A micro-explainer on the state’s economy
A micro-explainer on the state’s economy
Excelsior is a weekly City & State newsletter that gets sent out every Wednesday at noon. If you like what you see, you can sign up to have Excelsior sent directly to you by clicking here!
That’s not how it works, Amanda ...
When you ask, “How does New York make its money?” you might think there would be a simple, convenient answer. But, as you may already be guessing, there isn’t one – something I’ll try to remember the next time I pitch a newsletter topic without doing any research first.
A state doesn’t really make money. It collects tax revenues and fees, and receives federal aid, which is then redistributed throughout the state to fund various agencies and programs.
The bulk of New York’s funds have come from federal aid and tax revenue over the past few years, though it also receives money from what are known as miscellaneous receipts, which include state lottery sales, licensing and university fees, as well as monetary settlements from legal disputes.
During the 2018 to 2019 fiscal year – the yearlong period from April 1 through March 31 when the state’s finances are reported – personal income tax revenue accounted for the bulk of taxes received by the state. And it will surprise absolutely no one living in New York to know that the state has one of the highest personal income tax rates in the country, second only to California. However, the state still pulls in a lot of dough by taxing a wide array of industries, spanning from finance to agriculture.
However, this year the state’s finances have been upended by the ongoing COVID-19 pandemic, which has created a major deficit. In October, New York’s unemployment rate was estimated to be 9.6%, while New York City’s was estimated to be 13.2%; the average national unemployment rate was 6.9% that month. As the state enters into its second coronavirus outbreak, many are wondering how much more financial damage impending shutdowns could cause. The state has yet to make clear plans to recover its losses, as it’s still holding out hope for a federal bailout.
By the numbers
Taxes collected within the 2019-2020 fiscal year
- $53.6 billion collected from personal income taxes
- $17 billion collected from state sales taxes
- $7.7 billion collected from business taxes
- $2.1 billion collected from property transfer taxes
- $0.2 billion collected from other taxes and fees from a variety of sources, such as motor oil and cigarette sales
A teeny-tiny budget explainer
What does the state do with its money?
Once the state has collected its various fees, taxes and aid, it maps out how to allocate its revenue in what is known as the budgeting process. The state’s budget is complex, and deserves its own issue of Excelsior, but it’s important to have at least a basic understanding of how it works to get a sense of how the state’s economy functions.
Each year, it falls on the state government’s executive branch, overseen by the governor, to come up with a budget to address the state’s many needs, from funding for public schools to major infrastructure projects, for the following fiscal year. In essence, the governor has to estimate what he or she thinks the state will get in tax revenue and other funds, as well as how much money the state will spend in the subsequent year. The state’s Legislature also has to come up with its own revenue forecast.
Beginning in March, both houses of the Legislature and the governor need to come to a revenue consensus, where the amount of revenue that’s available for the next year has to be agreed upon. However, if neither the governor nor the Legislature can reach an agreement, then it is left up to the state comptroller to decide. Then the governor and lawmakers need to agree on how to spend all that money.If lawmakers want to pass laws that are going to cost a lot of money, then they need to do so before the budget gets passed, so that funds can be allocated to implement the new law. That’s why there’s always a scramble to get as many laws passed as possible ahead of the budget’s finalization.
The budget is expected to be finalized by April 1 – though sometimes lawmakers blow through that deadline – and is enacted in the following fiscal year. Then, miraculously, the process begins all over again.
The state’s biggest industries
The bulk of the taxes New York collects come from personal income, but the two second biggest sources of revenue are its sales and business taxes (a tax on the business itself, just for existing). In 2019, the state’s top 15 significant industries included construction, manufacturing, transportation and warehousing, financial activities, professional and business services, educational services, health care, and leisure and hospitality, according to a New York Department of Labor report. Significant industries are determined based on several factors, including the number of employees an industry has, its job growth, its expected job growth, and several other qualifiers.
Interestingly, the state’s manufacturing industry consists of both the food and electronic product manufacturing industries. New York’s biggest agricultural export is dairy – ever wonder why New York’s state snack is yogurt? Or why state snacks even exist, for that matter?
The leisure and hospitality industry, which accounts for most tourist attractions and activities, such as live performances, gambling and other amusements, accounted for $46 billion in annual spending prior to the COVID-19 pandemic. Most tourist attractions were forced to shut down amid the public health crisis, which contributed to the state’s current deficit. While some businesses are expected to see a return of tourists in 2021, it’s likely that the industry won’t be able to fully bounce back until 2025.
Who controls the state’s finances
- Gov. Andrew Cuomo: As governor, Cuomo proposes a comprehensive state budget for the next fiscal cycle each year and oversees its completion, in accordance with the state’s constitution.
- Thomas DiNapoli: As New York’s comptroller, DiNapoli manages the state’s Common Retirement Fund, a pension fund for state employees, and is responsible for how well the fund performs. It was valued at $194.3 billion in March. DiNapoli’s duties also include auditing various state agencies' spending, reviewing the state’s budget and reporting on the state’s finances.
- Michael R. Schmidt: As commissioner of the state Department of Taxation and Finance, Schmidt is responsible for the collection of tax revenue throughout the state and has served in this role since 2019.
- Robert Mujica: Director of the Budget Mujica is tasked with overseeing and developing the state’s fiscal policies, as well as the preparation and creation of the state’s budget.
- The New York state Assembly’s Ways and Means Committee:Chaired by Assembly Member Helene Weinstein, this committee is charged with supervising the creation of the state budget every year, as well as any proposals introduced to the Assembly that may impact spending or revenue throughout the state.
- The New York state Senate Finance Committee: Similar to Ways and Means, this committee, chaired by state Sen. Liz Krueger, oversees the creation of the budget and any bills that may affect it in the state Senate.
The COVID-19 impact
New York’s deficit concerns
In October, it was reported that state and local governments are predicting a loss of $59 billion in revenue through 2022, due to the ongoing coronavirus pandemic. Cuomo has been neglecting to speak about possible solutions to this financial crisis, such as increasing taxes or making major spending cuts. Instead, he has been suggesting that the federal government be held responsible for its fiscal shortfalls. “My position is, the state is not liable for this deficit. It was caused by the federal government’s negligence. So, I’m not taking action to close the deficit – the federal government has to make up for the deficit,” the governor said on Oct. 7.
However, financial experts argue that Cuomo should have a contingency plan, should the state not get the amount of federal aid it’s hoping for, and that relying on aid isn’t a viable long-term solution. Some have suggested that the governor raise taxes on New York’s uber wealthy, like New Jersey did, but it seems unlikely that Cuomo will go for that, as he has historically rejected such proposals.
The governor has invested a lot of faith in President-elect Joe Biden and has suggested that once he’s in office, the state will have a better chance of rectifying its economy. “With a Biden victory, we know there will be a state-and-local package which will go a long way toward handling New York’s economic problem,” Cuomo told the Albany radio station WAMC in early November. “We don’t know how far, but it is a matter of time now.”
But a Joe Biden presidency doesn’t mean that Congress will automatically fork over the money that the state needs to recoup its losses – and even if it does, it’s likely it won’t receive funds until the following fiscal year. If the state isn’t able to come up with more money or devise a plan to make severe budget cuts, it will be unable to begin patching up its deficit hole – something it’s legally required to do every year, according to the state constitution.