A "fiscal gap" is said to occur when, as metropolitan income rises, revenue from a given local tax structure (at fixed rates) grows more slowly than expenditures required for a given program structure (at fixed quality). In "economies," the elasticity of taxes with respect to income is less than the elasticity of expenditures.

Prof. Gerald Boyle of the University of New Mexico has estimated aggregate elasticities for state and local governments between 1956 and 1966. What he found would not surprise any urban mayor, particularly John Lindsay. With every one per cent increase in income, expenditures grew by 1.1 per cent while revenue grew by only 9 per cent.

What this implies is that with any constant-quality public service package and at any tax rate level (with the present mixture of state and local taxes), given sufficient time, costs will exceed tax revenue. The situation for New York, however, is even worse than the average American city.

A working paper circulating in the Mayor's office estimates that "City revenues have a natural growth... of only about 5 per cent, while City expenses are now growing at a rate of 15 per cent."

This fiscal gap substantially accounts for the "political theatre" of the "battle of the bulging budget." The tendency for costs to exceed taxes requires periodic adjustments to annually balance the local budget (as required by law), either by downgrading program quality, raising tax rates, or increasing dependence on outside aid. Usually some combination of all three types of adjustment is used, leading to cries of distress from three overlapping groups: public service recipients, City taxpayers, and State (and to a much lesser extent, Federal) taxpayers.

Mayor Lindsay, in his Policy Statement accompanying the latest Executive Budget, outlined a multiple adjustment (and received, as expected, a multiple response): "To close the ($600 million) gap has required a series of measures. First, the budget was cut ($276 million). Second, State aid to the City has been substantially increased ($220 million). Third, new and additional taxes will be necessary. Fourth, I am recommending that user charges and fees for certain services he adjusted to a full cost basis. Fifth, there are in addition numerous funding shifts."

To understand the polities of the urban fiscal crisis, it is crucial to recognize that a fiscal gap can occur regardless of the portion of wealth in the City.

IN THE "economic theatre" of the budget battle, the skeptics overlook some distinctions that are crucial to the issue. While metropolitan areas may be wealthy as a whole, this wealth is far from evenly distributed.

Again according to the 1960 Census, average personal income in the New York metropolitan region (SMSA) was $2,422. However, this hides the fact that New York City's average personal income was $2,306 while the outlying suburbs was $2,733.

Also important is the implied assumption that the wealth of the cities can be sufficiently expropriated for urban services. Again, this is not the case for New York or most other major cities. New York City can onlyuse those taxes delegated to it by the State, and then, in many cases, only up to certain rates. This applies to debt limitations as well.

Another even more important reason why Mayor Lindsay would not locally raise sufficient revenue to finance his programs goes back to the central theme of conflict between economically optimal and socially desirable policies.

The City is limited to taxes which are on the whole regressive: the poor pay proportionately more. According to unpublished research done at the National Bureau of Economic Research for fiscal year 1968-69, a family in New York City with a before-tax income under $2,000 paid 11.5 per cent in total City taxes. As family income rose, this steadily decreased to 5.7 per cent for a family with income between $10,000 and $15,000 Families making over $15,000 paid an average of 74 per cent, a slight increase but still less than for families with below poverty-level incomes.

Nearly all of the regressively in the local tax bundle is explained by property taxes, the largest single source of income for the City, For a mayor as concerned with questions of equity as Lindsay is, raising local revenue is a "damned if you do-damned if you don't" proposition.

RAISING tax rates is not the only means of increasing locally raised revenue. One could also increase the tax base, holding rates constant (or even lowering them). The most important local tax is that on property, and the Mayor might also increase the property tax base for more revenue.

This base is composed primarily of two segments, the valuation of land and the valuation of structures on that land. The former segment is the result of a complex set of market factors over which the City government has only a marginal influence in the short-run. On the other hand, the City could have a substantial impact on what is built on a given piece of land through its powers of zoning, rent control, and condemnation, and its provision of public housing.