Blog State Budget

How to Address New York State's Revenue Shortfall

February 11, 2019

On February 4, less than 3 weeks after releasing the New York State Executive Budget for Fiscal Year 2020, Governor Andrew Cuomo reported that the State was facing a $2.3 billion shortfall in January personal income tax collections. This creates a deficit in the current year and likely will create a similar shortfall in the coming fiscal year. It is a stark reminder that the State should plan for future economic uncertainty. In the budget’s 30-day amendments to be released this week, the State should take and propose actions to close the current year and fiscal year 2020 gaps. The State should restrain spending growth, avoid one-shot gap-closing actions, and bolster its rainy day funds.

Causes of the Revenue Shortfall

Governor Cuomo blamed much of this shortfall on the impact of the federal $10,000 cap on state and local tax deductions (SALT cap), which was imposed as part of the federal Tax Cuts and Jobs Act (TCJA). It is likely that the shortfall also is the result of stock market volatility and an economic slowdown.

The SALT cap and other aspects of the federal tax law affected personal behavior, made state revenue forecasting more challenging, and made New York’s tax structure less competitive with low-tax states. The SALT cap encouraged taxpayers to shift income, including capital gains, from tax year 2018 into tax year 2017 in order to escape the impact of the cap before it took effect. The State may have underestimated this shift, thus initially overestimating fiscal year 2019 revenues and leading to a shortfall against projections. New York’s state and local taxes are some of the highest in the nation, and especially high when compared to low-tax states, including Florida and Texas, that do not impose a personal income tax.1  The SALT cap increased the relative tax price between New York and these states, which may have prompted taxpayers to leave New York.2

The shortfall also is likely the result of stock market volatility and an economic slowdown. In December the Dow Jones industrial average and other major indices were down by at least 9 percent, which would have decreased some taxpayers’ capital gains income or expected tax liability leading to decreased estimated payments in December and January.3 Since last year, the New York State Division of the Budget (DOB) has reversed forecasted growth in the Standard and Poor’s 500 Index from 5 percent growth to a 3.3 percent decline for calendar year 2019. Similarly, DOB previously forecasted New York State capital gains growth of 7.9 in calendar year 2018 and 7.8 percent in calendar year 2019. Now DOB is estimating that capital gains declined by 0.1 percent in calendar year 2018, followed by a 5.2 percent decline in 2019.

Determining the relative magnitude of these causes will take additional analysis and experience (for example, future tax payments and potential high-income earner mobility). However, some of these causes also will likely drive lower personal income tax receipts in the future.

What the State Should Do Now

To be in the best position to weather potential economic uncertainty, the State should close the shortfall-driven budget gaps by decreasing planned spending and building rainy day reserves.  

The State should hold spending growth to 2 percent, which would save $1.45 billion in fiscal year 2020.4 Doing so will be a challenge without limiting the growth in education aid. Increasing education aid only to those districts that need additional State resources to fund a sound basic education as defined by the Foundation Aid formula could save more than $500 million compared to the Governor’s proposed $956 million increase.5

In addition, the property tax relief credit set to expire after calendar year 2019 should be repealed; this would reduce the fiscal year 2020 deficit by more than $1 billion. Other spending, tax, and policy changes also can help close these gaps and improve the State’s long-run fiscal health. These include decreasing State economic development programs that have not been proven effective, including the film tax credit, and adopting the Governor’s cost saving proposals on employee and retiree health care.6

The State should resist short-term solutions, such as deferring retirement systems payments or business tax credits, which only exacerbate future deficits. It also should resist increasing broad-based taxes which can be counterproductive, especially in some cases given the SALT cap.

Instead the State should shore up reserves.  The Governor has said that allocated but unused settlement funds could be used for budget relief in an economic downturn. This would be best accomplished by eliminating the appropriations connected to these funds, which total approximately $2.9 billion, and by dedicating them to rainy day funds. This would double the State’s rainy day reserves which total only $2.3 billion under the Governor’s budget proposal.7

By David Friedfel

Footnotes

  1. Katherine Loughead, “Ranking Property Taxes on the 2019 State Business Tax Climate Index” (Tax Foundation, October 24, 2018), https://taxfoundation.org/ranking-property-taxes-on-the-2019-state-business-tax-climate-index/.
  2. For example, a married couple with $10 million in annual income and two children living in New York City would see an increased net cost of combined State and City taxes from $630,913 to $1,068,585. See: Andrew Rein, Practical Policy in Challenging Times (Citizens Budget Commission, March 18, 2018),  https://cbcny.org/research/practical-policy-challenging-circumstances.
  3. Fred Imbert, “US Stocks Post Worst Year in a Decade as the S&P 500 Falls More Than 6% in 2018,” CNBC (December 31, 2018), https://www.cnbc.com/2018/12/31/stock-market-wall-street-stocks-eye-us-china-trade-talks.html.
  4. David Friedfel, “Clear Picture; NYS Executive Budget Grows 3.4 Percent,” Citizens Budget Commission Blog (January 29, 2019), https://cbcny.org/research/clear-picture.
  5. David Friedfel, “State Education Aid Proposal for 2019-2020 Testimony Submitted to a Joint Legislative Budget Hearing on Elementary and Secondary Education” (February 6, 2019),  https://cbcny.org/advocacy/state-education-aid-proposal-2019-2020.  
  6. Due to the structure of the film tax credit, even if the credit were repealed immediately the savings would not accrue immediately. See: David J. Friedfel, “Repeal the film tax credit, but don’t expect savings just yet,” Crain’s New York Business (December 12, 2017), https://cbcny.org/advocacy/repeal-film-tax-credit-dont-expect-savings-just-yet.
  7. The Executive Budget includes an assumption that $2.9 billion of allocated, but unspent settlement funds are in the general fund. See: New York State Division of the Budget, FY 2020 Executive Budget Financial Plan (January 2019), p. 32, https://www.budget.ny.gov/pubs/archive/fy20/exec/fp/fy20fp-ex.pdf.