New York is starting to see a slowdown in money flowing into state coffers, a decline that comes just as temporary federal pandemic aid has largely dried up and the $229 billion budget newly approved dollars increased spending.
Tax authorities in recent days have raised concerns about the decline in the state’s main revenue driver, personal income tax, which was reduced in part due to a decline in bonuses in the financial sector on Wall Street.
The slowdown in earnings comes as some economists are bracing for a possible economic recession as soon as this year. Falling revenues could force state lawmakers and Gov. Kathy Hochul next year to make decisions about whether to raise taxes or cut spending to fill a projected billion-dollar hole in the budget.
In particularly dire economic times, tax increases and spending cuts have been used, leading to political consequences.
State Comptroller Tom DiNapoli in a report released Wednesday note that the state has set aside more money in its rainy day fund, now at $6.26 billion. The fund is up nearly $5 billion from a decade ago and could be used to offset some of those tough decisions created by a slowdown.
But at the same time, the drop in revenue could be a harbinger of trouble ahead.
“The enacted state budget funds critical services, including fully funding Foundation Aid for Our Schools, programs to help New Yorkers still struggling in our post-pandemic world, and stabilizing the MTA after a massive decline in ridership,” DiNapoli said. “It also comes at a time when revenues appear to be softening, inflation persists and the federal government has yet to reach an agreement on the debt ceiling. The state has made progress in building reserve funds, but policymakers must carefully monitor the economy and work to put the state on a sustainable fiscal path.”
The report released by DiNapoli’s office highlighted declining revenue expectations from the personal income tax, which comprises most of the state’s overall revenue.
This week, DiNapoli reported a year-over-year decline in personal income tax for April. Collections hit $7.5 billion last month, down nearly 50% from a year ago. This was also 39.1% lower than the Hochul administration’s budget officials expected.
Spending, on the other hand, has been increasing. The budget increased state operating funds by 3 percent over the past year and a 24.5 percent increase from fiscal year 2019-20.
More money has been devoted to direct aid to schools and aid to education in general has reached historic levels. Spending on health care has also increased.
But DiNapoli’s report also warns “that much of the increased spending is recurring and may pose a growing fiscal challenge for the state, especially as temporary federal aid declines and if a longer economic downturn occurs pronounced or prolonged”.
Income from personal income tax may fluctuate, noted Empire Center’s Ken Girardin this week. But tax rotations, along with increased spending, could be a rough recipe.
“This uncertainty about the state’s revenue picture should have given officials pause when they adopted the state budget earlier this month,” he wrote.
