State and City Budgets Gamble on More Gains for the Very Richest

At City Hall on June 29, Mayor Eric Adams discussed the new city budget — which largely depends on taxing the richest 1% of residents. | Ben Fractenberg/THE CITY

By Greg David, The City

This article was originally published on Jul 7 5:00am EDT by THE CITY

NEW YORK - When Mayor Eric Adams and City Council Speaker Adrienne Adams announced a $107 billion budget deal last week, the emphasis was on new spending financed by a late surge in revenue. “We’re passing a budget, it’s a necessary budget, and we got some fantastic wins for the people of this city,” Speaker Adams said. 

Likewise, the record $229 billion state budget announced by Gov. Kathy Hochul in April contained some hefty new items, including a $300 million payment to the financially strapped MTA.

But as fiscal experts peruse the fine print, another story is becoming clear: Both budgets spend money now while facing huge budget deficits next year and beyond.

And both have decided to bet on the fortunes of the 1%, whose rise in income over the past several years has been the primary source of the revenue bonanza. If the state and city are to fix their future budget problems without massive spending cuts, they will be increasingly reliant on the richest of the rich to continue making such profits.

The percentage of all state tax revenue generated by the top 1% of taxpayers topped 50% for the first time in 2021 and remained near that level in 2022, according to updated budget documents released by the state Division of the Budget last month. 

And much of that revenue comes from taxing capital gains — profits on investments like stocks, bonds and real estate — all of which soared during the pandemic. A broader group of high earners accounted for more than 80% of all state taxes collected on capital gains, which are taxed by both New York state and city at the same rate as ordinary income.

While the state predicts that tax revenue from the top 1% will decline only slightly — to 47% this year and in 2024, a figure still well above the historical average — a market downturn would reduce that amount dramatically. In 2009, during the Great Recession, the 1%’s share of state tax revenue dipped to 35% — and incoming Gov. Andrew Cuomo faced a $10 billion budget deficit.

“The state is now more dependent than ever on high-income taxpayers, and the state budget is more vulnerable than ever to swings in very high incomes,” said E.J. McMahon, the longtime budget watcher from the conservative Empire Center think tank.

Red Ink Ahead

The fine print also shows increasingly severe budget problems ahead.

The New York state budget for the fiscal year that began April 1 totaled $229 billion with last-minute additions financed by a late surge in tax revenue. At adoption, Hochul emphasized that she had convinced the legislature to bring the state’s rainy day reserve fund to an unprecedented, robust $19 billion.

Then in early June, state budget officials finally released updated financial information showing that the projected deficits in the future had ballooned by more than 70% to $36 billion.

With next year’s gap estimated at $9 billion and $13 billion for the year after, the reserves would last less than two years.

The city also saw a revenue windfall as Mayor Adams and the City Council engaged in tough budget negotiations, which ended with agreement on a $107 billion budget just before the June 30 deadline.

The $2.3 billion in revenue above what the mayor had said was available in May was used to pay for increased Medicaid costs the state has passed on to the city, almost $500 million for migrant costs officials had assumed would be covered by federal aid, about the same amount for programs the Council proposed, and more than $1 billion added to agency budgets.

The city did not increase its $8 billion in reserves, a record in terms of dollars, but not as a percentage of the budget. The budget does account for the cost of new contracts with its unions, as long as those yet to be finalized follow the pattern already established. 

Nevertheless, the projected red ink is substantial — and also understated.

Officially the city projects deficits of $5.1 billion in fiscal year 2025, followed by almost $15 billion in the following two years.

But extra money for cultural affairs, libraries, CUNY and several sanitation initiatives has been added for only one year, meaning the city will either need to find more money or impose cuts next year. That’s true for other spending, like the expansion of pre-kindergarten funded with federal pandemic aid that will run out.

“The budget more deeply ingrains the newfound habit of funding programs for one year at a time, which should be called cliff dancing,” said Andrew Rein, president of the nonpartisan, nonprofit Citizens Budget Commission, which projects that such new spending will add about $1 billion to the $5 billion budget deficit for the next fiscal year.

Looming over this is the question of whether the City Council will be able to override a mayoral veto on legislation expanding availability of city rent vouchers for people with low incomes. The budget agreement calls for the city to spend a little over $700 million on the city-funded vouchers for the next two years. 

The mayor claims that if Council overrides his veto of the vouchers, the cost could be as high as $17 billion over the next five years.

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