ALBANY — When Gov. Andrew M. Cuomo saw a surprise $2.8 billion drop in state income tax revenues in December alone, the Democrat blamed most of it on President Donald Trump's tax overhaul. The new law caps state and local tax deductions, or SALT, on federal income taxes. But fiscal analysts say there are other factors that could have played larger roles.
Wall Street bonuses, which traditionally contribute as much as 20 percent of state income tax revenue, are on track to be hundreds of millions of dollars less than a year ago, the analysts say. In addition, because of a 5 percent drop in the stock market at the end of the year, many investors took losses, reducing their tax liability. And they said other drivers likely included international trade turmoil, a weakening housing market and cooling economy, and even errors in the difficult task of forecasting income tax revenue.
“There are really too many different factors in play and it’s really hard to say what is the impact of SALT deductions versus other factors,” said Lucy Dadayan, a senior research associate with the Urban-Brookings Tax Policy Center at the Urban Institute, a Washington, D.C.-based research group. “I think it’s too early to come to any definite conclusions because we just don’t have enough data.”
“Determining the relative magnitude of these causes will take additional analysis and experience,” said David Friedfel, director of state studies for the independent Citizens Budget Commission, in his analysis. “However, some of these causes also will likely drive lower personal income tax receipts in the future.”
“That’s why the state needs to work on its reserves, so it could absorb these kinds of shocks,” Friedfel said. “If this is an indication of a slowdown, then one month could wipe out our rainy-day fund.”
On Feb. 15, Cuomo addressed the shortfall and revealed a broader deficit in his 30-day amendments to the budget. Along with a $2.8 billion shortfall in income tax revenue in December from what was projected, January’s projections were off by another $900 million, according to the state Division of the Budget.
In addition, the amount of wages that taxpayers approved for withholding by the state missed projections, too. In all, the state’s financial plan projects $3.8 billion less in income tax revenue for two fiscal years, ending in 2021.
To address the concern, Cuomo proposes to close as many as three prisons, reduce some Medicaid programs by $550 million, reconvene a task force to find further savings in Medicaid and carry over some deficits into future years to be dealt with then.
The state comptroller’s office won’t have its estimates of declines in state income tax and capital-gains tax revenue from lower Wall Street bonuses until March. Comptroller Thomas DiNapoli, however, is urging caution as Albany crafts the 2019-20 state budget.
Jared Walczak, a senior policy analyst at the fiscally conservative Tax Foundation think tank, said many investors took losses in December, and that would result in a substantial loss in New York income tax revenue because the state has so many big investors. Walczak and other fiscal analysts also said New York may have simply made an inaccurate forecast.
“States do miss on a fairly regular basis,” he said. “Forecasting is very difficult.”
Last year, stock market indexes dropped more than 5 percent, with the Dow Jones Industrial Average falling 9 percent in December alone. It was the worst December performance of the market since 1931, the early days of the Great Depression. That drop would prompt lower estimated income tax payments as well as filing for capital losses, all of which would have reduced state tax revenue in December, analysts said.
New York City Mayor Bill de Blasio said the city alone is expected to receive $935 million less in income tax revenue after a tumultuous year on Wall Street, according to his preliminary budget released Feb. 7.
Cuomo is focused on Trump’s 2017 tax law, which he said has possibly driven top earners out of state. “People are mobile,” Cuomo said recently. “They will go to better tax environments. That is not a hypothesis. That is a fact. People act in their own economic interest. Businesses act in their own economic interest. If you set up two economic realities, and one is much more favorable than the other, and they are mobile, they will move.”
Cuomo referred to the tax law adopted by Congress in December 2017. The then-Republican Congress passed the tax cut for corporations and most middle-class families. To pay for it, the law capped the amount taxpayers could deduct in state and local taxes from their federal income tax returns at $10,000. That forced a higher federal income tax bill for high-income, highly taxed New Yorkers on Long Island, New York City and its northern suburbs, who pay far more than $10,000 in state income tax and local property taxes.
State Budget Director Robert Mujica said the cap on SALT hits 1.7 million out of 9 million taxpayers, mostly on Long Island, New York City and Westchester. As a result, that group will pay $15 billion more in federal income taxes.
Some fiscal analysts, however, doubt there would be an exodus by the wealthy this quickly, even as Cuomo went to the White House two weeks ago to press for repeal of the SALT provision.
“He’s substantially overstating the effect,” said Walczak of the Tax Foundation. “New York has high taxes and we have seen migration out of high-tax states to other states. Governor Cuomo often dismissed that effect. It would make sense that would increase.”
To avoid some of the federal tax hit, many higher-income New Yorkers who pay quarterly installments on their estimated state income tax paid ahead to make sure all their state payments were deducted from their federal tax bill before the federal law took effect. Like most states, that resulted in a surge of state income tax payments in the quarter beginning in December 2017, before the federal law took effect, and a corresponding drop in state income taxes in December 2018, when the payments made early would have normally been sent to the state.
But unlike most states, New York saw a much deeper hole in December 2018 in the quarterly estimated payments of state income taxes that high earners often make throughout the year.
State records show that New York received $8.6 billion in December 2017 in New Yorkers’ estimated payments, which included a bump of $3.5 billion from earners seeking to get ahead of the federal tax law. The Cuomo administration said the extra prepayments to avoid the Trump tax law were the largest factor in the $3.5 billion increase, but it’s not possible to isolate every factor.
Officials say that bump was addressed in the 2019-20 budget proposed on Jan. 15. In that proposal, Cuomo estimated the state would receive less — $6.2 billion — for the key month of December.
But when the final figures came in, the state received just $3.9 billion in December 2018. That’s a $2.3 billion difference, even after Cuomo tried to compensate for the bulge in payments to avoid impact from the Trump tax law.
Cuomo budget spokesman Morris Peters said the state made its revenue estimates based on “robust” projections for the economy and employment that predicted an increase in income tax revenue that never materialized.
“Most states did see a decline in revenues in December,” said Laura Schultz, director of fiscal analysis and senior economist at the nonpartisan Rockefeller Institute of Government, a national think tank based in Albany. She said many taxpayers “shifted their tax burden” to avoid Trump's reduction in SALT deductibility.
New York, however, appears to have lost more than most states.
“It does look like they took (the bump in early payments) into consideration, but it was a bit of a surprise when it was lower than anticipated,” Schultz said.
Most states hope to make up their December loss in quarterly income tax payments by the end of their fiscal year, although most states also have a later end to their fiscal years in which to do it. Asked if New York likely will see it’s $2.3 billion loss recovered by the April 1 start of the fiscal year, Schultz said: “Probably not.”
A December drop in New York was expected, agreed Lucy Dadayan, a senior research associate at the Urban-Brookings Tax Policy Center at the Urban Institute, but the magnitude wasn’t.
“We might continue seeing weak growth in income tax revenues,” she said. “I think it’s too early to come to any definite conclusions.”