Rebounding income tax collections and a healthy dose of Federal relief from the American Rescue Plan Act (ARPA) will head off what last spring looked like certain New York State and City budget bloodbaths resulting from the coronavirus-induced recession. 

But while there may not be blood, there will be drama.

In Albany, an historic budget showdown between an embattled governor and emboldened legislature seems all but inevitable. 

Meanwhile, City Hall will balance short-term budget gains and long-term pandemic pain. 

First, some background. A year ago, budget forecasters expected State tax collections to fall by 16 percent and City tax receipts to drop by 11 percent compared to pre-pandemic projections. Even though Washington enacted three laws providing a total of $2.5 trillion in Federal aid that helped offset State and local government Covid-related expenditures, that did nothing to make up for lost tax revenues.

However, the extreme lopsided nature of the pandemic’s economic effects meant that State and City personal and business income taxes rebounded faster than expected even though over one million predominantly low-wage New York State residents were still out of work this January.

The budget picture then brightened even more dramatically on March 11th, when President Biden signed the $1.9 trillion ARPA. It provides $12.6 billion in flexible funds for New York State’s budget and $6.1 billion for New York City, as well as $6.5 billion for the MTA, $9 billion for the state’s public K-12 schools, and $2.6 billion for higher education institutions. 

According to U.S. Senate Majority Leader Chuck Schumer, ARPA also provides an estimated $56 billion to New York State families through: direct payments; extended Federal unemployment insurance benefits through September 6th; additional nutrition, rental, and mortgage assistance; child care subsidies; and enhanced Earned Income and Child Tax Credits. 

While not curing all the problems caused by the pandemic, ARPA will enable the State and the City to mitigate many of the extreme austerity measures taken to balance their budgets for the next two years.
 
Here’s the outlook as budget adoption decisions loom, first in Albany and then at City Hall.

Albany: Echoing Nobel economist and New York Times columnist Paul Krugman’s observation that ARPA shows that “the era of ‘the era of big government is over’ is over,” an entirely new budget stance has also emerged in Albany this year. 

In advance of the April 1st State budget adoption deadline, the Assembly and Senate majorities enacted budget resolutions on March 15th that signaled a break with Governor Andrew Cuomo’s decade-long practice of tightly limiting State spending and reducing corporate and estate taxes. 

In fact, rarely have the legislature and governor diverged so greatly as they do as they head into the final week of budget negotiations.

Intent on providing further State help to communities harmed by the pandemic and  also compensate for what they see as broadly ranging under-investment, the Assembly and Senate proposed significantly higher spending in public health, education (pre-K, K-12, and higher education),  housing, transportation, and for local governments than the governor has. 

Their largest single item is $2.1 billion for an “Excluded Worker Fund” to serve those dislocated by Covid, including undocumented workers who’ve been excluded from unemployment insurance, Federal stimulus funds, and other government assistance. Both chambers also proposed spending $1 billion for pandemic-related Small Business Reopening and Relief grants, and $100 million to aid arts organizations that have seen revenues plummet. 

To help pay for these programs and to advance what Senate Majority Leader Andrea Stewart-Cousins called “fiscal equity,” the legislature proposes ambitious tax proposals that would raise $7-$8 billion annually. They include: 

• two new personal income tax brackets for those filing joint returns with incomes over $10 million and $50 million;

• a one percent surcharge on capital gains;

• higher estate tax rates; and

• higher corporate taxes.

The Senate also rejected the governor’s proposed one-year delay in a middle-class tax cut and would provide an income tax credit for middle-class homeowners “over-burdened” by property taxes. 

Democrats have super-majorities in both legislative chambers and conceivably could override a gubernatorial veto. With Cuomo weakened by recent scandals surrounding falsified reports of nursing home Covid deaths and several sexual harassment allegations, a test of wills in Albany seems likely. 

New York City: The City’s budget calendar runs later than the State’s; the mayor and City Council need to approve the budget for Fiscal year 2022 by July 1st.

ARPA funds and better personal and business income tax revenues will avert what only months ago promised to be stomach-churning choices about spending cuts, tax increases, or pleading with Albany for emergency authority to borrow for budget-balancing purposes.

Nevertheless, two major questions will cloud the spring skies over City Hall – and also hang over the June 22nd primary elections that will select the general election contenders to succeed Mayor Bill de Blasio and the largely term-limited Council. Both arise from the especially deep impact the pandemic has had on the city.

The first is how long it will take for the city’s commercial real estate sector to rebound.

The answer is crucial for New York City’s long-term fiscal health, because property taxes make up the City’s largest single revenue source (more than 45 percent of all taxes). Commercial properties account for about 40 percent of that revenue.

For now, the outlook is forbidding.

In January, New York City slashed its FY 2022 property tax revenue forecast by $2.7 billion (8.5 percent) as a result of reduced property assessments on hotels and commercial office buildings stemming directly from the pandemic’s effects on tourism and Manhattan office occupancy.

Anticipating a continuation of these effects, the City also sliced property tax estimates by an average of $2.7 billion over the subsequent three years, too.

So, while ARPA provides the City a welcome $6.1 billion in relief between now and June 2022, after that there will be a significant challenge in balancing the budget – unless tourism and business activity turn around faster than now expected.

The second and related long-term pandemic challenge is: How quickly will the city’s hardest-hit workers adjust to what is a vastly altered job market?

As recent economic reports from the Center for New York City Affairs have shown, New York City faces an enormous challenge in helping train as many as 150,000-250,000 workers whose old jobs aren’t likely to return for new jobs in unfamiliar industries. Government has an obligation to make these workers whole since their jobs were sacrificed for public health reasons.

Since it is unlikely that there will be a future Federal aid package to fund job training, the City may need to use ARPA funding not only to meet the current job market emergency but also to establish a comprehensive system designed to overcome systemic racial and gender labor market disparities. Workers in the bottom half of the wage distribution made remarkable strides in the six years before the pandemic. Job growth flourished, unemployment was driven down to historic lows, poverty fell, and real wages and living standards rose by the most since the 1960s. The City cannot afford to let the pandemic wipe out those gains.

James A. Parrott is the director of economic and fiscal policies at the Center for New York City Affairs at The New School.

Photos by Tony Shi and Wikimedia Commons.