Things continue to look grim for New York's fiscal picture. Just this weekend I mentioned to someone that I expected the state's tax revenues to fall well short of even its most pessimistic expectations. Some news today confirms that prediction, with income tax revenue trending down 36% so far for 2009 compared to 2008. Could New York soon be the new California?
Here's New York Gov. David Paterson explaining the tax revenue problem to CNBC this morning:
They are down 36% over last year. And this is what is so frustrating: they were down 36% last year, but we added personal income tax, which we thought would make the falloff 10 percent to 15 percent. It's still 36 percent, meaning that our revenues fell more in 2009 than they did in 2008.
Yes, it must be frustrating to raise taxes and see tax revenue still plummet. Somewhere Arthur Laffer wants to take credit for this, but it's probably mostly due to the recession affecting New York business and subsequent compensation more than expected.
According to Paterson, upstaters can mostly blame Manhattan:
The reason we are ground zero for the economic recession is because 21% of our resources come from Wall Street taxes. And when that went off the cliff, our budget deficit quadrupled last year. So what we're recognizing now is what everyone recognizes in their own portfolio. You can't overinvest in one area, because when it fails you'll have a debacle.
Many 2008 Wall Street bonuses were payable in 2009. Given the vast decline in those historically juicy checks, it's no surprise tax revenues are suffering. Of course, bonuses across other major Manhattan industries like law firms and advertising will also suffer. That 21% also likely doesn't include finance-related income from accounting firms, rating agencies, law firms, etc. which is also way down. And then there's NY State's 9% unemployment (as of August) -- you don't pay taxes if you have no income.
Paterson's solution is to diversify past finance. In order to do that he touts his state's innovation economy matching-grants program, where his state kicks in an extra 10% for any qualifying project that the federal government funds. When CNBC asked if there was any state that does this currently? He said that California has set the example. With NY's deficit growing $83 million per day (according to Paterson), it's beginning to look like California in a more than one way.
In the past I've written specifically about New York City's woes. I'll be curious to watch and see how badly Manhattan, in particular, suffers. While programs statewide will have to be cut, Manhattan will magnify the fiscal squeeze felt by the rest of the state.
Here's the full interview, in case you want more detail: