The bear market is creating big problems for the State and New York City budgets
Wall Street generates an outsized share of New York’s tax revenue, so the recent drop in stock prices should worry both Governor Kathy Hochul and Mayor Eric Adams, even if a recession doesn’t follow soon.
The securities industry generates 20% of the city’s total private wages, although it accounts for only 5% of private employment. In total, one in nine jobs in each category is directly or indirectly associated with Wall Street, the state comptroller estimated.
Last year’s bull market helped fill Albany’s coffers to overflowing with higher taxes on capital gains, investment firm profits and bonuses. But that wave has now receded.
Stock prices have recently fallen well into bearish territory, more than 20% below the high at the start of the year. For now, securities sector earnings remain supported by the volatility fueling trading – but if markets remain down, trading will also dissipate.
The state government has built up a reserve cushion of $9 billion in fiscal year 2022, and Hochul has projected another surplus of $5 billion in fiscal year 2023, which began on May 1. april. But if the bear market is soon followed by a full-scale recession, projected state revenues could easily decline by 20% or more over the next few years. In this case, the State could start draining, and not building up, the reserves as early as next spring.
Adams has a tougher challenge. Its reserves are smaller than Hochul’s, and there is considerable uncertainty that the city’s economy can fully rebound to pre-pandemic levels. His pension funds assume an annual investment return of 7%, but falling stock prices point to heavy losses for the pension fund’s fiscal year ending June 30, which will add hundreds of millions of dollars to budget variances for the year.
Persistent inflation will also put more direct pressure on other spending categories in the service-intensive city budget – particularly if city unions return to their 1970s and 1980s pattern of pushing for inflation-compensating wage increases, as pointed out by Nicole Gelinas of the Manhattan Institute. these pages.
At the state level, the income tax structure is now flatter than it was in the 1970s, when stagflation led to “bracket” tax hikes. When inflation started to soar in January, the state was already cutting tax rates for middle-income households, which will offset inflation-induced tax hikes in the near future. .
A bigger problem: New York State’s budget is more dependent than ever on taxes generated in multimillion-dollar tax brackets, where income tends to be more closely correlated to financial cycles.
More than 70% of net capital gains in New York accrue to residents with incomes of $1 million or more. The share of capital gains in income is larger in New York than in any state, and more disproportionately concentrated among millionaires. These households, in turn, make up most of the state’s top 1% of residents, who now generate well over 40% of total state income taxes.
Tax hikes for the wealthy last year made New York’s combined state and city tax rate the highest in the nation — higher than it’s ever been, considering the change in tax law that made it primarily non-deductible for federal purposes. Yet Hochul’s long-term financial plan implicitly assumes that New York’s top earners will all stay put.
This is by no means a safe assumption – as illustrated by recently released migration data from the Internal Revenue Service showing a net outflow of 248,387 New York taxpayers and their dependents between 2019 and 2020. Outgoing New Yorkers reported average earnings of $114,360 – up 19% from the previous. average annual income of out-migrants of $96,104, the largest annual increase in this measure since the IRS’ current migration data series began in 2011.
The average income of the 71,845 New Yorkers who traveled to Florida, the second favorite destination for current Empire State residents, was $156,056 – it rose to $728,351 for the 1,893 Manhattan residents who are left for Palm Beach County. By comparison, the average income was $114,025 for New Yorkers heading to New Jersey, the top destination for outbound migrants.
The stock market will recover sooner or later, producing a new generation of successful investors. A top priority for state and city officials should be keeping them in New York.
EJ McMahon is a research associate at the Manhattan Institute and a founding principal investigator of the Empire Center.