New York, I Love You, but We Cant Go On Like This

"... Total NY state spending is $177 billion a year—almost twice the budget of Florida, which has a population that is 10% larger than New York’s. New York City alone spends as much as Florida’s state government does. In the past 18 years, New York City’s population has grown less than 4%, while its public payroll is up 20%. For the six years ending 2019, according to a Manhattan Institute report by Eric Kober, the city’s average public-employee wages rose 48%, almost three times the national average....""

Effective tax burden, “…The past is not prologue. In a middle finger salute to their hometown, Mr. Trump and Treasury Secretary Steve Mnuchin persuaded Congress to cap the state and local government tax deduction, which formerly made those levies about 40% less onerous for New York taxpayers. President-elect Joe Biden has proposed eliminating lower tax rates on long-term capital gains and subjecting high-income earners to the Social Security tax. Together, those changes would raise the top marginal federal income tax rate to 53%. Add in the current New York state and city tax rates of almost 13% and the marginal tax rate for the Big Apple’s high earners becomes 66%. Make that 68% if Albany raises its tax another two percentage points, as has been proposed. Even if I were indifferent to working the first eight months of the year for the government, what about my employees and the many talented and ambitious young people who are the future of New York? How will they feel about the difficulty in building a business and a life in a city and state that are driving away their tax base and will face declining public services?...”
Mark Kingdon, "New York, I Love You, but We Can’t Go On Like This," Wall Street Journal, January 15, 2021, https://www.wsj.com/articles/new-york-i-love-you-but-we-cant-go-on-like-this-11610732183

New York, I Love You, but We Can’t Go On Like This

I happen to love New York.

Born in Brooklyn, I grew up on Long Island. My first summer job was as an office boy at a Midtown Manhattan brokerage during the 1965 bull market. I went to Columbia University. I met my wife, who is Chinese, at a Japanese investment conference in Manhattan. After working for AT&T and a private investment firm (both in New York), I started a hedge fund 37 years ago and have run it from four successive locations in the city. Following a rough patch for New York in the 1970s, I was able to enjoy the renaissance under Mayors Rudy Giuliani and Michael Bloomberg.

Besides the obvious pleasures of living in New York—Broadway, the opera, art, dance, great restaurants, Central Park—I’ve been fortunate to be involved with organizations that make a difference in people’s lives, including Harlem Children’s Zone, United Jewish Appeal, the New York City Police Foundation, City Center and my alma mater. Many diverse friendships have grown out of work and community service. I always thought the high cost of living, erratic public services and high tax rates were a necessary and reasonable price to pay for the city’s many virtues.

Until now.

New York once had two competing political parties, which provided checks on extreme populist ideas. Not anymore. Reducing the use of cash bail to avoid discriminating against the poor was understandable, and the New York City Police Department’s decision to reduce the use of stop and frisk was a good one. But sharply limiting judges’ discretion to keep dangerous criminals in jail was not. NYPD Commissioner Dermot Shea and his predecessor, James O’Neill, both warned that this measure, and releasing more than 2,000 “hardened criminals” from Rikers Island, would significantly degrade the quality of life in the city, particularly in poor neighborhoods. They were right. Crime rates have reversed a long decline. The number of shootings in the city rose by 97% in 2020.

In the 1990s and 2000s New York became the safest American big city, sharply reducing its correctional population, thanks to the NYPD’s success at preventing and solving serious crimes through neighborhood-based proactive policing. New and proposed legislation at the state and city level, however, threatens future public safety. In June, the City Council voted 44-6 in favor of the Public Oversight of Surveillance Technology Act, which requires the NYPD to disclose publicly the surveillance technology it uses. Mr. Shea points out that terrorists and dangerous criminals will happily turn such information to their advantage.

This is a mayoral election year, and the announced candidates are engaged in a destructive competition to find the best way to hamstring the police. Bills in the hopper would limit police use of artificial intelligence, facial recognition and license-plate surveillance. State Attorney General Letitia James sued Mr. Shea and Mayor Bill de Blasio this week over their handling of the summer’s Black Lives Matter demonstrations. She is asking for a host of police reforms and a federal monitor to ensure compliance. The NYPD is already under the supervision of a federal monitor appointed in 2013 to oversee court-ordered changes to the department’s stop-and-frisk practices.

The growth of the homeless population in New York and other cities is directly related to the decision to empty the jails. Many homeless are mentally ill. They are often arrested and released several times before committing violent felonies. Mr. Shea says he’d like to see the city provide supervised facilities for the mentally ill, rather than leave the job to the police, corrections officers and the street.

Another measure that suggests New York’s legislators have learned nothing from the 1970s was their decision to enact a virtual rent freeze, eliminating vacancy decontrol and the ability of owners to pass the costs of inflation and building upgrades through to tenants. Look for the return of abandoned buildings, which will hit poor neighborhoods hardest and reduce the city’s tax rolls. Don’t expect public housing to come to the rescue. For three years in a row Public Advocate Jumaane Williams has included the city’s housing authority on his Worst Landlords Watchlist, with nearly half a million open work orders that would cost $45 billion to complete.

New York’s biggest existential issue is the dire financial condition of city and state government. Total state spending is $177 billion a year—almost twice the budget of Florida, which has a population that is 10% larger than New York’s. New York City alone spends as much as Florida’s state government does. In the past 18 years, New York City’s population has grown less than 4%, while its public payroll is up 20%. For the six years ending 2019, according to a Manhattan Institute report by Eric Kober, the city’s average public-employee wages rose 48%, almost three times the national average. These trends are worth keeping in mind during the discussion of how to fill Covid-related budget holes.

Well-known solutions to these problems include privatization of services, productivity measures for government employees, and changes to overgenerous pension benefits. Such measures are verboten in New York. Still, they may be the only viable options. In 2016, before the recent stock market boom, 1% of New York taxpayers contributed 37% of all state personal income taxes, according to a study by the Citizens Budget Commission. Those revenue generators are steadily leaving the state for less-taxing environments.

New York’s political class naively believes that residents will accept ever more draconian tax increases. But the city is like a restaurant that is losing customers because its service and food are going downhill. The appropriate response isn’t to raise prices and expect them to come flooding back but to reverse the decline in quality.

The past is not prologue. In a middle finger salute to their hometown, Mr. Trump and Treasury Secretary Steve Mnuchin persuaded Congress to cap the state and local government tax deduction, which formerly made those levies about 40% less onerous for New York taxpayers. President-elect Joe Biden has proposed eliminating lower tax rates on long-term capital gains and subjecting high-income earners to the Social Security tax. Together, those changes would raise the top marginal federal income tax rate to 53%. Add in the current New York state and city tax rates of almost 13% and the marginal tax rate for the Big Apple’s high earners becomes 66%. Make that 68% if Albany raises its tax another two percentage points, as has been proposed.

Even if I were indifferent to working the first eight months of the year for the government, what about my employees and the many talented and ambitious young people who are the future of New York? How will they feel about the difficulty in building a business and a life in a city and state that are driving away their tax base and will face declining public services?

There’s more. Progressive Sens. Bernie Sanders and Ron Wyden have called for taxes on wealth and unrealized capital gains, reversing a century of tax policy designed to encourage long-term investment. France and others tried wealth taxes and rescinded them when they discovered that implementation was a nightmare and the revenue generated was far less than expected. A wealth-tax bill that includes future appreciation on donated assets was introduced last year in Albany. If New York adopts such a tax on its own, it would raise a lot of revenue—for Florida.

Another proposal guaranteed to reduce employment and tax revenue is a local tax on security transactions. Perhaps those proposing a securities tax think that stock trading still needs to happen on Wall Street, so that runners can shuttle stock certificates back and forth between firms. Physical trading of paper certificates ended in the 1980s. Now Zoom has made working from home easier than anyone imagined. Investment bankers and money managers can operate effectively with minimal travel, reduced office space and a decentralized workforce. In March 2020, Ken Griffin moved 12 Citadel Securities employees to a beachfront hotel in Palm Beach, Fla., where they traded more securities than any brokerage firm in the country.

The best way to help the poor, besides supporting well-run charter schools and community programs like Harlem Children’s Zone, is to have a healthy, growing economy that provides job opportunities for all city residents. Badly designed criminal-justice, housing and tax policies will ultimately hurt the people they are supposed to help. Let’s hope we get the government and policies that New York deserves before it’s too late.

Mr. Kingdon is CEO of Kingdon Capital Management.