Thursday, February 04, 2010

New York's Tax Troubles Reflect Wall Street's Woes

Tax the rich. Make them pay their fair share.

Those are the incessant refrains coming from the Democrats these days (and most days). Well, the reason that New York is facing a multibillion dollar deficit is that all those taxes piled on the rich simply aren't bringing in the revenues that they did when Wall Street was roaring ahead.
New York State officials staring at holes in the budget this time of year generally have had a trusty cushion to fall back on: a mattress stuffed full of Wall Street bonus money.

But this year is what is known in business schools as an outlier. The tide of negative sentiment toward the big banks has thrown the normal flow and structure of pay on Wall Street out of whack. The taxes on those bonuses, in turn, are falling well short of expectations, widening the state’s budget deficit by the day.

On Wednesday, the state’s Budget Division said that the deficit for the next fiscal year, which will start April 1, was already $750 million larger than it appeared when Gov. David A. Paterson laid out his proposed budget two weeks ago.

The state had expected to collect $1 billion to $1.5 billion in taxes on Wall Street pay in the last two weeks of January, said Robert L. Megna, the budget director. But at the end of the month, tax revenue was about $1 billion shy of what had been projected, Mr. Megna said.

“We know that big guys typically pay us at the end of January,” Mr. Megna said, referring to large banks like Goldman Sachs and JPMorgan Chase. “Last week, after the budget came out, they didn’t pay us.”

One reason for the shortfall is that the banks have been cowed by public outrage and political rhetoric into cutting back sharply on the amount of cash they pay as bonuses. Citigroup, for example, capped cash payouts at $100,000 this year, a fraction of the millions some top producers and senior executives have taken home in the past.
When you have a tax scheme that is disproportionately reliant on any one sector of the economy, you're going to run into serious trouble when that sector enters a recession. New York has known for years that the Wall Street cash cow was susceptible to recessions, that further taxes and fees might drive business out of the state, and that consolidation in the financial sector would reduce tax revenues to the city and state.

Yet, the state has done nothing to address this by reducing spending. They've maintained or grown their state spending above the rate of inflation, and put New York on the precipice of a gaping budget deficit, which depending on who you talk to is anywhere from $8.2 billion (up from $7.4 billion estimated a few weeks ago - precisely because of the falloff from the tax revenues) to levels far in excess of that. State Comptroller Tom DiNapoli says that the Governor is underestimating the problem and basing its figures on wishful thinking of increased revenues coming in over the next two months to make up for a massive shortfall to date.

At least Paterson is astute enough to note that Wall Street isn't going to be able to bail the state out of the mess this time; they've milked it for all it's worth and there's nothing left to give without destroying the financial markets and forcing them to look for somewhere that has a lower tax burden (and New Jersey will gladly offer up tax breaks to lure Wall Street firms to Jersey City and Newark - within shouting distance of Lower Manhattan just as they've been doing for their back-office functions for years).

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