September 11: Recent Estimates of Fiscal Impact of 2001 Terrorist
Attack on New York (30-MAR-05, GAO-05-269).			 
                                                                 
In 2002, GAO reported that the New York budget offices estimated 
that from the terrorist attack, New York City sustained tax	 
revenue losses of $1.6 billion for 2002 and $1.4 billion for	 
2003, New York State $1.6 billion for 2002 and $4.2 billion for  
2003. GAO found some limitations to these estimates, such as that
it is likely that they included some of the economic recession	 
under way in September 2001, as well as events after the attack, 
such as economic fallout from the Enron collapse and accounting  
firm improprieties. After GAO issued its report in 2002, some New
York agencies used revised economic data to assess the attack's  
fiscal impact. In this context, GAO was asked to update its	 
report to ascertain whether the recent government studies using  
revised economic data would provide more precise information on  
the fiscal impact of the terrorist attack. In doing this work,	 
GAO did not independently estimate the attack's impact on New	 
York tax revenues.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-269 					        
    ACCNO:   A20377						        
  TITLE:     September 11: Recent Estimates of Fiscal Impact of 2001  
Terrorist Attack on New York					 
     DATE:   03/30/2005 
  SUBJECT:   Economic analysis					 
	     Economic growth					 
	     Recession						 
	     Statistical data					 
	     Taxes						 
	     Terrorism						 
	     Data collection					 
	     Economic indicators				 
	     New York						 
	     World Trade Center (NY)				 

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GAO-05-269

United States Government Accountability Office

GAO

                       Report to Congressional Requesters

March 2005

SEPTEMBER 11

     Recent Estimates of Fiscal Impact of 2001 Terrorist Attack on New York

GAO-05-269

March 2005

SEPTEMBER 11

Recent Estimates of Fiscal Impact of 2001 Terrorist Attack on New York

[IMG]

  What GAO Found

Three recent studies by New York government agencies concluded that the
2001

terrorist attack on the World Trade Center significantly reduced tax
revenues in

fiscal years 2002 and 2003. But their estimates of forgone tax
revenues-$2.5

billion to $2.9 billion for New York City and about $2.9 billion for New
York

State-are generally less than previous estimates of forgone tax revenues.
For

example, the study completed in 2004 found, from revised economic data,
that

the economic recession that began before the attack generally had a
greater

impact on reducing New York tax revenues than initially projected. The
studies

completed in 2002 and 2003 were issued before subsequent revisions to

employment data were released.

While the revised economic data indicate that New York's economy was
generally weaker before the attack than initially expected, inherent
uncertainties and data limitations still prevent the estimates from being
precise. The differences in the recent estimates reflect the
uncertainties, the timing of the studies, and data limitations. As GAO
reported previously, precisely measuring the attack's effect on economic
activity and tax revenues is inherently difficult, because it must be
disentangled from other factors that also reduced tax revenues. In
addition, a consensus has not yet emerged on employment and income
impacts, key factors in measuring the attack's impact on New York tax
revenues.

Previous estimate of impact

Recent estimate of impact

2002 2003 Total 2002 2003 Total

City Office of

$1,600 $1,400 $3,000 $926 $1,569 $2,495

Management and Budget

                                      n.a.   n.a.  n.a.    910-  928   1,838- 
                   City Comptroller                       2,015         2,943 
                  State Comptroller   n.a.   n.a.  n.a.     725 2,175   2,900 
           State Division of Budget 1,600  4,200   5,800   n.a.  n.a.    n.a. 

Source: New York City Office of Management and Budget (2004), New York
City Office of the Comptroller (2002), New York State Office of the State
Comptroller (2003), and New York State Division of Budget (2002).

Note: Dollars in millions, unadjusted for inflation; n.a. is not
applicable.

While the attack's fiscal impact on New York from 2002 through 2003
appears to be less severe than initially expected, ascertaining its
long-term impact is difficult, because other events also affected New
York's economy and tax revenues. For example, the New York City Office of
Management and Budget projected more than $400 million in tax revenues
forgone for 2004 and 2005, derived mostly because of estimates of
securities jobs lost as a result of the attack. Even so, the extent to
which securities jobs are fewer in New York City than if the attack had
not happened is not clear. Other factors, such as the relatively high cost
of conducting business have also affected securities employment in the
city. The city's property tax revenues will be lower than had there been
no attack, however, because destroyed and damaged buildings have not been
reconstructed.

                 United States Government Accountability Office

Contents �

Letter

Results in Brief�Background�Recent Assessments of Attack:
Fiscal Impact Was Substantial but �

Less Than Previously Estimated The Long-Term Fiscal Impact May Depend on
Factors Like Reconstruction Agency Comments

                                       1

                                      2 3

                                       9

                                     13 17

Appendix I Objectives, Scope, and Methodology

Appendix II GAO Contacts and Acknowledgments 20

GAO Contacts 20 Acknowledgments 20

Table

Table 1: New York Agencies' Estimates of the 2001 Terrorist Attack's
Impact on New York City and State Tax Revenues, Fiscal Years 2002-03

Figures

Figure 1: The Beginning of the Decline in Total Private Sector Job Growth
in Late 2000 4 Figure 2: New York City's Greater Fall in Employment in 4
Months Following the Attack Than in Prior Year 5

Figure 3: The Substantial Fall in New York City Jobs in Some Industry
Sectors in 4 Months Following the Attack, Compared to Prior Year 6

Figure 4: The Start of the Fall in Total Private Sector Quarterly Income
Growth in 2001 7 Figure 5: New Jersey's 2001 Temporary Increase in
Securities Employment 15 Figure 6: New York City's Share of Total U.S.
Securities Employment 16

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separately.

United States Government Accountability Office Washington, DC 20548

March 30, 2005

The Honorable Charles B. Rangel Ranking Minority Member Committee on Ways
and Means House of Representatives

The Honorable Carolyn B. Maloney The Honorable Jose E. Serrano House of
Representatives

New York's economy improved significantly in 2004, after declining in the
previous 3 years. Recent gains in overall employment, tax revenues higher
than expected, and increased tourism may indicate that New York is
rebounding from the economic recession that began in early 2001 and from
the devastation of the September 11, 2001, terrorist attack. Nonetheless,
because New York's economic growth has generally lagged behind that of the
United States since the attack, questions remain about the extent to which
the losses in jobs and tax revenue New York sustained were caused by the
attack or by other factors, such as the recession.

In 2002, we reported that the New York budget offices estimated that for
2002 and 2003 combined, the impact of the terrorist attack would be about
$3.0 billion for New York City and $5.8 billion for New York State.1 The
estimates were based on economic forecasts that indicated tax revenues
would likely be much lower than expected because of job and income losses
brought about by the attack. But we found that the attack's impact on tax
revenues in 2003 was uncertain because it depended on factors that had not
yet been determined, such as the degree to which the attack made New York
City less attractive for business.

Since we issued our report in 2002, some New York agencies have used
revised economic data to assess the attack's fiscal impact. Consequently,
you asked us to update our report to ascertain whether the revised
economic data provide more precise information. Accordingly, we

1GAO, Review of the Estimates for the Impact of the September 11, 2001,
Terrorist Attacks on New York Tax Revenues, GAO-02-882R (Washington, D.C.:
July 26, 2002).

reviewed the conclusions of recent government studies on the impact of the
September 11 terrorist attack on New York tax revenues.

To identify government studies of impacts on New York tax revenues
completed since our 2002 report, we reviewed the economics literature and
searched the Internet, and we contacted officials at the U.S. Bureau of
Labor Statistics (BLS), Federal Reserve Bank of New York, New York City
Office of Management and Budget, New York State Division of Budget, and
other state and local agencies. We identified studies completed by the (1)
New York City Office of Management and Budget in 2004, (2) New York State
Office of the State Comptroller in 2003, and (3) New York City Office of
the Comptroller in 2002. To review the studies, we used standard economic
criteria, such as whether the studies measured the incremental effect of
the attacks, used sound economic reasoning, and were based on current
data. We discussed the impact of the attack with officials in the New York
City Office of Management and Budget, New York State Office of the State
Comptroller, and New York City Office of the Comptroller, as well as with
officials at BLS, the Federal Reserve Bank of New York, New York City
Independent Budget Office, New York State Division of Budget, New York
State Financial Control Board, and the Securities Industry Association. We
also discussed these issues with economics staff of the New York State
Assembly Ways and Means Committee. In doing this work, we did not
independently estimate the impact of the terrorist attack on New York tax
revenues.

Unless we note otherwise, we determined that the data were sufficiently
reliable for purposes of this report (app. I has more detail). We
conducted our work from July 2004 through March 2005 in accordance with
generally accepted government auditing standards.

Three recent studies by New York government agencies concluded that the
terrorist attack on the World Trade Center significantly reduced tax
revenues in fiscal years 2002 through 2003. But their estimates of the
forgone tax revenues-$2.5 billion to $2.9 billion for New York City and
about $2.9 billion for New York State-are generally less than the
estimates of the forgone tax revenues that were estimated in 2002. For
example, the most recent study, completed in 2004, found from revised
economic data that the economic recession generally had a greater impact
on reducing New York tax revenues than initially projected. The studies
completed in 2002 and 2003 were completed before final revisions to the
employment data were released.

Results in Brief

While the revised economic data indicate that New York's economy was
weaker before the attack than initially expected, the inherent
uncertainties and data limitations still prevent the estimates from being
precise. As we reported previously, precisely measuring the effect of the
terrorist attack on economic activity and tax revenues is inherently
difficult because it must be disentangled from the effect of other events
that also reduced tax revenues, such as the economic recession in 2001. In
addition, a consensus has not yet emerged on the extent of the attack's
effect on employment and income, key factors in measuring New York tax
revenues.

Although the short-term fiscal impact of the attack on New York appears to
be less severe than initially projected, its long-term impact is difficult
to ascertain because other events also affected New York's economy and tax
revenues. For example, the New York City Office of Management and Budget
also projected that the city will forgo $400 million annually in personal
income tax revenues in 2004 and 2005, mostly derived from the loss of an
estimated 17,000 securities jobs. However, the extent to which New York
City continues to lose jobs as a result of the attack is not clear,
because factors such as the relatively high cost of conducting business
have also affected securities employment in the city. Nonetheless,
property tax revenues will continue to be lower than if there had been no
attack, until the destroyed and damaged buildings are reconstructed.

The three New York agencies generally agreed with the information
presented. Two also provided technical comments that we incorporated, as
appropriate.

The September 11 terrorist attack on the World Trade Center killed nearly
3,000 people and destroyed and damaged a dozen buildings containing
millions of square feet of office space. It severely affected New York's
economy, already in a downturn from a national recession and the collapse
of Internet companies and associated industries.2 Job growth in the United
States and New York, an important indicator of economic conditions, had
begun to decline in late 2000, turning negative several months before (see
fig. 1). For example, job growth, which had been slowing in New York City,
declined in June 2001, compared with June 2000, and bottomed out in
January 2002. But because some jobs moved to

2According to the Business Cycle Dating Committee of the National Bureau
of Economic Research, the recession began in March 2001 and ended in
November 2001.

Background

other parts of the state, and to states like New Jersey and Connecticut,
the net impact on New York State and the nation was less than on the city.

Figure 1: The Beginning of the Decline in Total Private Sector Job Growth
in Late 2000

Percent change from prior year6

4

2

0

-2

-4

-6 1998 1999 2000 2001 2002 2003 2004

                                 Year and month

Source: GAO analysis of Current Employment Statistics data from U.S.
Bureau of Labor Statistics and New York State Department of Labor.

Note: Includes revisions released in March 2005. Data for 2004 are subject
to revision. Vertical line denotes September 2001.

Although job growth began to slow well before the attack, it declined
noticeably in the 4 months after September 2001, particularly for New York
City. Employment growth in several major industry sectors fell more in the
city than in the state or in the United States. The largest declines were
in manufacturing and finance. In particular, employment in

manufacturing declined by about 14 percent in New York City, compared with
9 percent in New York State and 8 percent in the nation. In addition, the
financial sector grew about 1 percent in the United States but declined by
about 9 percent in the city and about 6 percent in the state. Figure 2
illustrates these differences.

 Figure 2: New York City's Greater Fall in Employment in 4 Months Following the
                           Attack Than in Prior Year

Percentage change from prior year

-16-14-12-10 -8 -6 -4 -2 0 2 4

Manufacturing Financial

    Professional and business Trade, transportaton, and utliities Leisure and
                                                     hospitality Construction

Information

             Other services Natural resources and mining Education and health

Source: GAO analysis of U.S. Bureau of Labor Statistics and New York State
Department of Labor data.

Note: Employment categories are industry "supersectors," as defined by the
North American Industrial Classification System. The change is measured
from October 2001 through January 2002 relative to the same period in the
prior year. January 2002 is the trough for New York total employment
growth, as shown in figure 1.

While some of these major sectors had significant job losses in New York
City year to year, losses in some subsectors were more substantial. For
example, employment in the apparel sector of manufacturing declined 21
percent, and employment in air transportation-a component of the trade,
transportation, and utilities sector-fell 19 percent from the same period
the year before (fig. 3). In addition, within the financial sector,
employment in the securities industry declined about 15 percent. Decreased
activity in these sectors from the combined effects of the recession and
the attack contributed to these job losses. For example, a significant
drop in demand for air travel in the attack's aftermath is a major
contributing factor in the decline in air transportation employment.

Figure 3: The Substantial Fall in New York City Jobs in Some Industry
Sectors in 4 Months Following the Attack, Compared to Prior Year

Source: GAO analysis of current employment statistics data from U.S.
Bureau of Labor Statistics and New York Department of Labor.

Note: Employment categories are industry sectors defined by the North
American Industrial Classification System. The change is measured as
October 2001 through January 2002 from the same period in the prior year.
January 2002 is the trough for New York total employment, in figure 1.

Manufacturing, as a sector, experienced significant declines but accounted
for 5 percent of the employment in major categories for the city. Finance
and transportation accounted for larger proportions of employment-15

and 18 percent respectively. For these reasons, the declines in these
sectors, while somewhat less than those in manufacturing, are particularly
important for the city's economic condition. As with employment, income
growth had already slowed and had turned negative in New York City and in
the state several months before the attack (see fig. 4).

Figure 4: The Start of the Fall in Total Private Sector Quarterly Income
Growth in 2001

Percentage change from prior year

20

15

10

5

0

(5)

(10)

(15)

(20)

Source: GAO analysis of Quarterly Census of Employment and Wages data from
U.S. Bureau of Labor Statistics and New York State Department of Labor.

Note: The change in private sector quarterly income is measured relative
to the prior year. According to BLS, because of delays relating to the
attack, some businesses may have underreported income in third quarter of
2001 and overreported in the fourth quarter. A BLS official said this
would not affect the overall trend over the latter part of 2001.

As discussed above, the securities sector was one of the hardest hit.
Although the decline in securities employment was not as great as in some
other sectors, high wage rates for the sector meant a much larger decline
in income. For example, securities income fell by 28 percent in the first
quarter of 2002 from the same quarter the previous year.

Other hard-hit sectors were air transportation, -20 percent; information,
-14 percent; and professional and technical services, -14 percent.

The decline in income has important ramifications for the collection of
state and city revenues. The city's tax revenue comes from taxes on
personal and business income and sales, property, and real estate
transfers; state tax revenue comes from taxes on personal income, business
income, and sales. In general, property tax receipts are relatively stable
from year to year, while the other tax receipts vary with economic cycles.
In particular, because the state's share of total tax receipts derived
from income tax is more than 50 percent, its total tax receipts can be
negatively affected when the economy contracts. In addition, New York has
a sizable share of relatively high-paying jobs in the securities industry.
As a result, economic contractions that affect Wall Street and deflate
stock values can negatively affect both state and city tax receipts.

The New York budget offices estimated in 2002 that from the terrorist
attack, New York City sustained tax revenue losses of $1.6 billion for
2002 and $1.4 billion for 2003, New York State $1.6 billion for 2002 and
$4.2 billion for 2003. In our 2002 report, we found some limitations to
these estimates, such as that it is likely that they included some of the
economic recession that was under way in September 2001, as well as events
after the attack, such as economic fallout from the Enron collapse and
accounting firm improprieties.3 Given these limitations, we concluded that
the estimates for 2002 appeared to reasonably approximate the impact of
the attack but that the estimates for 2003 were more uncertain because
they depended on factors that had not yet been determined, such as the
degree to which the attack made New York City less attractive to
businesses.

3GAO-02-882R.

Recent Assessments of Attack: Fiscal Impact Was Substantial but Less Than
Previously Estimated

Three studies completed by New York government agencies after our 2002
report concluded that the September 11 terrorist attack significantly
reduced New York tax revenues in 2002 and 2003. Their estimates of fiscal
impact, however, were generally less than the estimates made in the
attack's aftermath. For example, the New York City Office of Management
and Budget estimated in 2004 that the attack reduced the city's tax
revenues by about $926 million in 2002 and $1,569 million in 2003, for a
total revenue loss of about $2.5 billion (see table 1).4 By comparison,
the agency's initial total estimate in 2002 had been about $3.0 billion.
Agency officials said that revised data on economic growth, employment,
and income indicated that some of the tax revenue losses they attributed
initially to the attack were more likely to be attributable to the
recession.

Table 1: New York Agencies' Estimates of the 2001 Terrorist Attack's
Impact on New York City and State Tax Revenues, Fiscal Years 2002-03

Previous estimatea Recent estimate

       New York agency       2002   2003  Total    2002      2003       Total 
        City Office of                             $926                       
        Management and      $1,600 $1,400 $3,000           $1,569      $2,495
            Budget                                                
       City Comptroller          b      b      b 910-2,015    928 1,838-2,943 
      State Comptroller          b      b      b       725  2,175       2,900 
State Division of Budget 1,600  4,200  5,800          b      b           b 

Source: New York City Office of Management and Budget (2004), New York
City Office of the Comptroller (2002), New York State Office of the State
Comptroller (2003), and New York State Division of Budget (2002).

Note: Dollars are in millions, unadjusted for inflation. Estimates by the
City Office of Management and Budget and the City Comptroller represent
forgone revenues for New York City for fiscal year July through June. The
estimates by the State Comptroller and the State Division of Budget
represent forgone revenues for New York State for fiscal year April
through March.

aPrevious estimate as reviewed in GAO-02-882R.

bNot applicable.

For example, the agency developed a baseline revenue forecast from its
revenue forecasting models to reflect what the economy would have looked
like in the absence of the attack. To estimate the attack's fiscal impact,
the agency compared the baseline forecast with actual tax revenues
collected in 2002 and 2003, adjusted for tax policy changes made

4New York City Office of Management and Budget, Impact of 9/11 on New York
City Tax Revenue (New York: September 15, 2004; rev. February 1, 2005).

after September 11.5 In its initial study in 2002, the agency assumed that
employment in the baseline revenue forecast would remain flat for 2001 and
would increase by 0.7 percent in 2002. In its study using revised data,
the agency estimated that employment would have declined by about 0.2
percent in 2001 and 1.8 percent in 2002 had there been no attack. With the
updated forecast, the agency estimated that as a result of the attack,
about 64,000 jobs and $11 billion in income were lost through the end of
fiscal year 2002-a total of about 91,500 jobs and $22 billion in earnings
through the end of fiscal year 2003.

The 2002 study by the New York City Comptroller estimated that the
terrorist attack reduced the city's tax revenues by a range of about $910
million to $2 billion in 2002 and by about $928 million in 2003.6 The
agency used two methods to assess the attack's impact on tax revenues for
the 2002 fiscal year. For example, in deriving the lower estimate, the
agency assumed that the economic recession in 2001 would be comparable
with the 1990-92 recession, in terms of reducing the city's tax revenues.
The agency then attributed to the terrorist attack the difference between
the projected fall in tax revenues from the 2001 recession and a forecast
of the city's total tax revenues for fiscal year 2002. In deriving its
higher estimate, the agency compared an estimate of the effect of a
slowdown in the city's economic growth on tax revenues with actual tax
revenues collected in 2002 and attributed the difference to the effect of
the attack. In addition, on the basis of a preattack projection of job
growth, the agency estimated that the city lost about 146,100 jobs through
July 2002.

The agency's estimates of forgone revenue for the 2-year period are within
range of the city budget office's revised estimate of $2.5 billion, but
since the city comptroller published its estimates in 2002, subsequent
revisions to employment and other economic data have become available. For
example, each year, the New York State Department of Labor revises the
monthly employment data for the preceding 2 years. In March 2003, the
state labor department reported that the revised estimate of private
sector employment in New York was lower, both before and after the attack,
than indicated in the revisions reported in March 2002.

5The city budget office adjusted actual tax collections for the $1.4
billion in tax increases enacted in 2003. But its study did not assess the
extent to which the higher taxes might have reduced economic activity and
tax revenues.

6New York City Office of the Comptroller, One Year Later: The Fiscal
Impact of 9/11 on New York City (New York: September 4, 2002).

Finally, the New York State Comptroller's 2003 study concluded that the
attack reduced the state's tax revenues by about $725 million in 2002 and
$2,175 million in 2003, for a total of $2.9 billion.7 This is roughly half
of the $5.8 billion loss in tax revenues that the New York State Division
of Budget estimated in its 2002 analysis.8 According to the comptroller's
office, the recession caused more job losses in the months leading up to
the attack than initially expected-New York State lost about 75,000 jobs
before the attack and about 40,000 jobs in its immediate aftermath. In
addition, the state comptroller concluded that corporate accounting
scandals significantly reduced the state's tax revenues after the attack
because of reduced Wall Street profits and year-end bonuses. As a result,
agency officials said, the bulk of the state's tax revenue losses in the
2-year period were the result of the recession and other events unrelated
to the attack. Because the report was issued in early 2003, it did not
incorporate revisions to the employment data that were made in March 2003.
Nonetheless, agency officials stated that the revisions provide additional
support for their view that the recession that was under way at the time
of the attack was more severe than initially expected.

Although the recent estimates may be useful as general indicators of the
relative magnitude of the attack's impact, inherent uncertainties about
projecting economic activity in the absence of the attack and data
limitations prevent them from being precise indicators. The differences in
the estimates reflect these uncertainties, the timing of the studies, and
data limitations. Measuring the attack's effect on economic activity and
tax revenues precisely is inherently difficult, because this effect must
be disentangled from the recession and other events. In addition, a
consensus has not yet emerged on the attack's effect on employment and
income- key factors in New York tax revenues in its aftermath.

For example, in a related study in 2002, the Federal Reserve Bank of New
York used a statistical model to simulate the attack's effect on

7New York State Office of the State Comptroller, 2003-2004 Budget
Analysis: Review of Economic and Revenue Forecasts (Albany, N.Y.: March
2003).

8In 2005, a New York State Division of Budget official told us that the
agency had not reassessed the fiscal impact of the terrorist attack but
that estimates from the agency's 2002 study still appear to be reasonable.
See GAO-02-882R for a discussion of that 2002 study.

employment and earnings.9 The study found that the attack's effect on
employment had largely run its course by mid-2002 and that it caused net
earnings losses of about $3.6 billion to $6.4 billion by June 2002.
Specifically, the study estimated that employment was lower by about (1)
38,000 to 46,000 jobs in October 2001, (2) 49,000 to 71,000 jobs in
February 2002, and (3) 28,000 to 55,000 jobs by June 2002. However, the
report was completed before the subsequent revisions to employment data
were available.

In addition, a 2004 study by BLS economists found that the attack had a
significant impact on employment in New York City. For example, the study
estimated that the city lost the equivalent of about 143,000 jobs each
month for 3 months after the attack and about $2.8 billion in wages.10 The
authors stated that they believe their estimates were conservative but
that they were unable to isolate the attack's impact after January 2002
because of other factors that may have also reduced employment.

Finally, a 2005 report by staff for the New York State Assembly on the
status of the economy in lower Manhattan stated that the city sustained
substantial losses in employment and wages after the attack.11 For
example, the report found that private sector employment in Manhattan was
lower by 134,547 jobs during the first year after the attack and 172,013
jobs during the 3 years after the attack. However, the report did not
attempt to separate out the effect of the attack from other factors that
also reduced employment.

9Jason Bram, James Orr, and Carol Rapaport, "Measuring the Effects of the
September 11 Attack on New York City," Economic Policy Review (New York:
Federal Reserve Bank of New York, November 2002). This study did not
estimate fiscal impacts.

10Michael L. Dolfman and Solidelle F. Wasser, "9/11 and the New York City
Economy: A Borough-by-Borough Analysis," Monthly Labor Review (Bureau of
Labor Statistics) 127:6 (June 2004). This study did not estimate fiscal
impacts.

11New York State Assembly Ways and Means Committee Staff, New York State:
The Lower Manhattan Economy After September 11th (Albany, N.Y.: February
2005). The report also estimated that income taxes declined by more than
$400 million in the ground zero area of the city in the 3 years after the
attack. The report did not attempt to separate out the effect of the
contribution of other factors to economic losses.

The Long-Term Fiscal Impact May Depend on Factors Like Reconstruction

Although the short-term fiscal impact on New York appears to be less
severe than initially expected, the long-term impact may depend on factors
such as the pace of reconstructing destroyed and damaged buildings.
Separating the long-term impact on employment and businesses is also
difficult because of factors such as New York City's recovery from the
recession and businesses deciding to remain there, despite associated
risk.

For example, the New York City Office of Management and Budget estimates
that the city will lose more than $150 million in annual tax payments in
fiscal years 2004 and 2005, mostly from property damage and loss at the
seven World Trade Center buildings. According to the agency, only one
building is being reconstructed; designs for the other buildings are not
yet final. As a result, the agency expects that most of the property tax
revenues that would have been generated had the attack not happened will
not begin again until after 2010.

The agency's estimate of forgone revenues presumes that beginning in
fiscal year 2002, the city would have received annual property tax
payments of about $98 million from the leaseholder, based on the market
value of the commercial office space.12 The precise amount the city would
have received in revenues in the absence of the attack is not clear.

Historically, the city received about $28 million annually in payments in
lieu of taxes from the buildings' owner-the Port Authority of New York and
New Jersey. Before the attack, the Port Authority leased several of the
buildings and the city submitted a property tax bill to the leaseholder
for about $98 million. But agency officials said that the city never
received these tax revenues because the leaseholder contested the tax
bill. After the buildings were destroyed, beginning in 2003, the city
received payments in lieu of taxes from the Port Authority of about $3
million, representing the value of the World Trade Center site before any
improvements. In addition, according to a new agreement with the Port
Authority, the agency said that the city will receive about $6 million in
fiscal year 2005 and $13 million in subsequent years.

The New York City Office of Management and Budget projected that the city
would also forgo more than $400 million annually in personal income

12The property tax was based on the capitalization of net income of a
market basket of similar buildings in lower Manhattan. After 2002, the
property tax was projected to increase at the billable assessed value
growth rate for commercial properties.

tax revenues in 2004 and 2005, derived from the loss of an estimated
17,000 securities jobs. To develop this estimate, the agency used
information on the proportion of securities jobs in lower Manhattan in
March 2001 and an estimate of the number of jobs remaining outside New
York City as a result of the attack, as of September 2003. Agency
officials said that these jobs were relocated to New Jersey and
Connecticut.

How much the attack continues to affect securities employment is not
clear. It may induce some businesses to relocate some jobs to ensure the
continuity of their business in the event of a future catastrophic event.
But the city's share of total U.S. securities employment has been falling,
partly because of the relatively high cost of conducting business in the
city. As a result, separating the attack's effect from structural changes
in the industry is difficult. Figure 5 shows that job growth in the
securities industry declined in the city after the attack but gradually
recovered. In contrast, securities employment growth in New Jersey spiked
sharply, but only temporarily.

Figure 5: New Jersey's 2001 Temporary Increase in Securities Employment

40

30

20

10

0

-10

-20

-30 1998 1999 2000 2001 2002 2003 2004

                                 Year and month

Source: GAO analysis of Current Employment Statistics data from U.S.
Bureau of Labor Statistics and New York State Department of Labor.

Note: Includes revisions released in March 2005. Data for 2004 are subject
to revision. Vertical line denotes September 2001. Employment growth is in
securities, commodity contracts, and other financial investments and
related activities.

In addition, New York City's share of U.S. total employment in securities
fell sharply after the attack but then recovered and returned to a level
near its long-term trend (see fig. 6). According to reports by the Federal
Reserve Bank of New York and the Securities Industry Association, the
downward trend began well before the 2001 attack, because of relatively
higher business costs in the city, and the recession and attack
exacerbated the trend. An official with the budget office said that New
York City's

competitive position has improved because of rising commercial rents and
land use pressures in New Jersey. For example, according to the agency,
commercial rents in Hudson County, New Jersey-the most common destination
for securities jobs leaving New York City-were 97 percent of those
downtown in 2004, compared with 73 percent in 1990.

Figure 6: New York City's Share of Total U.S. Securities Employment

Percent40

35

30

25

20

15

                    1990 1992 1994 1996 1998 2000 2002 2004

                                 Year and month

    N.Y.C. securities as a percentage of U.S. Trend of N.Y.C securities as a
                               percentage of U.S.

Source: GAO analysis of Current Employment Statistics data from U.S.
Bureau of Labor Statistics and New York State Department of Labor.

Note: Includes revisions released in March 2005. Data for 2004 are subject
to revision. Vertical line denotes September 2001. Employment is in
securities, commodity contracts, and other financial investments and
related activities. The trend line was estimated using the share of New
York City securities employment as the dependent variable and time as the
independent variable.

Agency Comments

Finally, federal assistance to the New York City area in response to the
attack has included funding for initial response efforts and
infrastructure restoration and improvement, compensation for
disaster-related costs and losses, and Liberty Zone tax benefits and
business attraction and retention programs. According to the New York City
agencies, however, none of the federal assistance provided so far has been
to directly compensate for the tax revenues estimated to have been lost as
a result of the attack.

We provided the three New York agencies with a draft of this report for
their review and comment. The New York City Deputy Director of the Office
of Management and Budget generally agreed with the report's content. The
New York City Deputy Comptroller for Budget commented that the report
accurately described the information in that agency's 2002 study. Both
officials also provided technical comments, which we incorporated, as
appropriate. The New York State Deputy Comptroller for the City of New
York commented that the report accurately summarized the findings in that
agency's 2003 study. In addition, the official said that the attack had a
serious impact on the city and state economies but that later events-such
as corporate scandals and wars in Afghanistan and Iraq-also had an impact,
especially on financial markets, and that events such as these increase
the difficulty of isolating the long-term impact of the terrorist attacks.

As agreed with your offices, unless you publicly announce this report's
contents earlier, we plan no further distribution of it until 30 days from
its issue date. We will then send copies to interested congressional
committees. We will also make copies available to others on request. In
addition, the report will be available at no charge on GAO's Web site at
www.gao.gov.

If you have any questions about this report, please contact me at (202)
512-2700. Key contributors to this report are listed in appendix II.

Nancy R. Kingsbury, Managing Director Applied Research and Methods

Appendix I: Objectives, Scope, and Methodology

Congressional requesters asked us to review recent government studies'
conclusions about the impact of the September 11 terrorist attack on New
York tax revenues. To identify government studies of the impact on New
York tax revenues completed since our July 2002 report, we reviewed the
economics literature and searched the Internet, and we interviewed
officials at the U.S. Bureau of Labor Statistics (BLS), Federal Reserve
Bank of New York, New York City Office of Management and Budget, New York
State Division of Budget, and other state and local agencies. We
identified studies of the fiscal impacts by the (1) New York City Office
of Management and Budget (2004), (2) New York State Office of the State
Comptroller (2003), and (3) New York City Office of the Comptroller
(2002). In addition, in our literature review, we identified related
studies about the employment and income effects of the attack issued by
BLS, the Federal Reserve Bank of New York, and New York State Assembly
Ways and Means Committee staff. To review the studies, we used standard
economic criteria, such as whether the studies measured the incremental
effect of the attacks, used sound economic reasoning, and were based on
current data. In doing this work, we did not independently estimate the
impact of the terrorist attack on New York tax revenues.

We discussed the attack's impact on New York's economy with senior
officials of the three New York agencies, as well as officials at BLS, the
Federal Reserve Bank of New York, New York City Independent Budget Office,
New York State Division of Budget, New York State Financial Control Board,
Securities Industry Association, and TenantWise (a commercial real estate
firm in New York) and economics staff of the New York State Assembly Ways
and Means Committee.

We took several steps to assess the validity and reliability of data
underlying the estimates of the New York agencies that we discuss in this
report. We reviewed the documentation, methods, and key assumptions
underlying the agencies' analyses, and the documentation and procedures
underlying key inputs, such as the employment and income data from the
Current Employment Statistics and the Quarterly Census of Employment and
Wages programs, which are administered cooperatively by BLS and the New
York State Department of Labor. We also interviewed officials at BLS and
the New York State Department of Labor about their procedures for
collecting and revising these data.

In addition, we reviewed revenue reports and financial statements prepared
by the state and city and reviewed by independent auditors, and we
discussed the validity and reliability of data on city and state tax
revenues with officials at the New York City Independent Budget Office,

Appendix I: Objectives, Scope, and Methodology

New York City Office of the Comptroller, New York City Office of
Management and Budget, New York State Financial Control Board, and New
York State Office of the State Comptroller. We used data from Current
Employment Statistics and the Quarterly Census of Employment and Wages
programs in the background and findings sections of this report. Unless we
note otherwise, we determined that the data were sufficiently reliable for
purposes of this report.

We conducted our work from July 2004 through March 2005 in accordance with
generally accepted government auditing standards.

Appendix II: GAO Contacts and Acknowledgments

GAO Contacts Acknowledgments

(460569)

Nancy R. Kingsbury (202) 512-2700, [email protected] Joseph D. Kile (202)
512-5684, [email protected]

In addition to the persons named above, Carol Bray, Tim Guinane, Penny
Pickett, Teresa Renner, and Anne Stevens made key contributions to this
report.

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