The global credit panic has swept away many illusions, and we’re about to find out if that includes those of the politicians who have feasted for years on Wall Street tax revenues. Ground Zero is New York, which has lived a tax-and-spend fantasy thanks to the long bull market and “progressive” tax rates. Reality is now biting, says the Wall Street Journal.

For example:

The financial services industry employs between 2 percent and 3 percent of nongovernment workers in New York, the same as it did in the late 1970s.

What’s changed is the share of total wages in the state represented by Wall Street jobs, which had skyrocketed to nearly 20 percent last year from a little over 2 percent in 1977.

“This is 212,000 people making nearly $80 billion in wages and salaries last year,” explained E.J. McMahon of the Manhattan Institute at a recent panel discussion on the financial crisis. “This is all taxed at the margin, so it plays an outsized role in the state’s finances.” This is also the dirty little secret of highly “progressive” tax rates: They make a state dependent on relatively few taxpayers, explains the Journal.

The financial industry doubled its percentage of the national economy in the 1980s, and did so again between 1990 and 2006. As Wall Street wages have grown, so has New York’s dependence on revenue from the personal income tax:

In 1977 personal income taxes represented less than 45 percent of all state taxes; in 2007 they represented about 60 percent.

And for the past 30 years, inflation-adjusted state spending has tracked closely with booms and busts on Wall Street.

According to John Cape, a former state budget director, about 45,000 New York taxpayers provide the state “with anywhere from 20 percent to 30 percent of total income tax receipts.”

New York City has also done little to decrease its addiction to revenue from a single industry, says the Journal. Mayor Michael Bloomberg missed the chance to use 9/11 as an opportunity for reform, and he’s declined to challenge public unions over pay and benefits. Bigger and bigger budgets have been submitted and approved as though record Wall Street profits would never end:

The financial industry is 14 percent of gross city product.

In 2006, New York City received 50 percent of its personal income tax revenue from the top 1 percent of earners, many of whom work in finance.

New York’s revenue coffers are set to take a hit, predicts the Journal. The only question is how big. The state budget deficit is already projected to be $1.5 billion in the current fiscal year, and Governor David Paterson estimates it could grow to $14 billion over the next two years if nothing is done.

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