Tax Policy and the Fiscal Cost of Disasters: NY and 9/11

While the terrible attack on the World Trade Centers on September 11, 2001 caused a substantial short–run shock to New York City's economy, the city demonstrated substantial economic resilience over the longer run. Prices for office space increased relative to the nation between 2001 and 2003, and demand for housing has been robust. Combined with a short–lived national recession, the 9/11 attack led to severe short–run fiscal pressure on the city. Budget deficits were addressed mainly through roughly equal amounts of additional debt and tax increases, plus modest expenditure cuts. Costs of 9/11 through the public sector, including both tax losses and expenditure increases, are estimated to range from 0.7 percent to 1.35 percent of 2002 personal income, depending on the time period. Total federal compensation, through direct grants and tax expenditures, will ultimately equal about $20.4 billion. Fiscal relief to the government of New York City offsets about a third of the public sector costs. Because of linked tax bases, the state of New York shared heavily in the fiscal shock from 9/11. Rather than direct aid, the main state response has been to allow New York City the fiscal flexibility to borrow and raise taxes. We argue that there is a strong case, both on equity and efficiency grounds, for sharing the costs of disasters between the federal and the local governments, and that general assistance to governments can play an important role in recovery.