Luxury Sales Tax for New York City
Executive Summary
New York City, like many other major metropolitan cities, relies on its tax revenue to
sustain the needs of the populace. Often in times of economic hardship, a city will
increase taxes in order to ensure its revenue stream does not decrease. Recently, just such
a law was passed, which increases sales tax in New York City a half a percent. This
brings the overall sales tax in New York City to 8.875 percent. A struggling economy
needs consumers to utilize their purchasing power in order to assist the economy in
rebounding. An increase in sales tax, while beneficial to the bottom line, will not help the
overall strength of the economy. Rather, what should be implemented is a sales tax
system that charges higher sales tax for luxury items and incentivizes spending by
creating tax breaks on necessary items.
Introduction
New York City, like many other major metropolitan cities, relies on its tax revenue to
sustain the needs of the populace. According the New York City Executive Budget, tax
revenues come from primarily four areas of taxation: Real Property, Personal Income,
General Corporation, and Sales and Use.1 The city’s reliance on these taxes has increased
significantly over the past three decades.2 The taxes’ share of general expenditures rose
from about 40 percent in 1970 to over 50 percent in 1999.3 Historically, in times of
economic downturn or recession a decline in overall tax revenues results in a reduction of
these percentages.4 When projections suggest that the economy will be experiencing a
downturn, municipal officials often raise tax rates, making the revenue effect smaller than
it would have been without the policy change.5
According to 2008 estimates, real property tax accounted for approximately 35.1 percent
of tax revenue; personal income tax accounted for approximately 21.8 percent of tax
revenue; general corporation tax accounted for approximately 14.7 percent of tax
revenue; and sales tax accounted for approximately 12.4 percent of tax revenue.6
Although it is the smallest of the four primary areas of taxation, sales tax affects everyone
in the population equally. It is the only one of the four primary taxes to do so. Personal
income, general corporation and real property taxes are imposed on a graduated scale.
Therefore, the lower income families pay less in each. However, income is irrelevant
when it comes to sales tax.
The Sales Tax Problem
Sales tax accounted for 12.2 percent of New York City tax revenue in 2007, which equals
$4,619 million.7 As mentioned above, in 2008 it was estimated that sales tax accounted
for 12.4 percent of tax revenue, which equals $4,817 million.8 Recently the New York
State Senate approved a sales tax increase for New York City.9 This increase raised New
York City sales tax rate from 4 to 4.5 percent.10 The City tax rate is combined with the
State tax rate of 4 percent and an additional 0.385 percent rate that is levied in all
localities within the Metropolitan Commuter Transportation District (MCDT),11 making
the aggregate sales tax rate within New York City 8.875 percent.
In today’s economic climate, tax rates are being increased within New York City in an
attempt to cover the reduced revenues that the City will be collecting from its citizenry. 12
Many groups have commented on the increases in property tax and personal income tax
and the effect these have on low and moderate income families.13 However, few have
considered the effect of increased sales tax on these same groups.
New York City generally tilts toward progressive tax policies.14 However, New York
City has erred by increasing the sales tax.15 A major point of economic public policy is to
promote sustainable growth, which will in turn generate a positive revenue stream for the
City.16 A cornerstone of that public policy is to increase the disposable income of those
with lower and modest incomes.17 People of every income stream are consumers. If
consumers are over-taxed, they will be unwilling or unable to use what is left of their
income in the consumption of goods. The decrease in consumption will cause further
decline in the economy. Therefore, what can be done with regards to New York City’s
sales tax that will both benefit New York City’s immediate tax income stream and assist
low to moderate income families with their purchasing power?
The primary government stakeholders on this issue are the New York City Comptroller’s
and Mayor’s offices; as well as legislators both in the City and State (as some State
approval would be necessary to implement changes to the tax structure). The objective of
the policy would be to find ways to use sales tax as a viable revenue stream without
deterring the populace from consumer spending, given the current state of the economy.
Below is one alternative that could be considered when attempting to achieve these goals.
However, as discussed below, it is not a feasible option given the state of the current
economy.
Alternative: Repeal the sales tax increase and find an alternative area to tax.
The revenues obtained from a particular form of taxation are the product of the tax’s
effective rate and the base upon which the tax is levied.18 The changes in tax revenues
can be broken down into base and rate changes.19 Accordingly, a study of the
development of New York City’s revenue sources should consider certain properties of
tax bases – persistence, volatility and economic sensitivity.20
The more strongly positive the relationship is between the current year’s growth and the
previous year’s growth, the more persistent the tax base is said to be.21 Taxes of a
persistent base require relatively few rate adjustments to generate a steady stream of
revenues.22 According to a study, the persistence of the four primary taxable areas are as
follows: property tax – 0.6119, personal income tax – (0.440), sales tax – 0.520, and
general corporation – 0.082.23 This shows that there is an absence of persistence with
regards to personal income tax; meaning that above-trend (below-trend) growth in one
year is followed by below-trend (above-trend) growth the following year.24 Conversely,
property and sales taxes suggest persistence; in which above-trend (below-trend) growth
in one year is followed by above-trend (below-trend) growth the following year.25
Volatility is the size of unexpected changes in the tax base.26 A highly volatile tax base
will exhibit large, unanticipated deviations from its trend and a less volatile tax base will
display only small deviations.27 According to a study, the volatility of the four primary
taxable areas are as follows: property tax – 7.6, personal income tax –14.5, sales tax –
3.6, and general corporation – 9.5.28 This shows that, while all four tax bases are volatile,
property and sales taxes are less volatile than personal income and general corporation
taxes.29
Economic sensitivity describes the strength of the relationship between a tax base and the
current state of the economy.30 Sensitive bases move in step with the economy and
insensitive ones are relatively unaffected by short-run economic shifts.31 Tax bases that
tend to drop sharply when the economy slows can expose New York City to budgetary
shortfalls.32 According to a study, the economic sensitivity of the four primary taxable
areas are as follows: property tax – 0.072, personal income tax –1.355, sales tax – 0.749,
and general corporation – 0.825. This shows that personal income, general corporation,
and sales tax bases rise and fall at the same time as coincident economic indicators, while
property tax appears to move independently.33
This research leads to the conclusion that increases in personal income tax and general
corporation tax are not feasible whatsoever, given the current state of the economy. Both
are tied to directly to fluctuations in the economy. The research also shows that an
increase in property taxes could yield a similar benefit to the revenue stream that the
increase in sales tax provided, as there would be little or no effect overall as property tax
is persistent, moderately volatile and minimally economically sensitive. However, due to
the housing crisis, many individuals that currently own homes are in constant fear of
foreclosure. An increase in their property taxes could very well cause them to lose their
home. Furthermore, people are less inclined to purchase a home in the current economy
and an increase in property taxes would make New York City a less desirable place to
purchase a home.
Recommendation – Do not repeal the sales tax increase; rather limit what are
considered taxable goods and graduate the tax on higher luxury items.
The economic downturn will mean tough times for many people living in New York
City.34 The City Comptroller’s office recently projected that New York will lose
approximately 170,000 private sector jobs in the next two years.35 Unemployment is
likely to rise and personal incomes will decline.36 This will create an inability for many
New Yorkers to afford necessities that are deemed taxable under New York City sales tax
rules and regulations. The decrease in consumerism will lead to a further decrease in
sales tax revenue for New York City, thereby negating the benefit the sales tax increase
was supposed to bestow upon New York City.
As mentioned above, sales tax affects everyone in the population equally. It is the only
one of the four primary taxes to do so. Personal income, general corporation and real
property taxes are imposed on a graduated scale. Therefore, the lower income families
pay less in each. However, income is irrelevant when it comes to sales tax. Certain items
are considered taxable under the New York City guidelines for sales and use tax, that
would be considered necessities in most homes. Under the New York City rules and
regulations, sales tax applies to most tangible personal property (i.e. alcohol, furniture,
electronics, etc.); gas, electricity, refrigeration, steam, telephone, and telegraph services;
detective, cleaning, and maintenance services; occupancy of hotel and motel rooms; food
and beverages sold by restaurants and caterers; admission charges to places of
amusement; receipts from beauty, barbering, hair restoring, manicures, pedicures,
electrolysis, massage, and other, similar services; receipts from the sale of services by or
use of facilities of weight control salons, health salons, gymnasiums, and similar
establishments; sales of credit rating and credit reporting services; and receipts from the
sales of the service of parking, garaging, or storing motor vehicles.37 Many of the items
under tangible property and gas, electricity, and telephone services are items of necessity
to a certain extent. However, all income levels pay the same taxes on these items and it is
generally the higher incomes that can take a deduction for most items on their tax return.
Therefore, an increase in sales tax is plausible only if the low and moderate income
families are no longer punished by the system. Unlike a restructuring of the personal
income tax system, where there is a way to differentiate the low income from the high
income families, a restructure of the sales tax system would require more stringent
definitions as to what is taxable and the rate that it is taxed. The increase in sales tax in
New York City is supposed be limited to purchases over $110.38 However, even at the
cheaper retailers most families spend far beyond $110 clothing themselves and their
family members.
Under this new sales tax system, a basket of predetermined “luxury items” would be
taxed at the highest sales tax rate. Hotels and motels would be taxed at the next highest
rate, just below “luxury items.” Electronics would be the next sales tax rate. However, a
predetermined maximum purchase of electronics would be tax free. Clothing, furniture,
and household appliances would be taxed at the same tax rate. However, a predetermined
maximum would be tax free for all individuals. Gas, electric and telephone sales taxes
would be dropped for individuals. However, property owners renting apartments or
business spaces would still be responsible for these taxes at their current rates. All other
sales tax items would continue to be taxed at their current rates with no tax free
exceptions. Defining specifics as to what constitutes a “luxury item” or what the
predetermined maximums for tax free items would be or what the sales tax rates would
become is beyond the scope of this proposal. However, it is recommended that if this
proposal is accepted, an expert commission should be formed to research all of these
aspects in order to determine what each should be.
Higher earning individuals are the individuals who have the means to pay increased
taxes, even in times of economic downturn. It will be virtually impossible for the New
York City economy to achieve sustainable growth if lower income groups do not have
more to invest and spend. It would severely diminish a consumer base necessary in times
of economic hardship. Altering the current sales tax structure to a more graduated base of
sales tax will allow lower income people to spend more openly thereby stimulating the
economy in a much needed way. Also, higher income families will not curb their
spending significantly due to a small increase in sales tax. Therefore, the benefit of
restructuring the sales tax system in this manner far outweighs the costs.
1
New York City, Office of Management and Budget: Tax Policy, Revenue Forecasting &
Economic Analysis Task Force, Tax Revenue Forecasting Documentation – Financial Plan Fiscal Years
2008 – 2012 (City of New York: OMB, 2008) 1; Jess Edgerton, Andrew F. Haughwout, and Rae Rosen,
“Revenue Implications of New York City’s Tax System” Current Issues in Economics and Finance Second
District Highlights [Federal Reserve Bank of New York], April 2004: 1-7.
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 1-7.
2
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 1.
3
See, Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 1, as to historic accuracy. (“The decline in tax revenues that accompanied
the city’s recent downturn reduced the 50 percent figure to slightly less than 45 percent of general
expenditures in 2002.” This analysis excluded the city’s fiscal year 2003 tax increases, which raised
personal income, general sales, and property taxes.)
4
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 2.
5
6
New York City, Office of Management and Budget: Tax Policy, Revenue Forecasting &
Economic Analysis Task Force, Tax Revenue Forecasting Documentation – Financial Plan Fiscal Years
2008 – 2012 (City of New York: OMB, 2008) 1.
7
New York City, Office of Management and Budget: Tax Policy, Revenue Forecasting &
Economic Analysis Task Force, Tax Revenue Forecasting Documentation – Financial Plan Fiscal Years
2008 – 2012 (City of New York: OMB, 2008) 45.
8
New York City, Office of Management and Budget: Tax Policy, Revenue Forecasting &
Economic Analysis Task Force, Tax Revenue Forecasting Documentation – Financial Plan Fiscal Years
2008 – 2012 (City of New York: OMB, 2008) 1.
“New York Senate Approves NYC Sales Tax Hike” 13 July 2009
<http://www.shoppingblog.com/blog/713099>.
9
“New York Senate Approves NYC Sales Tax Hike” 13 July 2009
<http://www.shoppingblog.com/blog/713099>.
10
11
New York City, Office of Management and Budget: Tax Policy, Revenue Forecasting &
Economic Analysis Task Force, Tax Revenue Forecasting Documentation – Financial Plan Fiscal Years
2008 – 2012 (City of New York: OMB, 2008) 45.
See Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 2. (“Therefore, when the economy turns sour, as it did in 2001-2002, the
12
combination of cyclical revenues, limited cash reserves, and fixed expenditures forces the city to reort to
tax rate increases and asset sales to close budget gaps.”)
See Amy Traub, “Restructuring New York City’s Personal Income Tax: A proposal from the
Drum Major Institute for Public Policy”, Drum Major Institute for Public Policy 17 Feb. 2009: 1-6. Report
discusses the possibility of reforming New York City’s personal income tax structure by eliminating New
York City personal income taxes for all households that currently owe no state or federal income tax and
instituting a new tax bracket for households with income greater than $500,000 at a base tax rate of 3.285
percent (compared to the current base rate of 3.2 percent).
13
Joseph Lazzaro, “NYC sales tax hike: A regressive tax the economy doesn’t need.”
BloggingStocks,
3 June 2009, 25 July 2009, < http://www.bloggingstocks.com/2009/06/03/nyc-salestax-hike-a-regressive-tax-the-economy-doesnt-need/>.
14
Joseph Lazzaro, “NYC sales tax hike: A regressive tax the economy doesn’t need.”
BloggingStocks,
3 June 2009, 25 July 2009, < http://www.bloggingstocks.com/2009/06/03/nyc-salestax-hike-a-regressive-tax-the-economy-doesnt-need/>.
15
Joseph Lazzaro, “NYC sales tax hike: A regressive tax the economy doesn’t need.”
BloggingStocks,
3 June 2009, 25 July 2009, < http://www.bloggingstocks.com/2009/06/03/nyc-salestax-hike-a-regressive-tax-the-economy-doesnt-need/>.
16
Joseph Lazzaro, “NYC sales tax hike: A regressive tax the economy doesn’t need.”
BloggingStocks,
3 June 2009, 25 July 2009, < http://www.bloggingstocks.com/2009/06/03/nyc-salestax-hike-a-regressive-tax-the-economy-doesnt-need/>.
17
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 2.
18
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 2.
19
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 2.
20
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 2.
21
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 3.
22
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 4. (Source: Authors’ calculations. Note: Persistence figures are calculated
as the coefficient on the lagged growth rate in a regression of the annual growth rate on the lagged growth
rate and a constant.)
23
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
24
Bank of New York], April 2004: 3.
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 3.
25
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 2.
26
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 2.
27
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 4. (Source: Authors’ calculations. Note: Volatility figures are calculated
as 100 multiplied by the standard of error of the residuals in a regression of the annual growth rate on
lagged growth rate and a constant.)
28
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 3.
29
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 3.
30
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 3.
31
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 3.
32
Jess Edgerton, Andrew F. Haughwout, and Rae Rosen, “Revenue Implications of New York
City’s Tax System” Current Issues in Economics and Finance Second District Highlights [Federal Reserve
Bank of New York], April 2004: 4.
33
Amy Traub, “Restructuring New York City’s Personal Income Tax: A proposal from the Drum
Major Institute for Public Policy”, Drum Major Institute for Public Policy 17 Feb. 2009: 1; Joseph Lazzaro,
“NYC sales tax hike: A regressive tax the economy doesn’t need.” BloggingStocks,
3 June 2009, 25
July 2009, < http://www.bloggingstocks.com/2009/06/03/nyc-sales-tax-hike-a-regressive-tax-the-economydoesnt-need/>.
34
William Thompson, “The State of the City’s Economy and Finances, 2008,” NYC Office of the
Comptroller, December 2008.
35
Amy Traub, “Restructuring New York City’s Personal Income Tax: A proposal from the Drum
Major Institute for Public Policy”, Drum Major Institute for Public Policy 17 Feb. 2009: 1.
36
“NYC Finance: Sales and Use Tax,” 20 July 2009 <
http://www.nyc.gov/html/dof/html/business/business_tax_nys_sales.shtml>.
37
“New York Senate Approves NYC Sales Tax Hike” 13 July 2009
<http://www.shoppingblog.com/blog/713099>.
38