New York Still Has Enough Rich People to Pay the Bills

In the early months of the COVID-19 pandemic, many people with the means to do so left New York City and New York state. With state finances in particular highly dependent on high earners’ income taxes, this was a worrying development.

The pandemic asset-price boom, plus a 2021 state income tax increase for those earning more than $1.1 million, at first overwhelmed any migration effects. As of April 2022, New York state personal income tax receipts had risen 58.5% from their 2019 levels while federal individual income tax receipts were up 49.3%. As markets slumped, though, New York’s personal income tax receipts fell much further than the federal government’s. When I wrote about the state’s income tax predicament last May, it seemed to me that the tide had gone out and revealed New York to be swimming naked, to borrow one of Warren Buffett’s favorite market metaphors.

The state was better clothed than I thought. New York state personal income tax revenue has in fact retraced all its gains since 2019, which if you factor in inflation amounts to a 16% decline. But about half the fall since April 2022 can be chalked up to a change in state tax law that allowed partnerships and S-corporations that had previously paid personal income tax to instead pay something called the pass-through entity tax. The reason for doing this is that, as a business tax, the pass-through entity tax is fully deductible from federal income taxes, while state personal income tax payments are subject to the $10,000 state and local tax deduction cap imposed by the federal Tax Cuts and Jobs Act of 2017. Add up the revenue from the personal income tax and the pass-through entity tax, and New York state’s income tax receipts are holding up about as well as the federal government’s.

New York State Tax Revenue Isn't Collapsing

As already noted, the state did enact an income tax increase in 2021, creating new tax brackets for incomes above $1.1 million for single filers and $2.2 million for married couples filing jointly that range from 9.65% to 10.9% and are set to expire after 2027. These rates apply to the pass-through entity tax as well. Without the rate increase, the state’s personal income tax plus pass-through tax receipts would probably be lagging federal individual income tax receipts by more than 5 percentage points. (The state also cut rates for some middle-income taxpayers in 2023, but the revenue losses are expected to be relatively tiny.)

In New York City, property taxes are the top source of revenue, and they brought in 6.9% more in fiscal year 2022 than in 2020, an increase that didn’t keep up with inflation — although they made up some of that lost ground in the first quarter of the 2023 fiscal year. The city also has a flattish income tax (the top rate of 3.876% kicks in at $50,000 for single filers and $90,000 for joint filers) that doesn’t reap the same windfall from asset-price increases that progressive state and federal income tax structures do. This rate wasn’t raised during the pandemic, and the city implemented its pass-through entity tax a year later than the state. Combined revenue from the two taxes has lagged federal receipts (monthly income tax statistics for both city and state are available here) and in recent months has fallen to levels that, if adjusted for inflation, would be lower than 2019’s. But the latest drop appears to be chiefly the result of payment-timing issues and refunds of overpaid 2022 taxes, with the most recent city forecasts projecting that combined revenue will bounce back to about 17% above 2019 levels by mid-year.

NYC Income Tax Revenue Is Lagging But There Are Reasons