New York has a problem. And it’s a big problem — a $30 billion problem.
That’s how much money the state Division of Budget says will be lost in tax revenue over the next two years because of the coronavirus.
You’ve probably already heard about the state’s budget deficit. For months, it’s been a frequent topic of discussion between Gov. Andrew Cuomo, his top aides, and the press. Weeks have rarely gone by without a mention of the shortfall.
And yet, nothing’s changed. Instead, New York’s projections of the deficit have continued to evolve. Not only will the state need $30 billion over the next two years, New York City is facing its own deficit of approximately $9 billion.
Then, when you factor in what the Metropolitan Transportation Authority, Port Authority, and local governments outside New York City need to break even, you’re looking at a $59 billion total shortfall in New York.
Since April, Cuomo’s hedged his bets on the federal government filling that gap. Without that aid, New York will descend into financial chaos, he's said.
“If we have to close this deficit without Washington, there's going to be no good way to do it,” Cuomo said Thursday. “There's going to be no constructive way to do it.”
The result, Cuomo says, would be a counterproductive cocktail of spending cuts, tax hikes, and borrowing. Democrats in the state Legislature already approved up to $11 billion in borrowing this year, but that’s a far cry from the total financial needs of the state.
Because the two largest parts of the state budget fund education and Medicaid, it’s not unlikely that the bulk of any cuts from the Cuomo administration would be felt by the state’s schools and underprivileged residents
Most Republicans in Congress have staunchly opposed an infusion of aid to New York. U.S. Senate Majority Leader Mitch McConnell called the concept a “blue state bailout” in April, when the virus was still killing hundreds of people in New York each day.
And President Trump isn’t likely to come to the state’s rescue; the former Queens resident turned Manhattanite changed his official residence to Florida last year, and is currently considering a series of federal funding cuts targeted at New York City.
With all of that in mind, members of the state Legislature are starting to seriously consider other ways to address the state’s budget gap — even if they don’t fill it completely. A smaller deficit is better than nothing, they’ve argued.
The proposal they’ve talked about most is raising tax rates on the ultrarich — multi-millionaires and billionaires. And it’s not a new idea; some lawmakers supported higher taxes on the wealthy before the pandemic.
State Sen. Jessica Ramos, D-Queens, is one of several Democrats who’s wanted to raise taxes on the rich to provide a funding stream for areas like education and social services.
“The income inequality issue in New York has been the worst in the country for a very long time, way before the pandemic,” Ramos said. “What we've always wanted to do is balance the scale more, so that we're actually able to help those least among us.”
Ramos has signed on to a bill from state Sen. Rachel May, D-Onondaga, which would raise taxes on people making over $100 million each year. She’s one of 28 Democrats cosponsoring the measure, which is also supported by Republican state Sen. Phil Boyle, R-Suffolk.
But Ramos also has her own legislation to tax the rich called a mark-to-market tax.
It would only apply to the state’s billionaires, and it would create a new tax on what are called capital gains. That’s, essentially, the change in value of someone’s investments. Some have referred to the idea as a “wealth tax.”
Think of stocks. If you invest in something, and its stock goes up, that stock is now worth more than when you bought it. But you don’t profit unless you sell the stock.
Ramos wants the state to treat the difference in value as income, and have it taxed. She says it could generate more than $5 billion every year from the state’s wealthiest residents.
“They've made $77 billion over the past four months,” Ramos said. “And so asking them to contribute just enough for all of them to come up with $5.5 billion is really chump change to them, and would provide some stability for thousands of New Yorkers.”
That money would then be used to pay $3,300 every month to certain low-income people.
And while everyone agrees that the state and federal governments need to find a way to help those people, not everyone wants to do it by raising taxes.
State Sen. Pam Helming, R-Ontario, said she’s worried rich people will move to another state if lawmakers make it more expensive to live here — especially in the age of COVID, when people have learned to work from anywhere.
“If we do this tax on millionaires and billionaires … they now know they could work from anywhere, they are going to relocate and they're going to take their jobs with them,” Helming said. “That's going to mean problems for working class people.”
Cuomo sides with Republicans on that point. He’s historically been resistant to higher taxes on the state’s richest residents, and the concern is rooted in the state’s coffers.
Right now, more than 40% of the total state income tax collected every year in New York comes from the top 1% of earners, according to E.J. McMahon, an economic analyst from the Empire Center for Public Policy.
So, if New York loses even a small share of those people, it could mean a lot for the state’s bottom line. That could spell trouble at a time when rich people are considering a move out of New York after what happened with the coronavirus.
“You've got people who are on the fence, who are actively considering, ‘well, am I going to come back to New York State or not?’” McMahon said. “And the message sent by these proposals is, ‘well get lost or it's going to cost you to come back.’”
But it’s also worth noting that this wouldn’t be the first time New York leaned on its wealthiest residents after a crisis. New York City raised taxes on high-income earners after 9/11 to help with the city’s recovery.
Less than a decade later, during the Great Recession, Gov. David Paterson and the state Legislature raised taxes statewide on the wealthy at a time when New York was facing a budget deficit of similar proportions.
That’s been affectionately referred to as the ‘millionaires tax’ in Albany, and it’s still in effect today. It was supposed to sunset, but state lawmakers agreed to extend the tax indefinitely.
Between the state income tax rate enacted under the ‘millionaires tax,’ and the local tax rate in New York City, high earners in the five boroughs actually pay the second-highest tax rate in the country.
But Democrats in the state Legislature have said that’s not enough, namely because it doesn’t tax multimillionaires and billionaires at a higher rate. In other words, billionaires in New York are currently taxed at the same rate as millionaires.
It’s those super high-income earners that Democrats want to tax at a higher rate. Ron Deutsch, an economic analyst from the Fiscal Policy Institute, said the consequences would be felt by the rest of the state if lawmakers don’t follow through with a tax hike for the rich.
“We cannot ask those who have been most impacted by this pandemic, to shoulder the burden of balancing the budget,” Deutsch said. “History has shown us over and over again, that when we're in times of crisis, we ask the wealthiest among us to pay a little bit more.”
It’s also unclear if rich people will leave the state if they’re hit with higher tax rates. It’s been more than a decade since New York enacted the ‘millionaires tax,’ and the state has still gained thousands of millionaires in that time.
But that’s just one idea for closing the state’s budget gap. There’s another that would still create new taxes on the rich, even if they move their primary home to another state.
The proposal, called the pied-a-terre tax, would place an annual tax on second homes in New York City worth more than $5 million. It’s targeted at people wealthy enough to own a second home in the five boroughs, whether they live there or not.
It’s sponsored by state Sen. Brad Hoylman, who said it could apply to as many as 5,000 homes in New York City and generate hundreds of millions of dollars each year.
“The very wealthy who use New York City as a safe and secure place to keep their wealth — it’s under taxing them,” Hoylman said. “They're not paying income tax, or paying very little taxes elsewhere.”
The money would only be collected by New York City, but it could take some pressure off Albany to fix the city’s finances. New York City is facing a $9 billion budget deficit on its own over the next two years.
And for that kind of shortfall, there’s no silver bullet.
Even if the state passed both the pied-a-terre tax and the mark-to-market tax, New York City and New York state would still be billions of dollars short of filling their budget gaps.
That’s why some think the state should reassess its spending in the short-term to preserve services in the long-term. Republicans like Assemblyman Ed Ra, R-Nassau, have questioned the long-term sustainability of relying on the state’s residents for revenue.
“Our tax base, the more we rely on these individuals, the more volatile it gets,” Ra said. “Something that is very attractive in the short term may end up just kicking the can down the road.”
Some analysts say the state could reconsider how it spends the money it already has without dramatically impacting services. That’s going to take a targeted approach in areas like school aid, according to McMahon.
“The school aid cuts should be targeted to those districts that are least dependent on state aid,” McMahon said. “And all districts should be relieved of the obligation to be paying generous pay increases during this recession.”
But Democrats in the state Legislature have called for their colleagues, including Cuomo, to consider other options for raising revenue before moving forward with any reductions in state aid — and there’s no shortage of ideas.
One of those proposals is actually more than a century old and could generate as much as $16 billion a year, according to a Democrat who sponsors the measure.
Assemblyman Phil Steck, D-Schenectady, sponsors legislation to reinstate what’s called the stock transfer tax. It’s basically a sales tax on stock transactions; it would place a tax of one-quarter of one-percent on stock transactions.
And it’s actually not new. The stock transfer tax was in place for decades before the state did away with it in the early 1980s.
But Steck says it’s time to bring the tax back — especially when the stock market is doing so well. The S&P 500 still hit a record high in August, despite the economic turmoil caused by the COVID-19 crisis.
“I think Ironically, the stock transfer tax is the hardest one to avoid,” Steck said. “As we've seen in this time period, the market has been doing extremely well, even though the rest of the economy has not been.”
There’s not a lot of support in the Legislature for reinstating the tax. When it was dropped more than three decades ago, it was partly out of fear that stock brokers would move to New Jersey. Steck said some lawmakers think that might still happen.
Either way, Democrats haven’t rallied around the tax, nor have they agreed on any specific measure to raise revenue for the state.
Assembly Speaker Carl Heastie, D-Bronx, and Senate Majority Leader Andrea Stewart-Cousins, D-Westchester, have both said in recent months that they would support some version of a proposal that garners revenue from the state’s wealthiest residents.
Their members, the Democrats who currently control both chambers of the Legislature, likely won’t return to Albany this year until they have a bill to pass. And, in an election year, it’s anyone’s guess as to when that will happen — if at all.
“All these things are sort of seen as geese laying golden eggs that aren't laying enough eggs. So, let's cut them open and pull the eggs out,” McMahon said. “And what you have in the end, what you end up with is a dead goose.”
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