Mayor Mike's SimCity blunder

By now many of us have, beyond our day jobs, a greater responsibility. We are mayor of a SimCity. One of the most popular computer games of all time, SimCity is based on what seems a simple concept. You supply your green field with raw materials, waterworks and a few apartment houses and pretty soon your screen fills up with your own buzzing metropolis of "Sims".

Except it doesn't, not every time. For to be a good guardian to your SimCity, you have to manage a subtle thing.

You have to make it want to grow. This involves thousands of continuous real-time fiscal and regulatory decisions taken by you, the mayor. The key to success is making such calls not from the point of view of City Hall but from the vantage point of your charges. For, as the SimCity 4 handbook notes, "Sims come first"; and Sims are moody creatures. Incentives inspire them to invest. Disincentives make them sad. Small alterations in the tax law yield big changes in their behaviour. Even the most apparently inconsequential steps may send your city into irreversible decline.

Of course, such tragedy is not instantly visible. All may look fine when you walk away from your chair. But while you are off telephoning or dabbing goat's cheese on your cracker, your city is beginning, quietly, to die.

This is the point that Michael Bloomberg has reached with the SimCity he acquired recently: New York. The city may look, to him and others, like a permanent fixture on the national and international screen. But it does not have to be permanent. Every day, tiny decisions are determining whether New York has a future. And the decisions Mayor Mike is making are the wrong ones.

The main problem is taxes, which are also one of the vital SimCity variables. The handbook warns against "soaking the rich with exorbitant tax rates". It also lays out its own general theory of taxes: "Typically, when you lower tax rates for any sector, demand for that sector will increase . . . If the tax cut attracts a lot of new Sims to your city, income may increase, even though each taxpayer pays a small amount."

The "soaking the rich" end of this argument describes New York today. New Yorkers currently shoulder the second heaviest burden of combined state and local taxes in the US, a fact that drives jobs to Connecticut, New Jersey or even income-tax-free Florida.

Yet Mr Bloomberg and his partners at the city council are not thinking like Sim-mayors. Instead of lowering rates they are raising them.

Until now, New York City has had a classic graduated rate structure for its income tax, with the first share of income being subject to low rates and the next few dollars earned to a higher rate. And up the staircase it goes. Under the 2003 plan, households will face rate increases. So far, so bad.

Next, however, Mr Bloomberg's scheme moves from bad to perverse, via one of those tiny decisions that mayors tend to dismiss as inconsequential. Worried about budget gaps, he is also introducing a "recapture" mechanism. Under this mechanism, as Edmund McMahon of the Manhattan Institute, a public policy think-tank, points out, the mayor is jettisoning parts of the graduated structure. At a certain stage - $150,000 in taxable earnings - taxpayers will find that all their income, not just the last dollars, is subject to a higher rate.

This creates a nightmare of a flat tax, the sort of disincentive that kills off SimCities. A couple with taxable income of $150,000 face no tax increase. But, as Mr McMahon notes, if the same couple make $150,001, they face a tax increase of hundreds of dollars. As they move towards $200,000 in earnings, they will find that an even higher flat tax locks in.

The same trick happens again at the $500,000 point. If our couple earn $500,000 in taxable income, they will pay a flat rate of 4.25 per cent, or $21,250 to New York City. If they make $500,001, however, they will pay $1,000 more, for suddenly all their income will be subject to that threshold's 4.45 per cent rate. The effective marginal tax rate on that last dollar has too many zeros for the FT to print.

State rates are moving up; property taxes, too. The idea that New York's most productive will "just live with" all this is hard to accept.

The point here, though, is not that low taxes are the sole factor promoting urban growth; tight budgets and good schools are also in the SimCity primer. It is that, as cities become more dynamic, the errors caused by a static model become ever greater. New York's current fiscal crisis has been likened to the crisis of the 1970s but in one way it is worse. In those days there were no digital trading platforms to compete with New York's stock exchanges. Today New York's economy is virtual enough to vanish. That ought to be easy to understand, especially for someone who built a virtual empire by putting a screen on a box.

© Copyright 2003 Financial Times

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