COVID 19 Disrupts Municipalities—Will Taxing Millionaires Accelerate Outmigration?

Apart from some high-profile downgrades, the muni credit markets finished 2020 buoyed by breakthrough vaccines and signs that state and local tax collections were better than anticipated. That said, many governors still face tough choices when it comes to budget
shortfalls: they must either raise revenues, cut spending, or both. Our Director of Municipal Bonds, Ben Barber, and Director of Municipal Bond Research, Jennifer Johnston, explain why tax revenues have rallied unexpectedly for California, and explore if working remotely will accelerate outmigration from New York City.

New York Governor Andrew Cuomo didn’t mince words last April. In the wake of budget shortfalls triggered by COVID-19, Cuomo promised to cut state spending by $8.2 billion. It wasn’t an idle threat. Lawmakers in the Albany capital gave Cuomo unilateral authority to make broad cuts based on projected revenue shortfalls. Because raising taxes was off the table, the only way to avoid spending cuts was either direct federal aid to replace lost revenues, or if revenues turned out better than forecast.1 Fast-forward to January 2021, and Cuomo is now contemplating an approach New Jersey recently adopted: raising taxes.

Progressive Tax Increases

Back in September, New Jersey Governor Phil Murphy convinced state lawmakers to implement a progressive tax increase on residents earning $1 million or more. By raising the state’s top marginal rate from 8.97% to 10.75%, New Jersey now has one of the highest personal income tax rates, trailing just California (13.3%) and Hawaii (11%). That tax hike, however, wasn’t enough to hold off a credit downgrade in early November, due to the state’s hefty structural deficit. Following the downgrade, New Jersey issued an emergency $4 billion COVID-19 bond to help close the state’s budget gap. Driven partly by scant tax-free muni supplies, New Jersey’s one-of-a-kind bond was nearly 10 times oversubscribed. Given low rates, many issuers could refinance tax-exempt bonds with taxable munis and still achieve lower yield—doubling taxable muni issuance to $140 billion in 2020.2

Would raising New York’s top income tax rate solve Cuomo’s budget shortfall? Let’s start by reviewing California’s progressive tax structure to see how the Golden State weathered the COVID-19 storm last year.