Warren Buffett famously said that “It’s only when the tide goes out that you learn who has been swimming naked.” Now that the absolute tidal wave of Covid stimulus money is finally receding, states that have been relying on that money to avoid painful budget realities will be exposed. The editors of The Wall Street Journal explain what future awaits many of the high tax, big spending states as the Covid money runs out:
New York State Comptroller Thomas DiNapoli said Friday that state tax collections in the past two months are running 32.2% lower than a year ago, with personal income tax revenue lagging 45%. His report follows Gov. Kathy Hochul’s revised budget forecast this month projecting a $36.4 billion shortfall over the next three years.
While income-tax withholding is still increasing as payrolls grow, capital gains have fallen. Democrats in Albany exacerbated the state’s fiscal reliance on the rich in 2021 when they raised the combined state and New York City top rate to 14.8% from 12.7%. Millionaires now pay as much state income tax as the bottom 98.9% of tax filers.
Cities may also soon feel budget pain since year-over-year growth in local sales tax collections has run below 2% in each of the last three months, Mr. DiNapoli warns. That’s well below the rate of inflation. No doubt one contributing factor is New York’s loss of some 525,000 in population between 2020 and 2022.
Yet Democrats in Albany this spring boosted spending by $9 billion in their $229 billion budget. New York City Mayor Eric Adams last week reached generous five-year labor agreements with 11 government unions. Teacher pay will increase by about 20%, raising the top salary to $151,271.
Next door in New Jersey, officials reported Monday that tax revenue last month declined 20% from the previous May, driven by a 55% plunge in income-tax, and 44% drop in corporate-tax, collections. Income-tax revenue in the current fiscal year that began last July is running 9.2% lower than in the previous year while corporate-tax revenue is down 5.7%. For the first time in nearly three years, sales tax revenue in May also dropped.
Recall that Democrats in Trenton raised income taxes and extended a 2.5 percentage point corporate surtax in autumn 2020. New Jersey’s 11.5% top corporate tax rate is now the highest in the country. Gov. Phil Murphy has said he wants the surtax to expire this year, but don’t count on it.
Time and again, progressives use putative budget emergencies to impose supposedly temporary tax increases that invariably become permanent as the revenue is baked into spending baselines. This is what happened in California in 2012 when Democrats raised the top rate to 13.3%.
California’s budget has since become even more dependent on the affluent. The top 0.5% of taxpayers pay 40% of state income tax, and their capital gains have plunged. Income-tax collections in the fiscal year that started last July are 34.6% below a year earlier and corporate-tax revenue is down 33.7%. Gov. Gavin Newsom last month increased the state’s projected budget deficit to $32 billion, but revenue is already trailing his revised forecast.
By contrast, tax revenue in Florida is exceeding forecasts. Florida’s corporate-tax revenue—at a 5.5% rate—during the first 10 months of this fiscal year is up 57.7% year-over-year. States tax corporate income based on the share of business done in their borders. So while corporate earnings generally are shrinking, Florida appears to be grabbing a larger share of profits as businesses expand in the state. The opposite may be happening in California, New York and New Jersey.
Action Line: Read that last paragraph again. Florida, with no income tax, has revenues exceeding its forecasts. If you’re in a state that treats you like a piggy bank, it’s time to move out. Click here to subscribe to my free monthly Survive & Thrive letter and make yourself a Survivor.
