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Tax Policy and the Fiscal Cost of Disasters: NYC and 9/11 Howard Chernick

Tax Policy and the Fiscal Cost of Disasters: NYC and 9/11 Howard Chernick Department of Economics Hunter College City University of New York Howard.Chernick@hunter.cuny.edu Andrew F. Haughwout Microeconomic and Regional Studies Federal Reserve Bank of New York

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Tax Policy and the Fiscal Cost of Disasters: NYC and 9/11 Howard Chernick

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  1. Tax Policy and the Fiscal Cost of Disasters: NYC and 9/11 Howard Chernick Department of Economics Hunter College City University of New York Howard.Chernick@hunter.cuny.edu Andrew F. Haughwout Microeconomic and Regional Studies Federal Reserve Bank of New York Andrew.Haughwout@ny.frb.org First Draft: May 2006 *Prepared for the 36th Annual Symposium and State-Local Tax Program, National Tax Association, May 18-19, 2006, Washington, DC. The views presented here are those of the authors, and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.

  2. Economic Effects of 9/11 Immediate Losses: $30 Billion of Office Space Destroyed or Damaged – (Size of Atlanta) 75,000 – 100,000 Jobs Lost in 4th Quarter of 01. GCP Fell by $17.6 Billion by July, 02.

  3. Separating the Recession from 9/11 • 60,000 jobs. $5-10 billion GCP loss • Pre 9/11 trend regained 8-12 months after

  4. Fiscal Effects • Large Budget Gap in FY 02. Borrowed $2.1 billion. • Projected Deficit for 04: $6.4 billion (14% of exp) • Source of Deficit: sharp decrease in revenue; Cost increases from 9/11; • Overtime; Medicaid enrollment increase. • Response: raised taxes, cut expend, subst. Fed funds

  5. Tax Increase • Effect on Tax Base? Very Small. • Why? Temporary; historically low, tax room, relative rate • But deductibility severely attenuated by AMT in NYC; 20.9 percent overall; 52% of filers with AGI $100,000 - $1 million s.t. AMT /30% nationally • Real Estate Transaction Tax Revenues Strong. (Robust R.E. Market)

  6. Federal Compensation • Total. $20.4 Billion. • $6.3 bil : emergency response needs • $4.4 bil for economic recovery • $9.7 bil for long-term rebuilding • Direct Budgetary Relief to NYC. $1.7 bil. 35 percent of public sector cost

  7. Tax Benefits General. Advanced Refunding. $937 billion (cost to Feds); general relief Geographically Targeted. $2.9 bil. Hiring credits, acc. Depr. Take-up very slow. Convert to transp. Subsidies; geographically tied.

  8. Tax Benefits (con’t) Liberty Bond. $8 billion of Private Activity tax exempt Bonding Auth. Geograph. targeted 80 % commercial undersubscr. 20 % resid. oversubscribed Goldman Sachs. $1 billion – Residential by income level? equity and efficiency.

  9. Evaluation of Tax Benefits Tax Benefits are inefficient relative to direct compensation Tight Time Limits on Tax Benefits Ineffective. Geographic Targeting Inefficient.

  10. Federalism and Risk Sharing • Too high? Too low? • Principles: • Compensation rate should be higher the higher the local tax base elasticity. (Reflects local fiscal resources); • Rate higher the greater the cost as a percent of the base. • 2. EX Ante rather than Ex post • 3. Feds should share with state. Depends how much state affected. • 4. Form of Compensation. Lump-sum for direct damages (clean up WTC site) plus matching for fiscal costs.

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