The Entrepreneurial City
Archives of Rudolph W. Giuliani
The Manhattan Institute

Wednesday, December 3, 1997



Introduction

The name of today's conference is "The Entrepreneurial City." That's what we were 100 years ago, when we became consolidated as a City. That's what we stopped being when over the last 30 years we subscribed to misguided, short-sighted policies that failed to invest in the future.

Because of the disastrous effects of these policies on our economy and our outlook, four years ago there were few that would have believed that we could have restored the optimism, hope and confidence that so many of us feel today. Today we can confidently say that New York City is returning to the spirit that made it great in the first place—a spirit that embraces individual initiative, responsibility, and drive: what entrepreneurship is all about.

What this means is that we not only have more entrepreneurs within the City, but that we are becoming more entrepreneurial as a City, among other cities of the nation and the world. Just as entrepreneurs lead the way in business with their hard work and ideas, New York City as a whole is now leading the way—in areas like crime reduction, welfare reform, and tax reform, to name a few.

Today, I would like to discuss with you how this has happened. I want to talk about how the way we plan our budgets is inseparable from the immediate growth and future security of our economy. How we plan a budget may not seem as dramatic as how we police our streets or educate our children, but it's no less fundamental. In fact, changing the way we think about our budget is perhaps the most telling example of how our philosophy as a City has changed.

Past

First, let's talk about the old philosophy. The old philosophy was to increase spending year in and year out. You didn't think systematically or strategically about the long term consequences. You might think that the fiscal crisis of the 1970's would have changed things. But it didn't change the culture of government taxing and spending. The ingrained culture was still to increase spending and raise taxes and enlarge the City head count each year. The City learned very few lessons from the fiscal crisis of the 1970's except those posed on it by law and cutting spending never really became part of the political philosophy of the City.

A perfect example of the old way of thinking was the Kummerfeld Report, which was commissioned by Mayor Dinkins to recommend ways of closing the enormous and damaging budget deficit the City faced in 1993.

The report recommended layoffs of City workers, an increase in the real property tax for single family homeowners, an increase in the city's sales tax of 1/4 of 1 cent, tolls for all of the East River and Harlem River bridges, imposition of a residential garbage collection fee, a tax on movie and theater tickets, elimination of scheduled "safe streets, safe city" police hires, elimination of City subsidies for day care, as well as other programs that would have robbed the City of its core vitality and escalated the hemorrhaging of jobs, and the destruction of our tax base.

I was asked to consider the report. I said it should be thrown in the garbage. Or maybe I said it should be recycled. I can't remember.

Why did I say that? Because the Kummerfeld Report would have addressed the deficits that the City faced at the time a $1.2 billion deficit in that fiscal year and a $2.2 billion deficit for the following fiscal year—in the most shortsighted way. It made two major mistakes that we have committed ourselves to reversing, namely hiking taxes and cutting spending indiscriminately without any real consideration for the consequences that those tax increases would have 10 or 15 years down the road.

If we had implemented the recommendations of that report—as Mayor Dinkins and the political establishment at the time were inclined to do (Dinkins said he would give the report consideration)—we would have spent less money as a City in the short term. And some people thought that was adequate. But in the long term, it was clear that such a dramatic increase in the tax burden, and on top of that a decrease in the quality of life resulting from that indiscriminate cutting, would have chased away our tax base, driving businesses and residents out of the City and doing immeasurable damage to our future.

But at the time the Kummerfeld report didn't seem so crazy to most people, because it was consistent with the prevailing philosophy of the times. The basic truth that previous administrations failed to see is that a budget and an economy are fundamentally interwoven. The way we exercise responsibility and discipline in the way we handle the budget cannot be considered without thinking about its impact on the long term growth and security of our economy.

Present

Over the last four years, we have looked at the budget in a different way. We now understand that every choice we make has not only an effect on this year's calculations, but on the very future of the City five, 10, and 15 years down the road.

City government should not and cannot create jobs through government planning. The best it can do, and what it has a responsibility to do, is to deal with its own finances first, to create a solid budgetary foundation that allows businesses to move the economy forward on the strength of their energy and ideas. After all, businesses are and have always been the backbone of New York City.

That's the first major difference. The second major is that we now have a realistic understanding of the effect of targeted tax reductions. This is intrinsically linked to the fact that we now grasp the connection between the budget and the larger economy, but it's not exactly the same thing.

No one ever considered tax reductions a reasonable option. They thought that because, on paper, tax reductions seemed to reduce government revenue, they would damage the City government's fiscal security. We now understand that is completely misguided. Targeted tax reductions spur growth. That's why we have made obtaining targeted tax reductions a priority of every budget.

So essentially, what we have done to reverse the downward spiral of our economy has been almost exactly the opposite of the Kummerfeld report. We inaugurated targeted tax cuts aimed at freeing business from government regulation. At the same time, working cooperatively with the City's labor unions, we reduced the size of government, without layoffs, to begin to mitigate the distorting effects of having a government that is far too large an employer in relation to the private sector.

This conference is about entrepreneurship. I believe that this City, thanks to our tax reductions, is finally returning to the spirit of entrepreneurship that made us great.

The basic principle underlying our tax cuts is this: when you reduce taxes in a responsible and intelligent way, you promote job growth and stimulate the economy. That, in turn, reduces the deficit and makes us more stable. So even though it seems in the short run that cutting taxes means less money for government, and makes it harder to reduce our deficits, time and again we've proven that just the opposite is true.

When I ran for Mayor in 1993, I advocated vigorously for a reduction of the hotel occupancy tax. That tax, which was the highest in the country, discouraged tourism and convention business. Because of the tax, other cities began to get tourism and convention business that historically had come to New York City. In 1994, working with the state, we substantially reduced the hotel occupancy tax and the result has been a boon for our tourism industry, our convention centers, and hotels.

In the year before the hotel occupancy tax was cut, the city received $127 million in hotel tax revenue. This year, the City is projected to receive $172 million in tax revenue, clearly showing how a reduction of this tax has been good for the city as well as good for business. Between 1994 and 1996 we gained almost 21,000 jobs in the tourism and restaurant industries.

Like the hotel occupancy tax, the sales tax of 8.25% discourages many shoppers from making purchases in New York City. The City loses about $3.5 billion each year in economic activity to surrounding areas, largely due to our sales tax.

In order to help eliminate the sales tax, my administration advocated for two one week sales tax "vacations". In one week in January the sales tax was eliminated for clothing purchases under $500, and for one week in September it was eliminated for clothing purchases under $100. Each of those weeks generated unprecedented levels of economic activity in the City, again showing that the elimination of a tax is often more successful in expanding the economy than the imposition of a tax.

Because of the success we had during our two "sales tax vacation weeks", we were able to lobby Albany to permanently eliminate the sales tax for clothing purchases of $100 or less, excluding footwear, starting in December of 1999. But this is not enough. My goal is to obtain an elimination of the sales tax on clothing purchases of $500 or less, including footwear, because I think that doing so would be good for business and for our residents and it would produce a lot more jobs.

Smart tax reduction helps businesses as much it helps consumers—look at our experience in eliminating the commercial rent tax in all four boroughs outside of Manhattan, and in Manhattan south of Chambers Street and North of 96th Street. In the area in Manhattan where the commercial rent tax still applies, it has been reduced. This year, our CRT reforms have been reduced and according to our financial plan will be reduced from 6% in 1993, to 3.9% in 1998, and will return about $300 million to the private sector, money which will allow businesses to expand, hire new employees, and which will continue to foster growth in our economy.

At the same time, we have reduced the unincorporated business tax, another tax that was particularly unfair to small businesses. This year we will return almost $100 million to small business through our unincorporated business tax reform. Because of the success we have had in reducing the UBT, our goal for the next four years is to eliminate the tax entirely.

Not only have we reduced or eliminated many of the government taxes that were strangling the growth of business, but we have already put hundreds of millions of dollars back into the private sector by ending the "mob tax" that was imposed on businesses throughout the City by the carting industry. By breaking organized crime's control of this industry, we have for the first time in years injected competition into commercial carting, and the result has been staggering.

Future

In the future, we'll continue to free businesses of these burdens—both government imposed burdens and those imposed by others.

We'll continue to eradicate mob influence from key City industries, including the construction industry, the garment industry, and wholesale food markets throughout the City. Once we put reforms in place in these industries that are modeled after our successes in the Fulton Fish Market and the private garbage hauling industry, I believe we will have returned a billion dollars to legitimate New York City businesses.

In October, I proposed eliminating the unfair double-taxation on owners of "S" Corporations. I also proposed a new child-care tax credit for parents and guardians who are working or looking for work. There are many more taxes that we need to reduce, eliminate, or restructure, and we plan to do just that.

The important thing is that philosophically, we've proven the fundamental importance of targeted tax reductions on stimulating the economy and generating revenue.

The result of our economic choices is an economy that is revitalizing itself. We are re-embracing the spirit of entrepreneurship that used to define our City. Over the past few decades, we had neglected it, and in fact done encouraged dependence, rather than the kind of independence and initiative that are the hallmarks of an entrepreneur's success. All you have to do to understand this is look at welfare rolls, which in 1993 had over 1 million people and were projected to rise to 1.2 million.

Since 1993, the City has gained 178,000 private wage and salary jobs, reversing the Dinkins administration's loss of 320,000 private sector jobs. We haven't regained all of the jobs lost in the early 90s yet, but we are more than halfway there, and that's a real achievement.

We still have a long way to go, but the increase in private sector jobs in the City over the last four years has been the highest annual percentage increase in the City's history.

Not only is this an important sign that the economy is moving in the right direction, but the job growth has been experienced in all five boroughs in diverse business areas. There is a misconception that most of the City's jobs have been on Wall Street. This is not the case. Although Wall Street generates a large portion of the tax revenue that the City has realized over the last four years, job growth is far more diversified.

In fact, the finance and insurance industries only gained 200 jobs between August 1993 and August 1997. In contrast, employment rose by 48,000 in other business services, 35,000 in retail trade, 22,000 in media, culture and entertainment, 16,000 in proposed services, and 9,500 in construction. So it is fair to say that although Wall Street has played a role in our economic turnaround, the turnaround has been much more diversified. That is a very good sign that our economic policies have taken hold and begun to work.

Conclusion

Over the last century, millions of people from all over the world have come to New York City.

They didn't come here to be taken care of and to be dependent on City government. They came here for the freedom to take care of themselves. This spirit of independence and entrepreneurship has defined New York City. It's made us the Capital of the World.

It's very easy to forget that every single powerful corporation which means so much to New York City, began with the energy and initiative of individuals who were willing to take risks many of them immigrants themselves. For every corporation, there was someone who had the creativity, desire, and will to make the most of the opportunities and the challenges of this great City.

When Nathan Handwerker opened a hot dog stand in 1916 on Surf Avenue in Coney Island nobody could have imagined that about eight decades later the original stand would have sold over one million frankfurters, and that Nathan's Hot Dogs would become a franchise with outlets nationwide.

The spirit of immigration and the spirit of entrepreneurship, which together have defined New York City more than anything else, are really one and the same. They are about encouraging, embracing, and harnessing new ideas and new energy.

The turnaround is not complete. We're simply on the road back to the real meaning of New York City investing not in government, but in people.

Our challenge for the next four years, and into the next century, is to make sure that more and more New Yorkers have access to the same spirit of entrepreneurship and self-advancement that made the City great in the first place and that have led to our most recent turnaround.

We will set our standards high, and do everything we can to make New York City the entrepreneurial City it was meant to be.

Thank you.



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