The Tax Gimmick that Built New York

How greater New York City was created, and its taxpayers were stuck with the bill.

Times Square, New York, N.Y. Source: LOC

The modern city of New York was created in the 1890s by merging several of the then-independent boroughs together. Major administrative changes create headaches, as everyone who has got a new driver’s license or changed their name knows. This merger was no exception. Among other things, ironing out the finances of the merger proved to be painful.

In a previous post, I discussed the forgotten history of how judicial decisions abolished cities. Here I will balance that out by discussing how public finance helped create a city—history that manages to be even sillier.

The Merger

The modern city of New York was created in 1898. What was then called the city of New York comprised Manhattan and the Bronx; the other modern boroughs of Brooklyn, Queens, and Staten Island were independent counties and cities. Various civic boosters had long proposed creating a consolidated city of greater New York, and a (successful) campaign to do so was launched in the 1890s.

The effort led to a referendum in 1893, which required a separate vote in every county (and some minor political districts). Every locality voted in favor of consolidation, but sometimes narrowly: in Brooklyn, ‘yes’ won by only a fraction of a percent; in the town of Westchester, annexation won by only a single vote!¹

The greater New York revanchists won the referendum battle, but after the thrill of high politics came the tedium of administrative details. Each borough, for example, had its own police and school systems that had to be folded into a unified New York bureaucracy.

A surprisingly consequential administrative detail was the question of how to merge the boroughs’ separate debts and taxes into a single system.

Prior to consolidation, Manhattan had more debt than Brooklyn (which ran a balanced budget). If they merged without any adjustment, Brooklyn taxpayers would effectively pay for Manhattan’s mismanagement: greater New York would assume the debts of Manhattan, so all taxpayers (including Brooklyn’s) would pay off debts that had sprung only from Manhattan’s spending.

It is akin to a newly-married couple where the husband has significant credit card debt and the wife doesn’t. If they merge bank accounts and finances, then the more responsible wife will be responsible for the debts of the less responsible husband.

This was a common problem in public finance and was eminently solvable. Options might have included having Manhattan pay higher taxes for a limited period of time, or issuing a special type of bond. New York’s politicians had a variety of reasonable options.

They chose an unreasonable option. As Frederick Cleveland, a contemporary public administrator (and New Yorker) put it:

[W]hen it was proposed to consolidate the various boroughs the two large cities were Manhattan and Brooklyn. Manhattan had a deficit about equal to one year’s revenue, while Brooklyn had kept her revenues abreast of her expenses. The remedy should have been for Manhattan to have issued bonds equal to the amount of her deficit and then sink them over a period of years. Instead of this, however, the pre-consolidation agreement was that Brooklyn should go a year without paying any taxes so that both cities would be on an equal footing in arrears.

Brooklyn indeed skipped collecting taxes for a year and then merged with Manhattan. It was, to continue our example, as if the wife skipped a couple of credit card payments to make her credit just as bad as her husband’s, so that she could now get married without any issues!

This scheme led to an obvious problem, which was that the newly-consolidated city now had a debt equal to about a year’s worth of tax collection. The long-term effort to fix this was also a doozy.

One would suppose that New York would raise its tax rate to pay down a bit of the debt every year. But instead:

The material reduction in this part of the interest bill was brought about by advancing the tax collection date six months. Efforts have since been made to cover the other six months by turning the hands of the clock forward one month a year.²

Every year, they moved tax day forward to collect an extra month’s worth of taxes!

Conclusion

The dreary details of New York City’s fiscal unification were, in its day, a live issue for both New York’s civic boosters and its much-aggrieved taxpayers. Today, it shows us that even dreary technocratic issues like municipal finance can get wrapped up in politics, with far-from-technocratic outcomes.

This history can be read in two entirely different ways.

On the one hand, it was about as dumb as public policy can possibly get, but—it worked. Despite going against the recommendations of public finance (and common sense), it got the consolidation effort over the line. One possible lesson, then, is that sometimes achieving results matters more than following technocratic policy recommendations. Without a theory of political adoption, policy proposals are just white papers addressed to no one in particular.

However, a pessimist might draw the opposite lesson: we should be unnerved to learn that such an important initiative took such an unserious approach, and might even have been entirely derailed due to incompetence. A non-negligible amount of resistance to the merger came from voters that (correctly) believed that the boroughs lacked the expertise and machinery to stitch together a consolidated city smoothly. We know that the consolidation succeeded but forget that it nearly didn’t—the margin of success in Brooklyn was narrow, in part due to concern about fiscal consolidation. In an only slightly different universe, the government’s perceived competence might have determined whether the referendum passed or failed.

Moreover, if the bureaucracy had been utterly incompetent, the idea of merging the boroughs of New York would have been doomed and nobody would have proposed it in the first place. Today, we remember what succeeded, but we can never know about the ideas that were never proposed because politicians knew the bureaucracy wasn’t up to the task. The pessimist might conclude that an expert bureaucracy is a crucial precondition of politics.

You, reader, can choose which lesson you find more compelling. Whichever you prefer, both options suggest that “politics” and “implementation” are interrelated rather than sequential steps in passing a law.

Even the most technocratic reformers need to consider the politics. Conversely, the government’s perceived competence helps determine the political deals that can even be struck in the first place.

Citations

Frederick Cleveland, Some Results and Limitations of Central Financial Control in New York City (1917).

1. City of Greater New York, Wikipedia.

2. Cleveland, Some Results and Limitations of Central Financial Control in New York City, 43–44.