The Legislature Puts Its Own Stamp on the NYS Budget; Tax Hikes, Tax Breaks

The New York State Assembly and Senate moved boldly past the Executive Budget Plan submitted by Governor Hochul to the Legislature on January 20^th to propose a Statewide whopping middle-class income tax cut and a near complete bailout of Mayor Mamdani’s enormous deficit at the New York City level.

The State government must adopt a new budget by April 1, 2026, although the budget has been frequently late in adoption. The State budget was adopted late every year for the first twenty years I was in the Legislature.

Naturally most of the public blamed me!

Hochul’s Original Budget Plan…

Governor Hochul’s initial budget plan, with substantial investments in universal child care and protections from Trump’s health care cuts, proved popular enough to give her a 53%-41% approval rating in a February 2026 Siena Research Institute poll.. The poll also showed Statewide public support for allowing New York City to raise taxes on millionaires within its borders 54%-29%.

…Could Not Plug NYC’s Budget Hole

Despite Governor Hochul’s generous expansion of child care for New York City in the State budget, the funds by themselves were far from sufficient to plug the hole in New York City’s budget. That deficit was estimated at more than $5 billion by the Mayor in his 2026-2027 Preliminary Fiscal Plan, even after Governor Hochul announced an additional $1.6 billion in State aid over two years. The Mayor sought tax hikes on the rich to fund the City’s ambitious child care plans, but the Governor covered much of the sought-after funds in the State budget without a tax hike. Instead, the City’s huge deficits became the Mayor’s rationale for the tax hikes on the wealthy and big business to prevent deep budget cuts.

The Democrats Decided to Do Something Different…Only Tax the Super Wealthy, A Middle Income Tax Cut…

The Democrats in the State Legislature have chosen to put their unique stamp on the budget, shrugging off Governor Hochul’s wishes to avoid tax increases. However, the Legislature’s plans tax only the super, super-wealthy, the top one-half of one percent, and only the State’s very largest businesses.

Their plans call for income tax increases only for very high worth taxpayers, starting with those making over $5 million a year, with small, staggered increases for those making over $10 million, then $25 million, and finally a bump from 10.9% to 12% for those making over $100 million a year.

The Assembly’s corporate income tax plan calls for an increase from 7.25% to 9.25% on businesses with net New York income of $10 million a year, which affects only the very largest businesses in the State. Only 0.2% of businesses had net income even in excess of $1 million in 2022.

The State Senate plan is very similar. New York State’s corporate income taxes contain a little-known advantage: when a business sells its products or services to an out-of-state customer, the New York corporation is allowed to allocate the profit not to its New York net income but to where the product or service was sold. This is called market-sourcing allocation. Of course, all NY companies exist in a competitive environment and someone must absorb the cost of the tax increase; the NY corporation could pass the cost on to its customers.

The Assembly and Senate plans also include a sales-like tax on cryptocurrency mining and a partial limitation on special tax deductions for partnerships. The sum of all these revenues, focused on extremely high-income individuals and corporations, would yield $3-$5 billion and fund the basis for middle-income tax cuts, school aid and revenue sharing increases, not just for New York City but Statewide.

There would be a full-on one percentage point reduction in the income tax for New York taxpayers making less than $323,000 a year, and the restorations of revenue sharing for New York City in the Assembly plan funded at $1 billion over a three-year period. The middle-income tax cut would be immediate at $2.6 billion in 2026-2027 and expand to $3.5 billion in the following year. If I was in the Legislature, I’d fully fund the tax cut before the election and be sure to let people know about it.

…A Fall Rebate For Relief From High Electricity Prices

The Democrats in the Assembly and Senate also have a fall rebate, worth $2.6 billion, entitled the POWER rebate, to afford relief from high electricity prices of $500 for households making up to $150,000 a year, to $300 for up to $300,000 a year. The rebate would be partially paid for with a drawdown of $1.5 billion in reserves (without affecting the State’s main $14 billion in reserves). I’m not sure a family making $300,000 a year that is getting more than a $2000 income tax cut needs a $300 electric bill rebate on top of that but it’s there in the Legislature’s plan.

…And A Bailout for NYC

The Democrats in the Assembly and Senate also bail the City of New York out of its $5 billion deficit. The City’s new Comptroller, Mark Levine, wrote a clear summary (with some edits by me) of the plans of the two Houses to help the City in his March 2026 newsletter:

• Both houses added additional revenue proposals that affect NYC:
  • Authorizing NYC to increase the unincorporated business tax (UBT) rate for businesses with incomes above $5 million from 4% to 4.4%. The Senate estimates this will result in $250 million in revenue for the City.
  • Authorizing New York City to increase corporate tax rates for financial sector firms from 9% to 10.8% and for other firms from 8.85% to 10.62%. The Senate estimates this will raise $1.5 billion for the City.
  • Lowering New York City’s pass-through entity tax credit from a 100% rebate to 75%. The Senate estimates this would increase tax revenues by $700 million.
  • Imposing a 1% additional transaction tax on residential properties with sale prices over $5 million. The Senate estimates this will raise $321 million in revenue for NYC.

The State Senate is also proposing to end a sales tax exemption on gold bullion over $1,000 and expects this would yield $300 million in additional revenue for the City. NYC-specific highlights of the Assembly’s Budget proposal include: $1 billion in temporary municipal assistance for New York City, to be provided over three years. Currently, NYC receives no Aid and Incentives for Municipalities (AIM) funding. This proposed amount is in line with what the City received prior to 2011, when it became permanently ineligible for this funding stream. 

NYC-Specific Highlights Of The Senate’s Budget Proposal Include:

• $600 million in additional aid to support the NYC class size mandate for the 2026-27 school year (equal to the amount estimated by the Chancellor to hire sufficient teachers to meet this year’s threshold of 80% compliance).
• $604 million in temporary municipal assistance for New York City, to be provided over two years.
• $431 million of additional school aid funding for NYC
• $500 million in funding for a statewide Child Care Worker Retention Grant program.
• Reversing past state actions that limited NYC resources: the adult shelter reimbursement cap, estimated to benefit NYC $500 million per year (Assembly proposal added $100 million, Governor had no proposal); the NYC-specific Family Assistance 15% local share, $193 million per year; and the unfunded mandate for foster care rates, $263 million per year.

Although there are differences in the specifics of each House’s plan to help the City, enabling the City to impose an additional $3 billion in taxes and receive several $ billion in extra funding eliminates what the Mamdani administration estimated was the City’s budget gap.

My Take On All This

Corporate income taxes in New York City do not have the advantage of allocating their profits income out of state, the way the corporate income taxes can be allocated for New York State net income. A tax hike on a NYC corporation must be attributed to its net income in NYC, raising the cost of doing business in NYC compared to other localities. Major businesses are making plenty of money in the City now but raising the cost of doing business is a concern.

According to the New York City Financial Plan, issued in February 2026, only two of the nine major private employment sectors of the economy, health and education, and information, actually grew jobs.  Despite the fabulous income tax revenue coming in from the wealthiest sectors of the economy, areas like finance, real estate, and professional services gained no jobs in 2025. What would business leaders considering new investments in the City think of a major tax hike in the City for their business?

Large city businesses will pay the increase in the State corporate income tax, so enacting a City corporate tax increase will add to that burden.

Are there any options to the $1.75 billion in extra revenue the State is authorizing the City to obtain from its corporate income and unincorporated business income taxes?

The State could let the City borrow the $1.75 billion, with a short-term repayment window to enable the City to find cost savings.

The State could let Mayor Mamdani do his own version of a millionaire’s tax, as I had suggested in my previous article on the budget, letting the City tax incomes of $1 million or more, but limit the tax to residents making less than where the Legislature set the State’s own income tax hike, on incomes of $5 million or more.

The State could allow the City a one-year postponement of the class size reduction obligation, saving $600 million for the City while avoiding the State expense in its own budget.

            Some Words of Caution…

Mayor Mamdani’s budget forecast $6.6 billion in extra tax revenue over the current and coming fiscal years, but NYC Comptroller Mark Levine in his testimony warned this forecast could be very optimistic. The Comptroller forecast $1.8 billion less.

            …And Trump’s War

Some reports I have been reading suggest the American economy is resilient enough to get past this crazy war and its oil price surge if it lasts only a few more weeks or a month. But if the war lasts several months, it could slow the economy – which is not growing rapidly anyway – much further and affect New York. This suggests the Legislature might want to enact a more prudent budget.

Governor Hochul

The Democratic majorities in the Assembly and Senate have proposed budgets with major policy differences with the Governor on tax increases. But the State tax increases essentially fund a deep middle-class tax cut, something the Governor in theory would want. The tax hikes are so far away from ordinary people and businesses they won’t be noticed and are unlikely to do major harm to New York’s competitive position. The Governor should accept them and claim credit for a big tax cut.

The City

There are some legislative authorizations for the City to increase mansion taxes (high-end residential), enact a sales tax on gold bullion, and allow partial recapture of special deductions available to partnerships and S corporations that seem unlikely to do harm to the cost of doing business in the City and should be accepted. The City is also authorized to significantly increase the New York City corporate income and unincorporated business taxes, which could be problematic.

The Governor and the Legislature should let the City borrow some money over a several year period to get out of its structural deficit.

My Conclusion The Governor’s original budget, and the generous additions for revenue sharing, shelter costs, and education aid from the Legislature give the Mayor much needed budget relief, while the meaningful investments in child care being paid for by the State create a welcome new entitlement and help several hundred children in the City in coming years.