This week's surprise announcement from Governor Andrew Cuomo was the alarming news that the state budget was missing $2.3 billion in expected tax revenues from December and January — and that Trump's tax cuts were to blame.
As the governor put it in his Monday press conference:
We've set up reserves, but this is worse than we had anticipated. It is not a New York only phenomenon. It's states that are suffering under SALT. Especially in the Northeast. New York is down 50 percent, Jersey is down 35 percent, Connecticut 55 percent, Massachusetts 50 percent, California 24 percent.
Cuomo continued: "If you lose $2.3 billion, you have $2.3 billion less to spend—that is simple, undeniable math. And you look at our funding priorities, it's education, it's healthcare, it's infrastructure and we have a middle class tax cut. Those are the main expenditures. Those would be the main areas that would be affected by a cut."
SALT, for those who aren't up on their tax-law lingo, stands for State And Local Taxes, which until last year could be deducted on taxpayers' federal returns. The 2017 Republican-backed tax reform plan — in what most observers agreed was a calculated attack on Democratic-run states with high local taxes — eliminated the deduction, meaning that New Yorkers (and Californians, and Massachusettsans) would end up being taxed twice on the same income.
Okay, so it sucks to be a New York state taxpayer under Trump. (You may have already realized this if you've started doing your taxes this month, though an increase in other available deductions partly compensated many lower-income residents.) But if New Yorkers are still obligated to pay the same state taxes — just now having to pay the IRS more as well — how does that translate into less revenue for the state, and potential service cuts?
The answer, it turns out, is twofold: Cuomo's announced shortfall is part accounting trick and part tax-shelter arbitrage by some of the state's wealthiest residents. And the trouble is, no one can tell yet which is the main factor — so the $2.3 billion gap could vanish by April, or be all too real.
The key to understanding what's going on with state tax revenues lies in this chart from the governor's office:
The shortfall, it turns out, is in estimated tax payments made by New Yorkers in anticipation of having a large state tax bill in April. (Also known as "quarterlies," estimated tax payments are familiar to all freelance and self-employed workers, but are particularly common among financial industry workers like hedge fund or private equity managers.) And while the state has received less in estimated taxes this December and January, it saw almost as large an increase last winter.
Last year's bump, it turns out, was almost certainly the result of the Trump tax law. "A lot of these guys did pay more in 2017 to get in before the tax law changed," says Morris Peters, a spokesperson for the New York State Division of the Budget. "We expected the up — we also expected the down. We didn't expect the down to the extent that we saw it."
Indeed, estimated tax payments this December and January were not just down $2.3 billion from the budget division's projections, but down $1.2 billion from two years ago, before the Trump bump. So something is clearly going on — the question is what?
Cuomo's answer was clear: Wealthy New Yorkers are responding to their increased tax bills by decamping for lower-tax states. "SALT encourages high-income New Yorkers to move to other states," said Cuomo on Monday. "Tax the rich, tax the rich, tax the rich. We did. Now, God forbid the rich leave." Florida, he noted, has no personal income tax — and no estate tax either, making it an alluring relocation target for anyone seeking to hide their earnings on tax day.
There are reasons to be skeptical of the idea that New York's wealthy all up and moved to Tampa over the last 12 months. Previous studies have shown no evidence that high-income earners disproportionately flee states where their taxes have increased.
Still, there are reasons to believe that this might be an exception to the rule. First off, earlier state increases on taxes on the rich were much lower—between 1 and 3 percentage points, whereas the effective tax hike in New York from the SALT changes is a little over 5 percentage points for top earners. That could be enough to tip the balance for potential relocators, especially those who already have second homes in a low-tax state like Florida.
There have also been some reports from real estate industry insiders in Florida that more out-of-state buyers have been spotted purchasing local property in the wake of the federal tax law changes.
"These are things we are hearing anecdotally, from the small universe of people who are super-rich," says Peters, though he says more evidence will likely have to wait until tax filers declare their states of residence in April.
The fact that other states are reportedly seeing similar dropoffs in tax receipts only makes it more likely that New York's millionaires are starting to take their tax ball and go to new homes. Center for Economic and Policy Research senior economist Dean Baker, who has closely followed the potential impacts of the new tax law—and advised New York on ways to blunt its impact—says it's at least "plausible" that many dual-state residents are now claiming Florida or other low-tax states as their primary residences.
Either way, Cuomo's statements appear to have at best jumped the gun on assuming that the tax shortfall is a trend and not a blip. The governor, in fact, has pulled similar maneuvers before: The Buffalo News has reported in detail how annual budget gaps are an accounting trick that the governor last year used to predict a $4 billion budget hole, which disappeared entirely by the time the final budget was enacted on March 31.
Assembly speaker Carl Heastie — who formerly worked in the state comptroller's office — is for one urging everyone to step back and take a deep breath:
Responding to @NYGovCuomo’s projection that there is a $2.3 billion revenue shortfall because of the SALT cap, Speaker @CarlHeastie says "it’s still a little too early to determine what we can or can’t do. I still want to see what this is— is it just a blip or a delay." https://t.co/kqKVbGFawF
— Josefa Velasquez (@J__Velasquez) February 4, 2019
"The question is," concludes Peters: "Is this a change in how people are spreading out their tax liability over the year?” Or, he wonders, are the raised tax costs of residing in New York “changing [people’s] behavior in a much more profound way?"
Or to put it another way: Has the national GOP's plan to siphon off trillions of dollars to the wealthy had the side effect of encouraging Wall Street barons to hide their winnings in swampland in Florida? One thing is certain: No one knows.