Why is New York City so Expensive? Part two: Food, Unions, Taxes

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Food costs in New York

A 2012 study by UBS which found that New York was the 6th most expensive major city on earth, calculated a monthly average food cost of $552, beating out cities such as Chicago, Milan, Vienna, Montreal, London and Paris.

However, a 2011 study by Columbia economists actually found that food is cheaper in New York than in other places in the US. Specifically, although food on average is more expensive (hence the results in cost-of-living comparisons), when the study authors looked at comparable food items, the city came out cheaper for both low-priced and high-priced groceries. The great number of high-end, fancy grocery options makes NYC seem more expensive, according to the Wall Street Journal article discussing the findings:

The perception of higher costs, the authors say, comes from the vastly expanded food choices available in a major metropolis like New York, which throws off the average prices used in cost-of-living calculations.

Bigger cities also tend to be wealthier than their smaller counterparts, and the grocery-variety gap between New York and Des Moines is filled with many fancy foods that cater to wealthy customers.

You can get bread in any grocery store, as Mr. Weinstein says, but "if you go into Fairway in New York, you can buy a Balthazar baguette"—and pay for it too.

In dense, high-traffic commercial areas of Manhattan like Midtown East or the Financial District, the delis, sandwich shops and restaurants charge high prices because the workers in those areas have high salaries, a demand for healthy and quick meals during the day, and a desire for high-end dining in the evening. (Those eateries must also pay higher rent and wages than their counterparts in residential neighborhoods, further pushing up prices.)

As a result, workers see the amount of money they spend on lunch every day and conclude that New York has expensive food. But cheaper options are available in residential areas like the Upper East Side and Harlem, and in the outer boroughs.

Union membership in New York

Perhaps unsurprisingly, New York state has the highest rate of union membership in the United States at 24.1% of all employed workers. New York had 1.9 million union members in 2011, second only to California. According to the Bureau of Labor Statistics, in 2011 "Texas had about one-fourth as many union members as New York, despite having 2.3 million more wage and salary employees." New York City had about 40% of the state's union members, at 750,000 individuals. Fourteen percent of the city's private sector workers are unionized (twice the national total), and 71% of public sector workers are unionized (predominantly education, healthcare and public administration).

Whether one is a supporter or critic of unions, the fact is that unions push up costs for corporations and businesses, which in turn often leads to higher prices for the consumer. One major example is hotels. In early 2012, the New York Hotel Workers' Union negotiated a very attractive new contract with the city's major hotels. The agreement provides for a 29% rise in wages over the next seven years. In 2011, the average Manhattan hotel room cost $275 per night, and hotels only see demand rising in the coming years.

Taxes in New York

New York state has some of the highest personal income tax rates in the country, ranging from about 4 to 9% in 2012. New York City is one of the few cities of its size to have its own personal income tax, roughly 3 to 4% in 2011.

New York state has one of the lowest sales taxes in the country at 4%, but one of the highest average local sales tax rates at 4.48%. The two combine to make the state #7 in the country on the overall sales tax rankings as of January 2012.

New York City's basic sales tax rate is 4.5%, and the city also features a number of business and excise taxes on banks, cigarettes, commercial vehicles, hotel rooms, mortgages, alcohol and more.

Finally, New York state has been ranked as the fifth-highest in the country on property taxes as a percentage of median income (higher than 5%). And New York City's property tax rates range roughly between 10% and 18% for 2011 and 2012.

Why New York City is so expensive

A combination of supply, demand and government factors has created the costliest city in the country. Manhattan is a small island that has a low supply of real estate, but extremely high demand. Residents make high incomes and can afford high average food costs. Poor fiscal management by transit authorities has contributed to steep costs for public transportation. The highest rates of union membership in America increase the costs of doing business. High taxes and significant regulations from the state and the city on real estate, parking, business activities and healthcare further push up costs for companies and residents.

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