New York confident about recovery

Paul M. Drury, CFA, Portfolio Manager, and Garrett L. Hamilton, CFA, Portfolio Manager, 02/24/21


  • New York is facing a $15 billion deficit.
  • Federal aid could help the state avoid budget cuts, officials say.
  • Lawmakers to consider new sources of revenue with two proposals.
New York state is facing its biggest budget deficit ever.

The $15 billion drop includes the current fiscal year’s sum of $5 billion and a projected shortfall of $10 billion for FY 2022; these deficits remain even after revenue estimates were revised higher based on tax receipts collected through the first week of January 2021.

Governor Andrew Cuomo has requested $15 billion in federal aid from the next pandemic stimulus package. President Biden’s $1.9 trillion proposal includes $350 billion in aid for state and local governments. How much and when federal aid may arrive is an open question, as Congress and the Biden administration work on the bill.

In presenting his FY 2022 budget proposal in January, Governor Cuomo considered two scenarios. If the state receives $15 billion in federal aid, the proposed budget could meet its goals of treating Covid-19 and restoring the state’s economy. If New York receives a smaller sum, the consequence would be across-the-board budget cuts, a temporary tax increase on high earners, and a pause on the tax cut for middle-income taxpayers. Cuomo indicated that without federal aid or a tax increase, the state may have to make cuts in education and Medicaid.

An increase would make New York’s income tax rates the highest in the nation, according to the budget director. The Tax Foundation notes that New York already places the second-highest tax burden on individuals in the country, after Hawaii. The Empire State’s businesses have the fourth-highest tax burden on a per-employee basis.

An issue of competitiveness

Tax rates are a competitiveness issue, and Governor Cuomo has worked to lower taxes since taking office. He has overseen reducing the corporate income tax rate and instituted a program of tax rate cuts for middle-income taxpayers. (Tax Foundation)

Staying competitive is particularly challenging due to the pandemic. States are struggling to restore their economies as many small businesses have closed. Remote working has meant consumers are spending less money during their commutes. State revenues could also be impacted if conditions lead businesses or workers to leave the state.

Telecommuters will still be subject to state income taxes if their employer’s principal office is located in New York. In October, the New York Department of Taxation updated its guidance on the state’s “convenience of the employer” rule. The Department ruled that those working remotely due to the pandemic will generally be subject to New York state income taxes. The Supreme Court of the United States (SCOTUS) has been asked to rule on the legality of cross-border taxation, but there is no timeline for when SCOTUS will make a decision.

Outmigration trends

Would New Yorkers flee from higher taxes? State and business leaders have monitored outmigration trends for years. Between 2010 and 2017 (most recent data), New York lost a net 963,182 residents to outmigration. In total, these individuals earned about $51 billion in annual adjusted gross income, the Tax Foundation reported.

The question is whether the pandemic will accelerate these trends. International immigration to New York had largely offset domestic outmigration prior to the pandemic, but travel restrictions led to a steep decline in visa issuances in 2020. The economic pressure on business may be most visible in New York City. Workers are coming back, but at a slower pace than in other major cities. Just 10% of Manhattan office workers had returned as of late October, according to The Partnership for New York City. Responding businesses expect 48% of their employees to return by July 2021.

New York leaders are optimistic. In his state of the city remarks, New York City Mayor Bill DeBlasio highlighted a plan for recovery, stating that remote city workers would return to their offices in May. Many have already returned.

And Governor Cuomo released his 2021 agenda to “Reimagine, rebuild, and renew.” Among the goals are reopening the state, rebuilding infrastructure, and boosting its green energy program, creating 50,000 jobs.

What’s on the table

In addition to the budget adjustments related to federal aid, the FY 2022 executive budget includes proposed new sources of revenue. The state is asking lawmakers to approve bills legalizing mobile sports betting and the sale of recreational marijuana. These new revenue sources could raise up to $850 million per year when implemented.

In the coming weeks, the state legislature will introduce its own budget proposal. The next fiscal year starts April 1.

On December 11, 2020, S&P Global Ratings affirmed its AA+ rating on the state’s general obligation debt, and revised its outlook to negative from stable due to “looming budget uncertainty.” The bond rating will be reviewed again at the end of the first quarter.

Putnam’s municipal bond experts are looking closely at the budget burdens on states caused by the Covid-19 pandemic, and how these factors, among others, could affect the relative value and credit risk of bond issues, including New York municipal bonds. Putnam continues to view the State of New York as well positioned from a financial and governance standpoint, and we believe the state has the tools available to weather the pandemic.


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