Tax collections plunge in wake of stock market downswing

City comptroller reports estimated income tax payments are down by nearly one-third, driven by sharp drops in Wall Street capital gains.

July 13, 2022 Greg David, THE CITY

The Stock Exchange shows signs of the market slump, July 12, 2022. Photo by Ben Fractenberg/THE CITY

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This article was originally published on Jul 13 9:02am EDT by THE CITY.

In the first sign of fallout in New York from the stock market decline, collections from a key component of the income tax fell by one-third in June from June 2021, raising doubts about the revenue estimates anchoring the city and state budgets.

Estimated payments to the city, which are closely tied to capital gains realized when individuals sell stock, bonds and other assets, dropped 31% in June to $353.9 million over the same month a year earlier, according to the monthly economic report by city comptroller Brad Lander. It was the lowest total for the month since 2017. (The comptroller excluded 2020, when adjustments to tax deadlines made month-to-month comparisons unreliable.)

Sources say the state will show a similar decline when the state comptroller issues its monthly cash report later this week.

The sharp decline in estimated taxes is one of several signs that the stock market decline is rattling the city’s crucial finance industry.

Analysts say the city’s big banks and Wall Street firms are likely to report big drops in their second quarter profits ranging from 50% at Goldman Sachs to more than 20% at J.P. Morgan Chase. They expect that to translate into layoffs later this year on Wall Street, which employs 178,000 people in the city, about 2,000 below the financial industry’s pre-pandemic peak.

Pedestrians walk past the New York Stock Exchange on Friday, July 8, 2022, in New York. Stocks are falling on Wall Street on Wednesday, July 13, 2022, after a highly anticipated report on inflation turned out to be even worse than expected.
AP Photo by John Minchillo

Budget pillar

Tax collections are not the only sign of economic troubles. Just-released data shows that the amount of venture capital invested in New York tech and biotech companies in the April to June period fell 14% to $8.8 billion. While less than the 25% plunge nationally, it still represents a decline of 40% from the same period in 2021. The result is likely restrained expansion in the city’s tech sector, which showed strong growth during the pandemic.

The widely followed Standard & Poor’s 500 index has declined 19% this year — just shy of the 20% benchmark for a bear market. The NASDAQ composite index, used to track tech stocks, is down slightly more than 27%. Investors either don’t sell stocks in bear markets or, if they do, realize much smaller capital gains.

Capital gains are crucial to the state and city budgets. Gov. Kathy Hochul’s budget projected that capital gains for New York State residents would increase in the current fiscal year to more than $200 billion and would account for 18% of all the income generated in the state, which would be a record.

Capital gains represent a larger share of all income in New York than any other state, according to an analysis by E.J. McMahon of the Empire Center. More than three-quarters of all capital gains are reported by millionaires, who also pay the highest tax rates in New York.

For now, other income tax components remain strong and overall personal income collections in June were 5% above the previous year as a result of strong wage growth. But “these gains are likely to dissipate with economic growth slowing and a forecast decline in Wall Street bonuses,” the city comptroller’s report said.

The city’s $101 billion budget for the fiscal year that began July 1 projects that personal income taxes will decline by about $1 billion to $15.3 billion, which analysts say is conservative. “But if the market decline continues or we slip into a recession that stalls or reverses job growth, especially in high-wage sectors, the city’s revenues may underperform,” said Ana Champeny, director of research at the Citizens Budget Commission.

In addition to lower income tax collections, the decline in stocks and bonds will force both the state and city to increase the amount of money they will be forced to contribute to its pension plans.

Traders work on the floor at the New York Stock Exchange in New York, July 1, 2022.
AP Photo by Seth Wenig

McMahon Tuesday estimated the cost to the city will be about $4 billion over the course of the first four-year term of Mayor Eric Adams.

The key will be whether the city has put aside enough money to weather the economic turbulence.

The decline “is signaling Wall Street’s anxiety about the economy and inflation,” Lander said in a statement. “Our city needed to use the tax boon from last year to save up to prepare for the worst. It’s why I called to add nearly $2 billion in deposits to our Rainy Day Fund last budget so our City can weather the impending fiscal storm.”

More broadly, Wall Street accounted for 14% of all the economic activity in the city, about a quarter of all income on only 5% of jobs and, most importantly, almost 1 in 5 of all the tax dollars the state collects and 7% of all of the city’s tax revenue, according to the annual industry report from the state comptroller.