NEW York City’s tax reve nues have been booming for the past few years, thanks largely to Wall Street and to a torrid property market. But the party may well be ending – spurring a crisis that would force Mayor Bloomberg and the City Council to cut spending or hike taxes (or both) next year.
The tax gusher has been a record – a boom not seen even during the heady 1980s or even headier late ’90s. Problem is, the city has used much of the multi-year windfall to avoid getting its runaway spending permanently under control. Now New York’s fiscal fortunes may be teetering on the brink again, despite this week’s stock-market runup.
Since the city’s financial industry started to recover from the tech bust and 9/11, tax revenues have skyrocketed by an extraordinary amount over pre-9/11 levels – far outpacing inflation and measures of economic growth. Total tax collections jumped nearly 70 percent from 2000 to 2007. (That includes money from the tax hikes that Bloomberg enacted early in his term – but even without those, the city’s take would still be up 60 percent).
While inflation rose about 25 percent over these years, property-tax collections climbed 66 percent – while the take in taxes related to property sales jumped nearly 300 percent. City revenues from personal-income taxes rose 45 percent, while the take from the biggest business tax grew 84 percent. (For details, see my new report at nyfiscalwatch.com.)
Bottom line: In the last few years, New York has cumulatively taken in $15 billion more than it had expected to.
The two main sources of this tax boom are the twin property-market and financial-industry booms. Last year, Wall Street profits rose 82 percent and Wall Street bonuses grew 15 percent (beating 2005’s record). The city’s property boom has lasted without significant interruption for more than a decade now.
The swollen tax take left Bloomberg and the City Council free to push expected spending well past the inflation rate in their $60.1 billion budget for the fiscal year that began July 1. They used the remains of a record 2007 surplus to give taxpayers some modest relief (mostly through a temporary cut in property taxes), and to make a down payment on future-year deficits.
This year, city-funded spending is up about 7.6 percent, to about $43.4 billion – that is, it’s growing more than twice as fast as the expected inflation rate. (The balance of the $60.1 billion budget comes mostly from federal and state sources – although New Yorkers pay federal and state taxes as well, so we’re not getting any “free” money).
Today’s budget is up nearly 50 percent from the budget Bloomberg inherited from Mayor Rudy Giuliani, while inflation is up 21 percent.
Four big-ticket items have fueled this growth.
* First and second, spending on pensions and health benefits for city workers has gone nowhere but up.
* Third: Spending on Medicaid and public hospitals is still way too high, even though the state will cover future Medicaid spending growth.
* Fourth: City debt is also rising; in fact, Bloomberg will bequeath a more than 50 percent jump in New York’s outstanding debt to his successor.
An unsustainable tax windfall has masked this unsustainable spending – but cutting spending is hard work, particularly in areas like public pensions and health benefits. Such benefits are products of labor negotiations and of state law, while pension benefits already awarded are enshrined in the State constitution; even gradual reform likely requires years of tough negotiations.
But City Hall has even less control over when the tax gusher stops – that’s determined by market forces.
And there’s a very real chance that the local financial-industry and property booms may be over for now, halting that record tax boom. Yes, the stock market is doing well this week – but volume in some of Wall Street’s modern bread-and-butter sectors (debt securitization; advisories on mergers and acquisitions) is all but dead, and could stay that way well through bonus season this winter, at least.
The city’s real-estate boom (both residential and commercial) depends on high Wall Street bonuses and local financial-industry health – someone has to rent all that office space. And (as in the rest of the nation) it also depends on easy borrowing and the expectation of strong growth in property values every year. Anecdotal evidence suggests that the party may be over there, too. (This week’s reports of continued growth in luxury-property prices don’t cover sales initiated after the credit-crunch turmoil began.)
Bloomberg has prepared somewhat for a very mild downturn in tax revenues. But even after using some of last year’s record surplus to start paying down next year’s projected deficit, that shortfall still looms at more than $1.5 billion – and future deficits could easily reach $4 billion a year.
Further, if the outlook is worse that the city expects – say, if the city’s financial industry suffers a protracted downturn that lasts past the spring, or if the local real-estate markets don’t resume their march upward after a very short slump – those deficits could grow even larger.
But the city must balance its budget every year. So mathematically speaking, barring a miraculous continuation of the tax-revenue boom, the mayor soon could have to work with the council (and possibly Albany) to cut spending, hike taxes or both.
Recent history suggests tax hikes are in store. In the wake of the tech bubble’s burst and the post-9/11 downturn, Bloomberg and the council cut spending only modestly – it mainly closed those deficits by raising billions in taxes on property and cigarettes and (temporarily) on income and sales.
Let’s see if circumstances tempt New York to repeat that history.
Nicole Gelinas is a Chartered Financial Analyst and a Manhattan Institute senior fellow.