Final New York State budget may leave state vulnerable
New York State has an on-time budget, but some experts warn that it leaves the state vulnerable to an economic downturn.
The independent Citizen Budget Commission noted that the 2020 fiscal year budget agreement will likely result in a more than 3% increase in operational spending at a time when the state is facing an expected tax revenue shortfall.
The budget deal Gov. Andrew Cuomo cut with state lawmakers was announced Sunday, ending the threat of a late budget. The state fiscal year began Monday.
While Cuomo has pledged to add additional revenue identified by State Comptroller Tom DiNapoli into the state’s rainy day fund, CBC Executive Director Andrew Rein stressed that the fund would still be less than $3 billion, too small to combat potential gaps experienced in past recessions. A recent CBC analysis said that during the recession of 2008, capital gains income decreased $84 billion from 2007 to 2009, which would equate to a $7 billion drop in personal income tax liability today.
“Given that we are nine years into the recovery from the past downturn and the risk of a recession, controlling spending and building up reserves is really important,” Rein said. “The rainy day fund is not close to big enough.”
The final budget includes a five-year extension of a temporary personal income tax surcharge on the state’s wealthiest taxpayers that was first enacted to help New York weather the 2008 slowdown. Rein noted that phasing out the millionaire’s tax would have softened the negative revenue impacts New York is experiencing from a new federal cap on state and local tax deductions. The top marginal rate was scheduled to drop from 8.82% to 6.85% on Jan. 1, 2020.
Howard Cure, director of municipal bond research at New York City-based Evercore Wealth Management, said New York’s historic reliance on personal income taxes underscores the importance of boosting reserves when the economy is strong. He said if the economy turns south in the next year, the state could be forced to make mid-year budget adjustments.
“It’s a very progressive tax system and without much of a rainy day fund, if a recession hits how is New York going to be prepared,” Cure said. “I’m not sure how well the state is prepared for the worst scenario.”
Gurtin Municipal Bond Management released a credit analysis on New York State Monday noting that while Cuomo announced a $2.3 billion revenue shortfall in February, changing taxpayer behavior prompting filings in April instead of December because of SALT cap will likely chip away at much of the shortfall. Gurtin analysts Tom Schuette and John Humphrey noted that no matter what April tax collections numbers look like, New York will remain in sound fiscal shape because of “solid liquidity” and reserves projected at $6.5 billion of available resources in the state’s general fund.
“The state of New York’s revenues declined markedly in recent months, though it’s too soon to determine if a weak revenue trend has commenced,” Schuette and Humphrey wrote. “We believe it is still too early to confidently prognosticate on whether or not this is the beginning of a sustained trend or revenue weakness for the state.”
New York State general obligation bonds are rated Aa1 by Moody’s and AA-plus by S&P Global Ratings, Fitch Ratings and Kroll Bond Rating Agency.
The 2020 budget agreement included several policy measures pushed by Cuomo, including a congestion pricing plan that will charge drivers entering midtown Manhattan starting in 2021. The tolling program is expected to leverage $15 billion for the capital needs of the Metropolitan Transportation Authority.
The enacted budget also includes a framework to begin requiring online sellers to collect sales taxes, which Cuomo said is projected to generate $160 million in new revenue for municipalities and $320 million for the MTA capital plan lockbox. Cuomo also received legislative approval to enact a "mansion tax" with a top rate of 4.15% for the sale of residential properties valued at $25 million or above in New York City to raise an estimated $365 million be earmarked for MTA projects. The state's 2% property tax cap will also be made permanent under the budget deal.