Repairing and Modernizing New York City's School Facilities, proposes several solutions to the school facilities crisis.)

The U.S. Environmental Protection Agency estimates that New York needs to spend $26 billion to bring its wastewater treatment up to par, an amount equal to 6 percent of annual personal income, three times higher than the ratio for the rest of the country.

The Budget 2000 Project does not identify a detailed capital investment program analogous to its comprehensive tax reform package. That's because it is not as clear what it would take to make the Two New Yorks' infrastructure competitive. But it is clear that some of the new resources potentially available to State and City government should be allocated to new capital projects. The CBC makes no specific recommendations, pending completion of comparative research on infrastructure needs, which should help New Yorkers identify worthy projects and weigh their benefits against those of tax cuts and service enhancements.

How New York Can Improve Services

A third way states and cities compete for residents and jobs is by providing better services. Public education is one of the most important of these services, and one New York City in particular fails most egregiously to provide. Although it may eventually prove necessary and desirable to increase spending per pupil in New York City public schools, the major and immediate cause of this failure is not inadequate funding but ill-conceived programs, a misbegotten bureaucracy and the absence of incentives and competition. This can be corrected without major new investments.

New York City's public schools suffer from a lack of accountability that begins in the individual classroom and runs throughout the system to the Board of Education itself. Certified for life, teachers have little incentive to improve their performance. Even removing a teacher who is guilty of serious malfeasance is a drawnout affair. Union contracts keep bad teachers in place even as they keep good teachers out of the classroom more than a third of each school day. The way to better schools is to make teachers more accountable by replacing onceinalifetime certification with renewable licenses.

Principals also would no longer be eligible for tenure. They should be given contracts, not sinecures, and the freedom as well as the responsibility to improve their schools' performance. Principals should be the line managers of the school system, and recruited, trained, evaluated and compensated as such. Their authority and accountability would be enhanced by the elimination of district school boards, which in many cases have done more to encourage incompetence and corruption than to foster accountability. Instead, decisionmaking should occur at the school level, and those decisions-regarding curriculum, staff and budget-should be made by the principal, in consultation with new school-based advisory panels.

New York City provides school employees more expensive fringe benefits than school districts in the rest of the state, while maintaining a lower teacher-to-student ratio.

These reforms are unlikely to succeed, however, unless clear accountability is also restored at the highest levels. The Board of Education's current configuration encourages bureaucratic and political confusion. It and the schools chancellor should be made more directly accountable to the City government that funds it and whose leaders stand for election. Untangling the lines of command and accountability from the bureaucratic snarl of community school boards and the Board of Education will make it easier to introduce into the school system the same forces that can transform other government services: Competition and choice.

"Vouchers" and "choice" have become buzzwords of late, but thorough investigation of their mixed results elsewhere has made the CBC keenly aware that there is no magical "open sesame" to better education. A wholesale voucher system enabling every child to attend the public or private school of his or her choice would be difficult to finance, and even harder to administer. That is why the Public Education report recommends experimenting with a limited voucher system, available only to students from lowincome households in poorly performing schools.

New York City also should experiment with socalled "charter" schools, which are privately-sponsored schools that receive public accreditation and funds plus waivers from certain regulations. This will depend on the passage of State legislation, however, and the CBC believes that petitions to form charter schools should be approved at the State, not the local, level. For-profit firms also should be authorized to compete with civil servants in providing some instructional services.

Finally, parental choice among public schools should also be encouraged, so that the East Harlem Community School District is no longer a wellknown but isolated example of the power of choice to improve education. All of these measures of competition would give principals an incentive to improve their schools' performance, and give parents and school officials yardsticks to measure the principals' performance.

Principals and school children alike would be helped immeasurably if so much money and so many students were not locked into special education and bilingual education programs. Federal mandates and court decisions have created a perverse economic incentive to segregate as many students as possible into such programs. Not only does this reduce the amount of money available for educating other students, it also does many students with special needs or limited English a disservice by unnecessarily isolating them. It would be far better to "mainstream" them whenever possible, so they can learn to contend with-and contribute to-the world that awaits them upon graduation.

The number of New York City students in special education programs is 145,124-14 percent of total enrollment. And these programs cost an average of more than $19,000 per pupil, compared to just $6,000 spent on other students.

As revenues are freed by the restructuring measures recommended by the Budget 2000 Project, cries will doubtless arise for New York State and City to invest them not only in education but in a variety of other services, from expanding the hours of museums and libraries to collecting refuse and recyclables more frequently. Such investments may be worthwhile, but the CBC stresses investing in prevention activities and research and development of new approaches to service delivery. Programs to prevent fires, for example, can save both lives and money; so can programs to prevent child abuse before it leads to tragedy.

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THE END OF THE ROAD

It is unlikely but not altogether impossible that the Two New Yorks will be able to accomplish everything that the Budget 2000 Project outlines. Under an optimistic set of assumptions, fully $15.8 billion in savings might be available after meeting our highest priorities. This could finance a comprehensive tax-cut package as well as fund major new capital projects and service improvements. But even if we fall short and must debate which course to pursue, what mix of spending initiatives to undertake, such choices are infinitely preferable to the helplessness and hopelessness of recurring budget gaps.

THE WAY TO A BETTER NEW YORK is not a simple, single lane. But all the roads the Budget 2000 Project recommends lead to a new York revitalized by balanced budgets and free to choose among lower taxes, stronger infrastructure and better services. The choice is ours, but the clock is ticking. We can hit the ground running in the new millennium and regain the lead in the competition among the states and around the globe. Or we can limp along on our current course until it's too late to reenter the race, leaving our children and other New Yorkers to regret the roads not taken.

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