Governor Hochul and the New York State Legislature finished passing the 2023-2024 state budget on May 3, about a month after the April 1 start of the fiscal year. The budget includes generous increases in funding for schools, health and mental health care, the MTA, and more. The budget is, of course, intended to be balanced, but a New York State Comptroller April 2023 cash report, issued May 16, showed a major plunge in April tax receipts from the prior year, raising concerns about a developing budget deficit for this fiscal year as it’s just beginning.
The report comes early in the new fiscal year and includes tax returns filed by April 15, showing a 49% drop in income tax revenue compared to April 2022, falling from $14 billion to $7 billion.
Another report from Comptroller Tom DiNapoli’s office, released May 18 on the enacted state budget, says that April tax collections overall (including sales, corporate, and other) were $4.4 billion below predictions issued by the State Division of the Budget (DOB) just a few months ago.
The DOB had already forecast a drop in collections compared to April 2022, but the actual collections were still 39% below forecast. There is no official prediction yet of a sudden large deficit opening up in the state budget, but these numbers and other indicators tell me a big hole is highly likely.
The Comptroller’s analysis of the decline offers insight into why a deficit may have already opened, with this statement (my underline) on page 8 of the report:
“Although only a month into the new fiscal year, April tax collections may be a cause for concern, particularly in relation to the PIT [Personal Income Tax]. A large share of April PIT receipts is related to the settlement of the previous tax year as the majority of taxpayers file their annual returns during the month. These settlement collections are not based on current economic circumstances but those of last year. For example, they reflect the overall decline in the financial markets which impacted taxpayers’ investment income, such as dividends, interest, and capital gains. According to reports from the Department of Taxation and Finance, the net settlement for the 2022 tax year totaled $3.6 billion, 66.3 percent lower than that for 2021.”
As the Comptroller report points out, the tax revenue reduction in large part related to taxpayers’ income from 2022. It is past income, not present or even recent income. The basis for income in 2022 must have included large declines in capital gains income, concentrated heavily among the wealthy and related to declines in the stock market in 2022. The S&P 500 fell 19% in 2022.
According to the most recent information from the State Division of the Budget, in 2020, the top 1% of New York taxpayers were 53% of total nonwage income (capital gains, dividends, etc.) and 46% of New York State income tax liability, meaning drops in their nonwage income have major effects on New York’s tax receipts.
One possible confirmation that New York is headed for deficits comes from California. The state government there has announced it has a $32 billion deficit for its budget scheduled for adoption on July 1, 2023, an immense swing from large surpluses. California adopts its budget several months later in the year than New York, meaning it is getting more information about its tax receipts now than New York relied upon several months ago when it built the assumptions for its own budget. California’s economy suffered from major climate impacts in 2022, which is part of that story. California’s tax system, however, is similar to New York; its wealthiest taxpayers make up a large portion of the state’s tax revenue, and can be significantly affected by swings in the stock market.
A New York deficit of $4.4 billion would not provoke an immediate crisis because the State’s operating budget using State funds is $127 billion a year (of the $229 billion budget for the new fiscal year, which includes a lot of federal funds). The State has immense reserves, pegged initially at $19.5 billion, due in part to a surplus in the last fiscal year of nearly $9 billion, according to the last DOB update before adoption.
There is no evidence in New York that the current economy is declining; sales and corporate income tax receipts in April were normal, and withholding tax receipts from currently employed people did not decline. The State can backfill a deficit from its reserves.
A budget hole, however, could seriously exacerbate the State’s long-term challenges because budget forecasts project large deficits in the next three years, 2025-2027. State DOB budget gap forecasts are based on projected revenue and spending: in balance in 2023-2024, but deficits of $5 billion in 2025, $8.5 billion in 2026, and $7 billion in 2027 (see p.95 of the Updated New York Executive Budget, March 2023).
The State’s Financial Plans anticipate using its $19.5 billion in reserves to help cover those deficits in coming years, and those deficits add up to over $20 billion. But if the State needs reserves to cover even a $5 billion deficit this year, it will run out of its reserves that much more quickly. Any new weakness in New York’s economy will accelerate the State’s deficits.
After Governor Hochul issued her proposed budget, the Legislature’s own plans would have added $4 billion in spending above her budget. The Governor and the Legislature finalized the budget with only an extra $2 billion above the Governor’s proposal. The Governor deserves credit for getting the Legislature to exercise some restraint on spending, especially now that the risks of a hole in the budget are so substantial.
It may be some months before the Governor and the State Division of the Budget acknowledge a current-year deficit. There will be enough money this year to cover it, barring a disaster. I was in the Legislature in 2008 when then-Governor David Paterson called us back in December of that year to address an $18 billion deficit that had opened in New York’s budget as the Great Recession began. Let’s hope nothing comparable happens this time.