The gyrations on Wall Street are casting a cloud over New York State’s financial projections. Governor Andrew Cuomo’s 2010-11 Executive Budget, unveiled in February, assumed stock values would grow this year by 13.4 percent. This assumption was not changed in the Enacted Budget Financial Plan in April. As of 1 p.m. today, however, the S&P 500 was 3.4 percent below its level at the start of the year.
Today’s sharp Wall Street rebound (as of early this afternoon, at least) may mean stock prices have found their bottom. Then again, maybe not. In any event, it’s worth noting that the S&P 500 rose by 20 percent in the last quarter of 2010, after a fairly big correction earlier in the year. If it repeats that performance this year, despite the plunge of the last two weeks, the state budget projection will have been accurate. But certainly seems less likely than ever that the market will outperform Cuomo’s expectation.
So how does this affect revenue? Most directly, in the category of net capital gains. The budget assumed capital gains would grow this year in line with equity indices — by about 12 percent, on top of a 24 percent increase in 2010. Net capital gains for the year were projected at just under $40 billion, or about 6 percent of all adjusted gross income (AGI) reported on New York’s state income tax returns.
Net capital gains peaked in 2007 at $116 billion, 16 percent of AGI that year, and then proceeded to drop like a stone — by 54 percent in 2008, and by another 46 percent in 2009. Since the bulk of capital gains are reported by high-income taxpayers, who pay the highest average rate, this translated into a revenue loss of more than $5 billion.
A rough calculation: from the 2010 baseline, every 10 percent shift in net capital gains translates into a revenue gain or loss of about $250 million.
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