State Budget Outlook, More Information Due Soon

Wednesday, November 1st, 2017 at 12:24 pm by

Yesterday, State Comptroller DiNapoli released a report warning that the state faces a “triple threat of fiscal risks” from the combination of “projected budget gaps, weaker than expected personal income tax collections and cuts to federal programs.”

By law, the Governor’s Budget Division publishes quarterly updates on the state’s financial plan – the plan for implementing each year’s budget. The first quarter update, released in early August, projected a $4 billion structural deficit for 2018-19.

For perspective, a $4 billion deficit is equivalent to about 4 percent of projected expenditures. The corresponding figure a year ago was 2.7 percent, and when Andrew Cuomo took office as Governor, he faced the task of closing a structural deficit equivalent to more than 10 percent of projected expenditures.

The Comptroller’s report explains that there has been further weakening of state tax revenues since the first quarter update was released that could lead to a deeper deficit. Through the state’s second fiscal quarter (July-September), personal income tax (PIT) receipts were $371 million below the August update projections and $1.1 billion below projections when the current state budget was enacted.

The weakness in PIT receipts has been concentrated in estimated payments made quarterly by high income residents and self-employed business owners. The Comptroller’s report explains,

Estimated payments made with requests for extensions to file annual tax returns declined by over $600 million from the same period in SFY 2016-17, and were nearly $1.2 billion lower than anticipated in the Financial Plan Update released in February 2017. Over the first six months of the current fiscal year, quarterly current year estimated payments for the 2017 tax year have declined $87.7 million, or 1.6 percent, from the same period last year. The most recent Financial Plan projects current year estimated payments will increase 13.9 percent, or $1.5 billion, by the end of the fiscal year.

There is speculation that high-income taxpayers may be delaying taking profits and claiming bonuses for now in anticipation of a big federal tax cut. But as this blog post by the Empire Center’s E.J. McMahon explains, in the past, the biggest income-timing shifts have been tied to expected changes in capital gains tax rates. No changes in that federal tax component are on the table this time around, however.

PIT receipts from withholding are up from a year ago, but running below the projected level of growth (4.8 percent versus 5.2 percent)

A day earlier, the Comptroller released encouraging news that Wall Street profits are up substantially from a year ago. In a news release, the Comptroller reported,

Securities industry profits totaled $12.3 billion in the first half of 2017, one-third higher than the $9.3 billion earned in the same period last year, putting Wall St. on pace for a second consecutive year of higher profits.”

The level of bonuses paid in the financial sector at the end of the year will influence whether the state meets its projections for PIT revenue from withholding.

Total state tax receipts are $693 million below enacted budget projections, with business taxes partly offsetting shortfalls in the PIT and other sources.

Across several revenue sources, receipts in the second half of the state’s fiscal year would need to significantly exceed past patterns if budget projections are to be met.

Importantly, the Budget Division’s first quarter report did not reflect any impact from recent Congressional failures to extend funding for two health care funding initiatives, Disproportionate Share Hospital payments (DSH, for care uncovered by insurance) and the Children’s Health Insurance Program (CHIP).

The Cuomo Administration projects that the DSH cut would cost the state $1.1 billion over the next 18 months and $2.6 billion annually when fully phased-in. The state will lose another $1.1 billion if CHIP is not reauthorized, jeopardizing health care coverage for 330,000 New York children. Congress may yet act to preserve both funding sources, but that is not certain.

Within the next week or so, the Budget Division will release its mid-year update. It may bring some greater clarity to the fiscal outlook. But potential major federal actions on the Affordable Care Act, tax reform and other budget issues could compound whatever hard choices state leaders will face in the year ahead.

This entry was posted on Wednesday, November 1st, 2017 at 12:24 pm and is filed under Finance, State Budget. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.