Governor Cuomo’s Division of the Budget (DOB) and the Legislature’s fiscal committees have agreed to boost New York State’s revenue projection for fiscal years 2021 and 2022 by $2.45 billion—the latest in a series of upward adjustments that have dramatically improved Albany’s short-term outlook, even as sexual harassment allegations against the governor will complicate negotiations towards a new budget for the fiscal year beginning April 1.
The Consensus Revenue and Economic Forecast issued late last night by DOB splits the difference between the governor’s budget agency, which wasn’t budging from its already improved 30-day amended financial plan outlook, and a very optimistic projection from the Assembly Ways and Means Committee staff, which forecast $5 billion more in revenue through FY 2022. The Senate Finance Committee staff estimate came in a total $3.4 billion higher than the governor’s latest number.
** See postscript at bottom for subsequent Cuomo press release.
The Assembly and Senate analyses both indicated the bulk of the added revenues would be driven primarily by continuing increases in receipts from the personal income tax (PIT), the state’s largest revenue source. The state PIT total for the soon-to-end 2021 fiscal year is now on track to exceed what the state collected in FY 2020, just before the coronavirus shutdown slammed business activity and revenues. It’s part of a national pattern in which states with heavy dependence on income taxes are seeing their revenues rebound more quickly than those, such as Texas and Florida, leaning heavily on sales taxes.
Most notably, the new consensus forecast is nearly $1 billion more than what would be needed to avoid Governor Cuomo’s call to raise $1.5 billion next year from a PIT surcharge that would kick in at incomes of $5 million a year. In a normal year, the Legislature would now be positioned to adopt a budget boosting state operating funds spending up to Cuomo’s 2 percent target without raising taxes. Yet legislative Democrats remain under pressure from left-wing progressives and socialists to slam “millionaires and billionaires” with a package of radical tax hikes designed to support an unprecedented increase in state spending.
The bottom line is that the brighter current outlook is very temporary. Because Cuomo and the Legislature failed to reduce the budget last year even after it was clear the economy had begun crashing, recurring spending at the state level is still running billions of dollars ahead of recurring state tax revenues. The same is true in New York City—and in many counties and cities that have yet to feel the effects of likely property tax assessment challenges from commercial and residential landlords whose tenants haven’t paid rent for months.
Beyond the economic rebound widely expected once pandemic restrictions are lifted later this year, governments at every level have a lot of downsizing to do. As of December, New York’s jobs recovery still trailed far behind other states. And the next big injection of federal aid from Washington will only provide a temporary relief.
The stimulus gravy train
Meanwhile, a $1.9 trillion coronavirus relief bill already passed by the House of Representatives includes $350 billion in state and local government aid, of which New York’s total share would come to $50 billion. This would include $12.7 billion in unrestricted aid to the state—twice the “worst-case scenario”amount Cuomo’s financial plan literally counts on for FY 2022 and 2023—plus nearly $10 billion for local elementary and secondary schools, whose aid from Albany is the largest single category of state-funded spending.
But the final federal aid figure seems likely to be reduced—and have more strings attached— in the U.S. Senate’s version of the bill. The Senate, remember, is split 50-50 between Democratic and Republicans, with Vice President Harris as tie-breaker, which means Majority Leader Charles Schumer can’t afford to lose a single vote from moderate Democrats who are more leery of the unrestricted state and local aid package. And New York isn’t the only state with surging revenues, calling into question any justification for pouring more unrestricted cash into its coffers.
As reported by The Fiscal Times:
The $350 billion in state and local aid included in Democrats’ $1.9 trillion Covid relief package is proving to be another point of contention, even among Democrats. Several Democratic senators have reportedly pushed for changes to that portion of the legislation, fueled in part by concerns that states could respond to an infusion of more federal aid by cutting taxes instead of devoting the additional funding to pandemic-related needs.
The U.S. Senate is expected to vote on its amended version of the stimulus bill as early as this week, setting the stage for a conference committee to resolve differences between the two houses, which could put the bill on President Biden’s desk by the third week of March.
For now, it appears that state budget negotiations between the Legislative leaders and a politically weakened Cuomo will be coming down to the wire without a clear idea of how much money is coming from Washington, although the $3 billion assumed by the governor for fiscal 2022 would seem to be a lock.
All of the upside potential is short-term, however. The consensus forecast cites considerable downside risks—which include the possibility (if not likelihood) of a stock market correction from its current record highs and that the economy of New York City, in particular, will recover only slowly. While the city’s total tax receipts are ahead of previous forecasts, its resident personal income tax—in contrast to the state trend—is still projected by the Independent Budget Office to come in roughly 4 percent below the pre-pandemic, FY 2020 level.
Other risks include the possibility that at least a sizable minority of well-paid nonresidents previously commuting to Manhattan offices will continue working at home—and that their employers will find ways to establish the “bona fide offices” in the workers’ home states to free them of New York taxation. The large chunk of taxes New York collects from nonresidents, in particular, could be threatened by a case in which the state of New Hampshire is asking the U.S. Supreme Court review taxation of its work-at-home residents by neighboring Massachusetts, where their employers are based.
This afternoon at 3:45, the governor got around to issuing a press release (not yet post don his website, at this writing) announcing the revenue consensus. It included this:
“While the economy is growing beyond expectations and the delivery of vaccines is giving new hope, we must remain prudent as COVID-19 continues to spread,” Governor Cuomo said. “For New York’s economy to fully recover, the Federal government must deliver the $15 billion in aid after previous leadership failed to protect New York from the pandemic and end the cap on SALT deductibility. Thank you to the Legislature for its partnership in reaching this agreement and advancing the budget process.”
State Budget Director Robert F. Mujica said, “Revenues coming in higher than expectations is good news, but we’re still contending with devastating revenue losses caused entirely by the pandemic that we need the federal government to offset so we can continue to fund baseline services over two years. These new revenues will be used to reduce the deficit in the out-years after the federal funding is no longer available.”
In other words, even amid clear signs from Washington that $12.7 billion in unrestricted aid is the most Cuomo can hope for—and the final House-Senate deal will probably call for less—the governor is still maintaining the pretense, entirely unsupported by his own numbers, that the state “must” receive no less than $15 billion. The grammar of the quote is ambiguous, but it looks like he also is still demanding that the stimulus bill include repeal of the Trump tax law’s cap on state and local tax (SALT) deductions. This is sheer fantasy.