COMPTROLLER LIU: ECONOMIC ADVISORY

Following President Obama’s jobs address, the Office of New York City Comptroller John C. Liu produced the following preliminary economic analysis of his proposals and their potential effects on New York City. 

 

“President Obama has put forward a plan that, if enacted, will deliver significant benefits to New York City’s economy,” Comptroller Liu said.  “Although the President has indicated that the jobs plan will be paid for, specifics on funding have yet to be identified.  The President’s plan is in the best interests of New Yorkers, but we must remain vigilant and ensure that any potential spending cuts do not disproportionately impact our City.”

In his address to a Joint Session of Congress, President Obama proposed a $447 billion package of tax cuts and spending measures, as part of the American Jobs Act, designed to “put more people back to work and more money in the pockets of those who are working.”

As the United States consists of a number of regional economies with distinct demographics and industries, the President’s proposals would affect States and Cities in different ways.

Our preliminary analysis of the impact the American Jobs Act would have on New York City is as follows:

§  The payroll tax cut would provide a total benefit of $4.8 billion to New York City workers and create or preserve 25,000 jobs during 2012. Benefits will vary depending on individual salaries. For example, a worker earning $25,000 would receive an annual tax cut of $775, while a worker earning $100,000 would receive an annual tax cut of $3,100. 

§  The extension of the emergency unemployment benefits would help a portion of the 190,000 City residents who have been unemployed for more than 26 weeks.

§  Every $1 billion in increased infrastructure spending in the City would create or preserve 7,500 jobs. While the unemployment rate in 2010 for New York City was 8.5 percent, the unemployment rate in the construction industry was 14.6 percent.

§  Federal educational aid could help restore 3,700 teaching positions slated for reduction in FY 2012 and FY 2013. 

Payroll Tax Cut

The President has proposed a $175 billion program to cut payroll taxes in half for every working American during 2012, which would reduce the Social Security tax levied on income up to $106,800 from 6.2 percent to 3.1 percent.  The 2011 tax cut currently in effect reduced Social Security tax to 4.2 percent and was scheduled to expire on December 31, 2011.

We estimate this tax cut would provide a total benefit of $4.8 billion to New York City workers and create or preserve 25,000 jobs[1] in the city during 2012. 

Estimated Savings From 3.1 percent Employee Payroll Tax Holiday For NYC Residents, by Borough

Borough	Estimated Number of Workers Affected	Estimated Savings                          ($ in millions)
Bronx	417,850	$595
Brooklyn	966,500	$1,195
Manhattan	782,500	$1,600
Queens	1,251,500	$1,100
Staten Island	191,600	$305
Total	3,609,950	$4,795
Source: US Social Security Administration; Bureau of Labor Statistics; NYC Comptroller's Office

Extending the payroll tax deduction would also have a positive effect on the City’s fiscal picture. If one-third of that amount is spent on consumer items subject to City sales taxes, sales tax revenue would be increased by about $70 million. Moreover, the jobs created through greater consumption spending would generate additional income tax, sales tax, and real estate tax revenues. 

While an extension of the payroll tax cut will have a positive impact on household budgets and on the city’s economy, it does raise several areas of concern.

First, the aging of the baby-boom generation will put financial stress on the Social Security program in the coming decades. Repeated use of payroll tax “holidays” to provide fiscal stimulus to the economy may complicate long-term efforts to shore up Social Security as households become acclimated to lower payroll taxes and political opponents of Social Security portray a return to the pre-2011 tax levels as a “tax increase.”

Second, while the Social Security threshold of $106,800 ensures that no individual will derive an annual benefit in excess of $3,310, it provides more substantial benefits to higher earners.  For example, a worker earning $25,000 would receive an annual tax cut of just $775, while a worker earning $100,000 would receive an annual tax cut of $3,100. Tax cuts could easily be designed to deliver more benefits to lower-income households and to provide a more reliable fiscal stimulus to the economy.

Our office is still assessing the impact of the $65 billion employer payroll tax holiday for small businesses and those who increase the size of their payrolls.

Extension of Emergency Unemployment Benefits

The President has proposed a $49 billion one-year extension of the Emergency Unemployment Compensation program, which provides unemployment benefits for 47 weeks beyond the regular federal/state unemployment insurance program. Currently, New Yorkers are eligible for up to 86 weeks of unemployment insurance benefits consisting of:

§  Regular Unemployment Insurance – 26 weeks 

§  Extended Benefits (EB) - up to 13 weeks of benefits

§  Emergency Unemployment Compensation (EUC) - 47 weeks of benefits

If the emergency unemployment benefits are not extended beyond the end of 2011, newly unemployed individuals and those currently receiving benefits for less than 39 weeks would be eligible for a maximum of 39 weeks of benefits.

Although it is difficult to project the value of this benefit extension for New York City residents, national estimates indicate that extra income will have some stimulatory effect on the national and local economies, increasing the rate of real GNP and GDP growth by 0.1 to 0.2 percentage points during 2012.

As the table below shows, there are over 325,000 unemployed New Yorkers.  As of July 2011, almost 190,000 city residents have been unemployed for over 26 weeks and more than 150,000 for over 39 weeks.

Unemployed in NYC by Age, Education and Duration

	Jul-08	Jul-09	Jul-10	Jul-11
Total	188,050	407,440	362,210	325,200
by borough:
Queens	58,153	178,860	113,550	99,924
Brooklyn	55,361	69,985	92,900	101,880
Manhattan	32,825	72,116	64,111	37,066
Bronx	29,463	76,035	77,910	68,974
Staten Island	12,248	10,441	13,739	17,360
by age:
16-24 yrs old	66,559	138,060	86,570	60,347
25-44 yrs old	60,206	160,500	170,810	165,070
45-59 yrs old	58,372	87,063	77,281	71,039
60 yrs and older	2,913	21,817	27,544	28,739
by education:
No HS diploma	47,416	107,500	66,619	53,848
HS, some college	84,666	203,690	212,950	196,030
BA or more	55,968	96,248	82,639	75,321
by duration:
26 weeks or less	145,710	259,900	190,530	135,610
27 to 39 weeks	28,556	41,005	50,482	38,059
40 weeks or more	13,780	106,530	121,190	151,530
Source: US Bureau of Labor Statistics: NYC Comptroller’s Office

While education is often considered the key to stable employment, it is noteworthy that in the present economic climate unemployment is not concentrated among the less educated. Over 83 percent of the city’s unemployed have at least a high school diploma and nearly one-quarter, or more than 75,000, have a B.A. or higher degree. Moreover, more than 80 percent are 25 years old or older and more than 30 percent are 45 years old or over.

Infrastructure Spending

The President has proposed a $50 billion program to rebuild the country’s transportation infrastructure, a $30 billion program to modernize schools and community colleges, and a $10 billion program to create a national infrastructure bank.

The City’s biennial Ten-Year Capital Strategy (TYCS) released in May 2011 totals $54.1 billion for the ten-year period from FY 2012 to FY 2021. The total reflects a 10 percent reduction in City-funded commitments as compared to the prior TYCS. In addition, the City’s FY 2011 Asset Information Management System Report shows that agencies’ state of good repair schedule will only meet 48 percent of the state of good repair needs identified in the Asset Survey Report[2] for the City’s infrastructure in FYs 2012 - 2015. While capital needs have expanded, the City’s investment in infrastructure has been on the decline, as demonstrated in the graph below.  Since the release of the FY 2008, TYCS planned capital spending has decreased by nearly $30 billion. Federal support could restore some portion of these reductions which would help revive dormant projects and delayed repairs.

Comparison of NYC’s Last Three Ten-Year Capital Strategies ($ in billions)

While it is unclear what portion of federal infrastructure spending would be allocated to the City, any increase in infrastructure spending would provide a much needed boost to the New York City construction industry which had seen employment drop from 128,612 in 2008 to 108,895 in 2010[3]. While the unemployment rate in 2010 for New York City was 8.5 percent, unemployment rate in the construction industry in the City was 14.6 percent[4].

Based on the Bureau of Economic Analysis’ employment multiplier for the construction industry, every $1 billion in increased infrastructure spending in the City will create 7,500 jobs in the City.

Providing Aid for Teachers

The President has proposed a $30 billion program to provide aid to municipalities to prevent reduction in public school teachers. The City’s June 2011 Plan shows a reduction of about 1,100 positions in FY 2013. This decline comes on top of the 2,600 teachers reduced through attrition without backfilling already reflected for FY 2012.  Thus, the cumulative decline in teacher headcount in the FY 2013 baseline is more in the order of 3,700. It is unclear what portion of the President’s proposal would be allocated to New York City. 

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Planned Teacher Headcount Reductions in the Department of Education June 2011 Plan.PNG 7K   View   Download