The state budget’s been in place for just less than 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 the Friday before the Memorial Day holiday weekend, Gov. Andrew 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 from projections made as recently as February.
E.J. McMahon with the fiscal watchdog group the Empire Center has been poring over the numbers. He said the decline is actually part of a larger trend, and that Cuomo’s budget division already has projected tax collections for the new budget year will be lower than previously expected, by about $1.5 billion.
A report by State Comptroller Tom DiNapoli titled, “State Could Face Tough Fiscal Decisions in Year Ahead” also found that tax collections were down — nearly $1.2 billion from projections made a year earlier.
McMahon said part of the reason is that wealthier New Yorkers may be delaying some capital gains benefits because they hope that President Donald 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 said the same thing happened 30 years ago, when then-President Ronald Reagan and Congress were changing tax policies and rates.
He said 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 halfway through the last fiscal year, so there was not an unexpected budget gap.
Morris Peters, a spokesman for the budget department, agreed that some of the most recent downturn in revenue collections is 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 said other reasons could include the weaker-than-expected economy, including lower hedge fund gains, and a downturn in the private equity market.
McMahon said the state eventually may be able to get back some of that revenue. If Trump and Congress fail to achieve tax reform in the next few months, New Yorkers 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 said 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. 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.