Small Businesses to NYC: Get Off Our Backs! (NYC’s crushing burden on job-creating entrepreneurs)
City Journal ^ | 10/19/2009 | Steve Malanga
Posted on Monday, October 19, 2009 10:26:12 AM by SeekAndFind
Morton Sloan feels besieged. Over the last several years, the Bronx-based entrepreneur has watched the property taxes on the ten Morton Williams supermarkets he runs in the city swell by hundreds of thousands of dollars. Increasingly aggressive city inspectors now linger in those stores for hours, writing costly citations for items that clerks accidentally mislabel. Some of Sloan’s suppliers say they’ll no longer deliver to New York City because of the Department of Transportation’s frequent parking-ticket blitzes. It gets worse: a new Bloomberg-administration program that encourages fruit and vegetable vendors to set up on street corners has left him scrambling to match prices with competitors who don’t have to pay rent, utilities, payroll taxes, and various other expenses. And now the city wants to plunk a 60,000-square-foot supermarket into a heavily subsidized new development just blocks from two of his stores. “I’ve never received a subsidy or asked anything of the city in 35 years, except to be left alone to do business,” Sloan says. “But everywhere I look these days, it seems like the city is trying to make life tough for me.”
Doing business in Gotham has rarely been easy for the nearly 200,000 small firms that form the backbone of the city’s local economy. Virtually everyone who runs a business in New York has long had to deal with uncompromising inspectors, unsympathetic city bureaucracies, and complex regulations, to say nothing of profit-crushing taxes. But over the past few years, small businesses’ woes have worsened significantly, say many entrepreneurs and business groups. Taxes, fees, and fines are worse than ever; city departments have stepped up inspections and enforcement; city agencies have stymied efforts to cut red tape; and at a time when the national and city economies are struggling, commissioners have promoted new social policies that have added to businesses’ burdens. “In 25 years, this is the worst I’ve seen things,” claims Ramon Murphy, owner of two bodegas and president of the city-based Bodega Association of the United States.
In an election year and in the middle of a serious downturn, the costs of New York’s tough-on-business regime have started to grab headlines. Mayor Michael Bloomberg and the City Council have agreed to set up a commission to cut duplicative business regulations, and the administration is rolling out a series of economic initiatives aimed at helping small businesses. But while this (rare) attention to their problems is welcome, business owners say, what the city really needs is lower taxes, far fewer regulations, more manageable fines, and a more responsive bureaucracy. At stake is the health not just of a few small firms but of the city’s wider economy. Government-imposed barriers to doing business raise prices, narrow choices, and inhibit job growth for all New Yorkers.
New York City’s reputation as a tough place to do business dates from at least the Great Depression, when Mayor Fiorello La Guardia, striving to make Gotham the quintessential New Deal City, imposed new taxes on businesses to fund a rich array of welfare programs. When the Depression eventually gave way to post–World War II prosperity, the taxes stayed in place. Later, with a social agenda as ambitious as La Guardia’s, Mayor John Lindsay added a whole series of new business levies, seeking to make 1960s Gotham the shining star of President Lyndon Johnson’s Great Society.
New York’s fiscal and economic meltdown in the mid-1970s led the city’s leaders to make a sobering, if temporary, reassessment of its antibusiness regime, resulting in a few tax cuts. But New York never completely abandoned the big-government precedent that La Guardia and Lindsay had set. Even though the eighties’ Wall Street boom produced surplus tax revenues that eased the city’s budget problems, the steep recession at the end of the decade brought elevated spending and renewed tax increases. In 1990 alone, Mayor David Dinkins increased city spending 5.2 percent and heaped $859 million in new taxes on firms. (At the same time, the state financed a 6 percent budget boost with $900 million of new business taxes.) City departments also began an aggressive push in the early nineties to increase business fines and violations; many owners saw this as a move to rest the city’s ever more swollen budget on their backs.
The burden on businesses was also felt by New York residents and the larger economy. A comprehensive early-nineties study by economists Stephen G. Craig and D. Andrew Austin estimated that high taxes were largely to blame for an outflow of 750,000 to 1 million jobs from the city since the early 1960s. And a 1991 Office of the Comptroller report estimated that the previous year’s tax increases on business would cost the city up to 80,000 lost jobs. One reason was lost business to the suburbs, where stores, taxed less, could charge customers less. A study by the city’s Consumer Affairs Department found retail prices for basic items in some neighborhoods to be 8 to 10 percent higher than in the suburbs. No wonder 55 percent of New Yorkers in one 1993 survey said that they left the city once a month to shop for everyday items. In fact, the New York City Planning Department figured in 1993 that Gotham had lost 50,000 retail jobs in the outer boroughs alone because New Yorkers were shopping for better prices in the suburbs.
The plight of small business became an issue in the 1993 mayoral race, when candidate Rudy Giuliani called for business tax cuts and rolling back fines and fees. After his election, Giuliani initiated a rare era of tax-cutting, trimming or eliminating more than a dozen business-related taxes—including New York’s unique “vault levy” on underground space and the despised commercial occupancy tax, an unprecedented levy on rent dating from the Depression, which he wiped out in the four outer boroughs and for small businesses in Manhattan. Perhaps most significantly, Giuliani also persuaded the state legislature to eliminate the sales tax on clothing purchases of up to $110 (he had unsuccessfully sought a $500 floor), sparking a sharp uptick in retail sales citywide.
But after decades of hikes, Giuliani’s reductions were only a light easing of a tax load that the city’s Independent Budget Office estimated as 65 percent larger than the big-city average. By the Giuliani era’s end, corporate taxes alone took six times more per $100 of taxable income in New York than in America’s other big cities. And Giuliani had let several opportunities for bigger cuts go by—most egregiously in his second term, when he refused to kill the rent tax for big Manhattan businesses, hoping to reserve the revenues for a new stadium for the New York Yankees.
Still, the Giuliani years represented gains for small-business owners. They were further encouraged by the 2001 mayoral election, in which voters rejected left-leaning Democratic candidate and former Consumer Affairs Commissioner Mark Green and elected one of the city’s most famous business executives, Michael Bloomberg—especially when Bloomberg announced that New York was “open for business.”
But business owners would be disappointed, for in dealing with budget problems, Bloomberg’s tenure has been more like Dinkins’s than Giuliani’s. Owners got a glimpse of what was ahead right after Bloomberg took office. With New York and the nation reeling from the post-9/11 budget crisis, the city began vigorously enforcing an obscure 1962 ordinance that limited the inscriptions on a store’s awning to its name and phone number. Aggressive inspectors smacked shops with $400 fines, forcing many to replace their awnings at a cost of several thousand dollars. In just a few months, inspectors wrote as many violations as they had the entire previous year, justifying the ticketing frenzy by claiming “a new level of visual clutter in the city,” as a buildings-department spokesman put it. Sympathetic media attention and a public outcry prompted the City Council to rewrite the outdated law.
Far harder for Gotham businesses to survive, however, are steep recent tax hikes, especially the mayor’s $1.9 billion property-tax increase in 2003—the largest single increase in the city’s history, which fell disproportionately on businesses. Combined with aggressive reassessments of the value of buildings over the last eight years, the new levies have virtually doubled the real-estate tax bite in the city, from $8.6 billion in 2002 to $16.1 billion this year—a rate of growth nearly three times the rate of inflation. And businesses pay nearly half of this total, because New York has long taxed commercial properties at nearly eight times the rate it applies to homeowners. (Other big cities average only about 1.7 times.)
“Property taxes have created a huge problem for landlords and for small-business owners who rent,” says Bradley Silverbush, a real-estate lawyer at Rosenberg & Estis in Manhattan. “Most landlords now insert clauses into leases saying tenants must pay any increase in real-estate taxes because landlords have been burned by the big increases, but tenants, especially small businesses, can’t bear these new taxes either. Their revenues just don’t change that much from year to year.” These property-tax hikes, moreover, have come on top of sharply rising water and sewer charges—what Councilman David Weprin of Queens has called “backdoor property taxes”—which are up by 63 percent, a half-billion dollars, in eight years.
One result: many more instances of businesses shuttering, owing tens of thousands of dollars in property taxes. Bodyworship, for example, a trendy Lower East Side clothing boutique frequented by celebrities like Britney Spears, shut down last year after accumulating $45,000 in back property taxes, a staggering bill for a tiny store. Over the summer, Silverbush represented a small business that owed $163,000 in back taxes and rents and a landlord slammed with nearly $100,000 in city water charges. Bills like these have helped push up vacancy rates—now projected, by the year’s end, to hit 10 percent in Manhattan and 12 to 15 percent in Brooklyn and Queens. That’s up from a citywide vacancy rate of less than 5 percent at the end of last year.
The higher taxes are a particularly tough problem for businesses that operate on low margins or have competitors that can make products elsewhere more cheaply. David Zuckerwise, vice president of the Liberty Brass Turning Company in Long Island City, Queens, says that the manufacturer has outsourced about 30 percent of its work overseas in recent years to cut costs—and is now thinking of moving its domestic production outside New York. He’s looked at locations in the suburbs, where local costs—notably, commercial property taxes—are substantially lower. “There used to be advantages to being in New York City, like being near your suppliers, that offset the high costs, but those advantages are gone,” he says. “The smart move is to get out.”
Small firms with narrow profit margins have come to view Mayor Bloomberg as unsympathetic to their plight. The mayor defended his 2003 tax hike by calling the city a “luxury product” that businesses were willing to pay a premium for. While that might have been true of the financial industry from which Bloomberg himself came, far more common are businesses, such as supermarkets, that typically earn only 1 to 2 percent of sales. “You can’t raise the price of a can of peas that much to pay for higher taxes and fines,” says Nelson Eusebio, who ran a supermarket in Brooklyn for nearly 20 years before closing up shop recently. Eusebio now heads a local association of struggling, mostly Latino, supermarket operators. He estimates that 300 supermarkets have gone out of business in the city since 2000; the Bloomberg administration, in its own study, admits that New York is probably losing $1 billion a year in retail food sales to the suburbs because of a shortage of markets. The city could support up to 100 more supermarkets, the study estimated—but only, notes Eusebio, if they could sell at prices that made them competitive with the suburbs.
Business groups that have tried to make their case to the mayor on taxes say that he just doesn’t get it. When members of the Rent Stabilization Association, a group representing small landlords, complained about how the city was squeezing their bottom line, the mayor pointed out how much the value of buildings had gone up since he’d taken office—cold comfort to landlords prevented by rent-control regulations from passing the full effect of rising taxes along to tenants. “It was a baffling response,” says Jack Freund, the group’s vice president. “We can’t run our buildings on value.”
New York City’s fines, fees, overlapping regulations, and licensing requirements provoke nearly as much ire as taxes do, in part because they often seem capricious and frequently require big investments in time, as well as money, to sort out. The Rent Stabilization Association counts 24 state and city agencies—ranging from the Departments of Building, Aging, Environmental Protection, and Finance to the Human Rights Commission and the Water Board—that small-building owners must deal with. The city’s Department of Consumer Affairs requires licenses for 55 different types of businesses—including electronics stores, stores selling secondhand products, billiard parlors, stores that sell scales or measuring devices, storage warehouses, and parking garages. In some cases, an owner needs two licenses from Consumer Affairs, as in the case of a secondhand store that happens to sell electronics.