The state budget’s been in place for just under two months, and already there are signs that tax revenues may be significantly lower than expected. Anticipated federal tax reductions later this year may be one of the reasons.
Late on a Friday before the Memorial Day holiday weekend, Governor Cuomo’s budget division released its financial analysis of the new state budget, approved in early April.
If you look closely at the numbers, they show that tax revenues, reported in May, declined by just over $600 million dollars from projections made as recently as February.
EJ McMahon, with the fiscal watchdog group the Empire Center, has been poring over the numbers. He says the decline is actually part of a larger trend, and that Governor Cuomo’s budget division has already projected tax collections for the new budget year will be lower than previously expected, by around $1.5 billion dollars.
A report by the State Comptroller Tom DiNapoli titled “State Could Face Tough Fiscal Decisions in Year Ahead”also finds that tax collections were down --nearly $1.2 billion dollars from projections made a year earlier.
McMahon says part of the reason is that wealthier New Yorkers may be delaying some capital gains benefits because they hope that President Trump and the Republican-led Congress will lower the tax rate on those transactions.
“There’s speculation that high-income taxpayers and employers are anticipating a federal tax cut as soon as this year,” McMahon said. “Which has prompted a good number of them to delay deal making and to shift potential capital gains income to a year later.”
McMahon says the same thing happened 30 years ago, when then- President Reagan and Congress were changing tax policies and rates.
He says changes in the state tax laws also affected revenue collections. Streamlining of corporate taxes in 2014 led businesses to overpay some of their taxes in 2015, meaning they owed less money in 2016.
The governor’s division of the budget revised revenue estimates down half way through the last fiscal year, so there was not an unexpected budget gap.
A spokesman for the budget department, Morris Peters, agrees that some of the most recent downturns in revenue collections are because higher income taxpayers are holding off on reaping capital gains profits by delaying deals, presumably because they hope federal tax rates will be lowered. Peters says other reasons could include the weaker than expected economy, including lower hedge fund gains, and a downturn in the private equity market.
McMahon, with the Empire Center, says the state may be able to eventually get back some of that revenue. If President Trump and Congress fail to achieve tax reform in the next few months, then they may go ahead and complete those transactions anyway.
“The prospects for a Congressional agreement with the Trump Administration on a tax cut are dimmer than they were earlier this year,” McMahon said.
McMahon says there are bigger threats, though, to the state’s budget, as well as to New York’s economy. Proposals have surfaced in Congress to eliminate itemized deductions for state and local taxes. That could drive wealthier New Yorkers from the state. Governor Cuomo has said the effects could be “devastating” for New York. And a repeal of the Affordable Care Act, also known as Obamacare, could leave the governor and lawmakers grappling with a multi-billion dollar deficit.