New York City Already Massively Redistributes Income -- From Poor To Rich

Our new Mayor Bill de Blasio talks endlessly about the great challenge of income inequality, and how he is supposedly going to address it.  But I've never heard him mention the obvious fact that New York City is already engaged in the redistribution of income on a massive scale, and that that redistribution predominantly goes from (relatively) poor to (relatively) rich, rather than in the opposite direction as you might think.  Moreover, the biggest decision that de Blasio has to make in the next few months is highly likely to increase rather than decrease this reverse income redistribution.

The reverse redistribution of income arises from the combined effects of City taxing and spending.  On the taxing side, some parts of the tax system are progressive, but the bigger items are somewhat regressive, and the net is at best a little progressive.  On the spending side, the money predominantly goes to the City workforce, which is overwhelmingly far into the top half of the income distribution.  Thus, lots of money is extracted from private sector workers in the bottom half of the income distribution and paid out to public sector workers in the top half of the income distribution.  And the biggest issue currently facing de Blasio is the demand of the City workers for pay increases and retroactive pay to move them still higher in the income distribution.  Since these workers and their unions are mainly responsible for putting de Blasio in office, it is very likely that he will go along with their demand at least to some degree.

Let's first look at the tax side.  In New York City, people tend to focus on the City income tax -- an unusual tax for a local government to have, and one that gives our tax system an apparent patina of progressiveness.  According to the Economist magazine here from November 2013, the top 1% of earners, about 35,000 people, pay 43% of the New York City income tax.  Now that's progressive!  Well, but the City income tax accounts for less than $10 billion of revenue per year, which is well under 20% of City-generated revenue.  The big money raisers are the property tax and the sales tax, together generating over $25 billion annually, or about half of City-generated revenue.  How do those stack up in progressiveness?  The answer is, they raise proportionately more money from the bottom half of the income distribution.  Here is a 50-state study from the Institute on Taxation and Economic Policy from January 2013.  Data for New York appears at pages 89 - 90 of the report.  According to these data, people in the lower three quintiles of the income distribution pay a far higher percentage of their income toward property and sales taxes in New York than those in the higher two quintiles.  Actually, we didn't need this study to know that; it's kind of how property and sales taxes work.  

Now let's look at the spending side.  Well over half of the money spent by New York City goes for the cost of its more than 300,000 employees.  And those employees, on average, earn far and away more than do, on average, the taxpayers who pay their salaries.  The City's Independent Budget Office just came out, on February 5, with a report addressing just this issue.  According to the summary of that report here, the so-called "median base salary" of a City employee in 2012 was $65,299.  That compares to what they call "median earnings" in 2012 for everybody else in the City of $34,019.  Oh, but wait:  the "median base salary" of the City employee does not include "overtime, pension, or fringe benefit costs."  For a City employee, believe it or not, those extras are now closing in on 80% of base salary; for uniformed services like police and fire, they far exceed base salary.  Look here at the summary of the City's financial plan for 2014, and you will see that the budgeted amount for worker salaries is $22.4 billion, while the budgeted amount for pensions and fringe benefits is $17.1 billion, or 76.3% as much as the salaries.  So the real median pay of a City worker is 1.76 times the $65,229, or about $115,000.  These pension and fringe benefit costs for City workers are wildly more than just about anyone in the private sector can hope for.

According to federal tax data for 2011 reported at Kiplinger here, it took an adjusted gross income of $120,136 to put a taxpayer in the top 10% of earners for that year.  Granted, that is AGI, which also does not count pensions and many fringe benefits.  Nobody is going to have data to enable us to make an exact comparison between City workers whose pensions and fringes are almost 80% of salary, and private workers whose pensions and fringes might be more like 25% of salary.  But, adding back all pensions and fringes for everybody at cost, a fair estimate is that the median City worker is around the 75th to 80th percentile of an income distribution that includes these items as part of the definition of income.

And now of course de Blasio needs to settle the contracts for essentially all City workers, which were left open by Bloomberg on his departure.  The unions are demanding not just salary increases, but also some $7 billion in "back pay" that they claim they are owed since the expiration of their previous contracts.  Well, it's just a question of how much more income redistribution from the poor to the rich you are willing to allow.  The amount already paid City workers in excess of what they would be paid if they all received the median for private sector workers is about $20 billion in round numbers.  By comparison, de Blasio's pre-K program, projected to cost around $0.5 billion, is chump change.