The 7 percent drop led to an immediate call by Mayor Bill de Blasio on Thursday for $750 million in budget savings that could include cuts in some programs, although his overall proposed budget for next year still calls for a $3 billion increase in overall spending, to $92.2 billion.
The mayor’s announcement came three days after Gov. Andrew M. Cuomo announced a sudden $2.3 billion shortfall at the state level, which he largely blamed on the federal cap on deductions for state and local property taxes.
In both cases, the exact cause of the decline is unclear, although city officials believe the city’s investors were clobbered by stock market volatility at the end of 2018, when some indexes posted their worst monthly performance since the Great Depression. The markets have rebounded in January, but not before putting a dent in many portfolios.
Other states that depend heavily on high-income taxpayers for their revenues, such as California and Connecticut, also saw big drops in revenue late in 2018, according to Lucy Dadayan of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.
The market declines could also lead to lower — or lower than expected — bonuses for workers on Wall Street, a key source of tax revenue for both the city and state. Big banks have not yet announced their bonuses for 2018. Independent forecasters had been expecting a strong bonus season, but those estimates mostly came before December’s market turmoil.
Beyond the initial surprise, the gaps also have prompted a deeper, and perhaps more troubling, question: Is this the new normal?
“If this is actually a change in taxpayer behavior, long-term, and not a blip or an overcorrection,” said David J. Friedfel, director of state studies for the Citizens Budget Commission, “then this is the new base.”
Budget analysts were not sure that was the case; they noted that wealthy individuals often take advantage of investment losses to offset gains elsewhere in their portfolios, reducing their overall tax burden. The recent market drop, by coming late in the year, was particularly well-timed for investors looking to apply that strategy — while coming at a particularly difficult time for budget analysts trying to project revenues.
Cuomo, a third-term Democrat, saw another culprit for much of the state’s shortfall: the 2017 Republican tax bill, including what he called “a diabolical, political maneuver” to cap the so-called SALT deduction — something he said might be causing high-earners to flee to tax havens like Florida.
“For richer people, your tax liability could have gone up now $100-, $200-, $300,000,” Cuomo said Tuesday. “And there is a tipping point where people say, ‘I love New York, but to spend another $300,000 in taxes? I’ll move.’ ”
In making their predictions of shortfalls, city and state budget offices look at money from estimated tax payments that arrive during December and January, often from high-earners with large investment portfolios.
That two-month period is considered an “important bellwether,” according to a recent report from Moody’s Investors Service, because many taxpayers making money via capital gains make big payments at the end of the year to “true up” their accounts with the government. A bad stock market, however, “leads to fewer gains, lower tax liability and less revenue from estimated payments,” the report said.
The payments made in late 2017 and early 2018, however, were inflated because of the changes to the federal tax code; the pending changes created incentives for taxpayers to shift income and tax payments in various ways, either to wait until the new rules took effect or to take advantage of the old system before it went away. The change in the law also spurred companies to pay out bonuses to workers in late 2017 and early 2018, giving a temporary boost to tax revenues that will not be repeated this year.
The specter of a shortfall is likely to hang over coming negotiations over the state budget, due April 1, and any discussion of increasing funding for things like education, the state’s No. 1 cost. The state Assembly, in particular, is adamant that schools need billions of dollars more than Cuomo proposed in his budget Jan. 15; a shortfall would be a powerful argument against that.
The governor’s assertion of a $2.3 billion gap also comes with considerable caveats, including the fact that some economists believe that number could shrink as the April 15 tax deadline approaches and more people file their returns.
Some budget officials in California, for example, and elsewhere say they believe that the reduction in the SALT deductions changed taxpayer behavior by removing the advantage to paying such taxes in December to use them as federal tax deductions. The officials remain optimistic that the revenue losses in December and January may dissipate as April tax deadlines approach.
“Most if not all of this decline in December-January revenue is expected to be recouped in April,” according to H.D. Palmer, a spokesman for the California Department of Finance, when personal income tax returns are due.
Legislative budget analysts in Albany, New York, also believe the final shortfall may shrink to less than $1 billion as people start to pay, and other New York officials have acknowledged that the state might see its financial situation improve as the year progresses, as taxpayers adapt to the new rules.
“We know that April is also a time of great deal of activity around the April 15 date,” said state Comptroller Thomas DiNapoli, a Democrat, who appeared alongside Cuomo in Albany on Monday. “So, it’s not all gloom and doom, but it is a message, of very, very serious concern.”
Indeed, the terrible December that may investors suffered through cannot be undone, analysts say.
“Capital losses are capital losses, period,” said E.J. McMahon, research director of the conservative Empire Center for Public Policy. “To whatever extent the stock market dragged down state tax receipts at the end of 2018, the market’s partial recovery since Jan. 1 isn’t going to lift them in time to balance the budget in the current fiscal year.”
This article originally appeared in The New York Times.