The recent pummeling of Wall Street and the grim economic outlook are raising concerns at City Hall and in Albany that lawmakers will have to deepen budget cuts or raise taxes to cushion an anticipated blow to city and state finances.

Budget watchdogs say it’s too early to quantify the magnitude of revenue losses, but the ripple effect of the near collapse of Bear Stearns, anticipated job losses, meager year-end bonuses, and market turmoil are expected to be significant.

The city’s Independent Budget Office is projecting that New York’s financial services industry will lose 12,600 jobs this year and another 7,600 next year, and it is expecting Wall Street’s 2007 profits to end up totaling $3.2 billion, making it the industry’s smallest haul since 1994. In 2006, Wall Street pulled in a near-record $20.9 billion in profits.

“There is a lot of uncertainty about how bad it is really going to be,” the city’s deputy comptroller for budget, Marcia Van Wagner, said in an interview with The New York Sun. “The situation on Wall Street is kind of unprecedented. It is not like a stock market correction.”

Wall Street generates nearly 9% of the city’s tax revenues and up to 20% of the state’s tax revenues, the state comptroller’s office has found. Although only 5% of the city’s jobs are on Wall Street, each industry job is credited with creating two other jobs in the city and one job in the suburbs.

The director of the Empire Center for Public Policy in Albany, E.J. McMahon, said there would be fallout for the city and state, but predicted it would hit the city harder and have a potentially longer-term impact on the city’s finances.

He said the securities industry may be headed toward a fundamental restructuring that would mean companies would locate fewer jobs in New York and eliminate their back-office operations, so that only Wall Street “stars” would live and work in the city. He predicted that firms would reconsider being located in New York because of the expense of operating in New York City under the city’s tax structure.

He said there is a risk that Mayor Bloomberg would raise taxes to absorb the economic downturn, but added that he’s not predicting such a scenario. In 2002, Mr. Bloomberg raised property taxes by 18.5% to deal with soaring deficits.

Mr. McMahon said the city and state should be making serious spending cuts to address budget shortfalls and focus on maintaining essential city services, such as transportation, public safety, and education.

Assembly Democrats had proposed raising taxes on people earning more than $1 million a year to help close a budget deficit projected to be about $5 billion. In early March, Mr. Bloomberg instructed all agency heads to find ways to cut their budgets by 3% next year, on top of an earlier request to cut budgets by 2.5% this year and 5% next year.

“Just like people are tightening their belts at home, we have to tighten our belts in government, and this year we are not going to be able to afford everything we would like to do in the city,” a City Council member who is running for comptroller, David Yassky, said. “The numbers don’t lie, and the reality is that the city is in, what we have to hope, is a brief period of setback, but it’s real without question.”

The deputy mayor for economic development, Robert Lieber, who worked on Wall Street for 25 years, offered a somewhat optimistic view of the economy and the city’s finances, arguing that the near collapse of Bear Stearns was driven by “strange things that are taking place in the capital markets” and isn’t reflective of the state of the underlying economy. “Corporations are doing fine, they’ve got tons of cash. People are working. It’s not like you have a kind of broad economic hardship that is being spread around the city,” he said. “Having said that, the people who are being affected by this, tend to be in some respects the higher wage earners. And there’s a disproportionate amount of city tax levies that come from high-income wage earners.”

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The Empire Center is an independent, non-partisan, non-profit think tank located in Albany, New York. Our mission is to make New York a better place to live and work by promoting public policy reforms grounded in free-market principles, personal responsibility, and the ideals of effective and accountable government.