Whipping Up a Stew of Taxes

"We've seen so many cliffhangers that I don't get acrophobia when I look over a cliff," quipped New York Governor Hugh Carey last week. Once again he was peering into the abyss of default. The helping hand he had expected from Gerald Ford had not been extended. In a statement only a little less tart than in the past, Ford said that if more "progress" was made, he would "review" New York's situation this week and consider some kind of relief. What he appears to want is a comprehensive plan to restore fiscal stability to the city, including an increase of about $200 million in city taxes -on top of some $5 billion the city now collects -to prove that New York is serious about balancing its budget.

Many New Yorkers felt let down and fed up. "I'm tired of being diddled," sputtered Manhattan's Democratic Congressman Edward Koch; "Ford has bled us to death." New York State University students held a rally at the U.S. Capitol to drum up support for aid to the city; New York Congresswomen Bella Abzug, Shirley Chisholm and Elizabeth Holtzman lent their voices to the cause. The New York Daily News, a longtime supporter of fiscal conservatism, berated Ford for "tantalizing us in a cold-blooded game of cat and mouse." Said a top G.O.P. congressional leader: "Ford was right at the start. If he didn't hang tough, New York would never have taken the necessary steps. But now his position is stupid."

The President was reacting to conflicting advice within the White House. Some of his economic aides, whose positions have softened noticeably in recent weeks, have been urging him to aid the city. Several political advisers, on the other hand, tell him to continue to resist because it helps him among voters in a country that remains skeptical about New York's intentions. "There are still too many details we don't have," said an Administration economist. "What is going to happen to the labor contracts, to the hospitals, to the city university? There are things that remain to be demonstrated."

In Albany, however, capital of one of the most heavily taxed states in the nation, Carey ran into determined opposition to further increases. A proposed boost in the taxes on commuters to the city was batted down by upstate Republicans; a sales-tax increase (from 8% to 9% in the city) was rejected by city Democrats. In desperation, the legislators began to concoct what Senate Majority Leader Warren Anderson called a "bouillabaisse": a stew of taxes that added up to $205 million at the risk of offending most consumers in the city. In addition to an increase in the city income tax, the plan included higher levies on banks, automobiles and cigarettes, and new taxes on barbershops, beauty parlors and massage parlors. After a stormy all-night debate, the New York city council approved the tax package by a one-vote margin. But the bill bogged down in Albany, and by week's end its prospects remained unclear.

Danger Point. If the taxes are passed, New York can finally -but not inevitably -expect some help from the White House. Aid would probably take the form of a direct loan, not a bond guarantee, since the latter would give New York paper a competitive edge over the nonguaranteed securities of cities that have been more fiscally prudent. The loan would be in the neighborhood of $2.5 billion, with all money to be repaid within the year it is borrowed. The loan would be secured by future federal payments to the city, like revenue sharing. One loan would probably not be enough, since it could take the city three years or longer to regain investor confidence and enter the bond market again. In the meantime, the President and Congress might be prepared to advance similar loans in succeeding years.

Even with federal aid, it is not certain that the city can avoid some form of default. The next danger point is early December, when the city must raise $150 million. By one measure, New York is already in default since the state legislature has approved a three-year moratorium on redeeming $1.6 billion of the city's short-term debt. But the bill was immediately challenged in a suit brought by the Flushing National Bank of Queens, which charged that the state had violated the U.S. Constitution: "No State shall... pass any ... Law impairing the Obligation of Contracts." More lawsuits are expected. Says Donna Shalala, treasurer of the Municipal Assistance Corp.: "You have a sense of the rapacious relatives gathering around the bed of someone close to death."

Given the possibility that the moratorium would not survive a court test, a respectable minority of financial experts argue that the city should voluntarily declare bankruptcy. This, they say, would enable New York to renegotiate extravagant union contracts and oblige the various power blocs to accept lower benefits and subsidies. One disadvantage of this course is that 27 states and the District of Columbia prohibit some institutional investors from buying a defaulted municipality's paper for periods of from two to 20 years.

There will be no painless way to rescue New York from a crisis that, as Shalala charged last week, was produced by "financial mismanagement of a very extreme type." She puts the budget deficit at $1.4 billion, up from the estimated $991 million of only two or three weeks ago. City spending is still out of control.

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