The flashy and progressive $175.2 billion executive budget Gov. Andrew Cuomo presented last month just ran into a roadblock earlier this week when the governor and New York state Comptroller Thomas DiNapoli announced a $2.3 billion shortfall in income tax revenue – on top of the $500 million dip in revenue at the end of last year. Cuomo and DiNapoli both have pointed to the 2017 federal tax law capping how much of their state and local taxes (known as SALT) that income tax filers can deduct from their federal tax liability as a force that caused some of the state’s high earners – who contribute a significant amount to the state’s income tax revenue – to flee to states with lower taxes.
DiNapoli, a former Assemblyman and the state comptroller since 2007, spoke with City & State about the reason for the shortfall, the parts of the budget likely to face cuts and the best way for the state to tighten its belt going forward. Responses have been lightly edited for length and clarity.
The governor has blamed the cap on SALT deductions as the driving force behind this $2.3 billion shortfall. Is that what is happening?
It's probably a number of factors, but I do agree with the governor that the most significant change that we've seen relates to the impact of SALT. A very small number of New Yorkers pay a disproportionate share of the personal income tax. If you just look at the top rung, that 1 percent of taxpayers carries 46 percent of the personal income tax revenue. If you have even a small number of people in that category choose to change their domicile, we lose a significant amount of tax revenue. Now that SALT is part of the landscape, you have many folks, I think, consulting their advisors and accountants. Especially if you already have a second home somewhere, it's very easy to change your home address, and I think we've been suffering the consequences of that. Do I think that the volatility on Wall Street in December and that (last) quarter (of 2018) being an off quarter, does that have an impact? Probably. I think there are other pieces of the federal tax bill that may have had an impact on taxpayer behavior – the repatriation of the foreign profits, that could have a factor. But I do think the most significant explanation is that taxpayer behavior has been affected by SALT, and the effect of that has been a number of higher wealth New Yorkers have decided to either move out of state or just change what their legal address is.
Do we know how many high-income earners have left New York for states with lower taxes?
No, that's the challenge with this. The ones who would know, probably, would be [Department of] Taxation and Finance, which is separate from us. We can't quantify it, we don't have a hard number in terms of headcount.
How significant is a gap of this magnitude? The governor called it as “serious as a heart attack.”
I don't know if it's unprecedented. You'd probably have to go back to the huge drop-off when the Great Recession hit in '08 and '09 … No one should assume that it's not manageable. I think we've been used to a number of years where we haven't been confronted at this point in the budget process, at the start of a calendar year – which is the fourth quarter of the fiscal year – with this kind of a challenge since the Great Recession hit. I think it just underscores that it's going to be a little more challenging for the Legislature and the governor to address this. But in terms of the dollar amount, it's certainly not a number that can't be managed.
How much of this shortfall did we see coming?
The shortfall became evident in December. And we had been warning for many, many months that we need to be cautious about revenue forecasts because there as been an assumption out there for a while, without a sense of timing, that the economy was falling, and we certainly see projections are for lower growth this year than last year. And concern about what the impact of SALT would be. I think there was always a sense that we're in somewhat uncertain waters, and that revenue could be impacted in a negative way. Nobody had a precise sense of timing as to when that would hit, and obviously because of the end of the calendar year and tax issues, people make a lot of decisions in December. There's no doubt that that timing and the impact of SALT came together to produce this kind of shortfall. I think there were some warning signs out there certainly before the end of January, but it was at the end of January that we really had hard numbers on it.
So what’s next? How do we manage this kind of gap?
The next step really will be next week, when the governor does the 30-day amendments to the executive budget proposal. So at that point, we'll see how – really, in clear numbers – what revenue figure they're going to peg and whether or not they're going to propose any spending changes. So I think we have to wait and see what the 30-day amendments produce.
What amendments are likely to be proposed?
I also think it's fair to say that the big-ticket items that are always a significant part of the budget negotiations relate to education spending and health care spending. When you have less money to go around, it might make it harder to come up with an agreement on a school aid formula. But at this point, I think we need to see what the governor is going to propose as part of the 30-day amendments and then the next step will be the governor and the Legislature have to come up with a joint revenue forecast. They're still a couple of steps away before we have a more definitive picture on what revenues they'll be working with. It's probably a little too soon to speculate with any certainty amount how much less will be on table and which parts of the budget might be impacted the most.
How different will the budget look after the new revenue forecast is agree upon?
I think it would be fair to say we probably won't know until April, which is the next time because that's when the April 15th date comes along and you see a lot more taxpayer activity. We probably won't have a more clear handle on what the trends are until then. So that makes it a challenge. But they've got to work on the budget now and come up with an agreement by April 1st. I think that means a more conservative perspective on just how much money there is to work with.
You’ve mentioned the necessity of building up reserve funds more for a rainy day like this in the future. Can that be included in a budget that is already expected to be tighter?
We've been critical in recent years when we've had good budget years that we haven't built up our reserves more. We were pleased that in this executive budget, the governor added $488 million to the reserves. What I said the other day is I think perhaps it should be put on the table that we need to boost that figure even more. If this is going to be a problem for us not just to close out this year and the coming year, but in the next couple of years – God forbid, it really gets worse – if you have more adequate reserves, that could help you weather the storm. I would argue we made a mistake to not build up the reserves more in the past. Even though it's a more challenging budget now, we would be smart to not only include what the governor proposed but add some more to that.
How much would you like to see the reserves increase?
We haven't given a figure. We'll leave that to the wisdom of the Legislature and the governor. But we think the governor's number should be the floor, not the ceiling to what the addition to the reserves should be.
In your view, what is the best way to manage this shortfall?
Very often when you have a budget challenge, you deal with it by increasing revenues – or you cut programs, which cuts spending. People don't always like to do that. Too often in the past in Albany, the third alternative is used, which is to borrow money. And the reality is, we've borrowed a lot in past years. We have limited debt capacity and what I do hope, and I would urge that the Legislature and the governor not put off dealing with hard choices by attempting to borrow our way out of this challenge. I really think they have to look at the revenue and the spending side, and not borrow their way out of the challenge.
Is increasing the tax rate off the table, given the opinion that high taxes are what led high-income earners to leave the state?
I think the governor made clear that he doesn't want to compromise the middle-class tax cuts. I think he made clear that, from his perspective, if we're losing some of our wealthier taxpayers and that's hurting us, putting more taxes on those folks would probably be a mistake. I think it's fair to say there are some in the Legislature who would argue the other way. They would argue that people who are better off can pay even more. That will be the give and take of the budget deliberations. That will be up to the Legislature and the governor to work out.
What would you suggest?
The advantage of having been in the comptroller's seat – having been in the Legislature for 20 years – is I don't have to make the choices. That's beyond my job description. We just look at the numbers and urge everything be in balance. But those are the hard choices the Legislature has to make.
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