Edward I. Koch
Thursday, Jan. 9, 2003

Forty-eight states are now struggling with budget deficits which in the aggregate are projected at $67.5 billion. Every major city in the country has a projected budget deficit. New York City is looking at $3 billion in red ink. California faces a projected deficit of $35 billion, representing 45 percent of its total budget. New York State faces an $8 billion deficit.

A partial response to this fiscal crisis is unrestricted revenue sharing by the federal government.

The first federal revenue-sharing bill was proposed by then New York Governor Nelson Rockefeller. He asked two congressmen – Hugh Carey, who later became governor of New York, and me – to prepare the legislation, which we did.

The bill was adopted in 1972 and provided funds to be distributed one-third to states and two-thirds to cities. The total then made available was $5 billion annually, which in constant dollars today would be about $21.4 billion.

If Congress were to re-enact such legislation today, with the feds already showing a huge deficit, new sources of revenue must be identified. The pot of money available will have to be many times the original amount.

Here are some suggestions. As the matter is debated, others will surely have additional proposals.

When I was mayor, we ended the stock transfer tax, which raised $258 million in fiscal year l979, its last full year before being phased out.

We ended that tax because we were warned that the stock exchanges would leave New York City, removing not only the source of the tax but thousands of jobs as well. And, pending that relocation, the brokers would execute their stock sales in other cities so as not to be subject to New York City's tax. We had no choice but to surrender.

The state legislature ended the tax, replacing it with $114 million a year in additional state aid to make up for the loss, an appropriation that ended in fiscal year 2000.

However, if the federal government were to levy a national stock transfer tax, threats by stock brokers to leave a state or city would be useless, although somebody on Wall Street would probably threaten to move the stock exchange to Botswana.

Even then, the feds could reach the assets of those required to file taxes in the U.S. How much could or should be raised from such a nationwide tax, to be shared by states and cites, would be a matter of great debate summed up by a reference to the goose and the golden egg.

Another revenue proposal would be a national sales tax on all Internet purchases. They are currently untaxed because of a U.S. Supreme Court decision holding that an out-of-state company does not have to collect a state's use or sales tax unless it has a physical presence in the state. Congress can require that they collect the tax.

It's time for Congress to lift the Supreme Court's prohibition and allow the feds to collect that revenue and distribute it to the states and cities. It is estimated that by the year 2006, the annual amount lost on non-levied Internet sales taxes will be $45 billion. The estimated current loss is $13 billion. In New York State alone, the tax loss for the state is $550 million, and the loss in taxes for the city is $250 million.

A third source of revenue would be taxes on the sale of cigarettes on reservations made to non-Native Americans. The current loss nationwide is estimated at $5 billion.

An enormous revenue source would be a national sales tax on all insurance premiums. The federal government's tax code should include as taxable income all insurance proceeds. Insurance companies, like major league baseball, have been exempted by Congress from the laws prohibiting restraint of trade. That should end.

The Republicans and Democrats are now vying with one another to provide tax relief to taxpayers, under the guise of a stimulus package intended to restart the economy. The proposals of the president are in part inequitably directed at helping the wealthiest people in this country.

The Democrats rightly propose to help the middle class and lower- economically centered part of our working population. It would be more just to relieve them for a period of time of part or all of the so-called payroll taxes, e.g., FICA and Medicare, than to look to further assist the wealthy top 5 percent of our citizenry.

If the feds exclude dividends from taxable income, as proposed by the president, states will, in the aggregate, lose more than $4 billion annually from state income taxes. The old adage "the rich get richer and the poor have children" seems particularly apropos at this time when viewed against the president's proposals.

Edward I. Koch is the former mayor of New York. His commentary for Bloomberg radio is republished here. You can hear his weekly radio show by clicking here.

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