New York cannot TaxA tax is a compulsory payment or levy imposed by local, state, and national authorities on individuals or businesses to cover the costs of general government services, goods, and activities.
towards a balanced budget.

New York State’s recently released budget for fiscal year 2025 shows some optimism, but with caveats. According to the budget, the state’s financial situation is not as dire as the comptroller predicted last year. But even revised expectations of accelerating economic growth, even when combined with temporary tax policies that could potentially raise far more tax revenue, still cannot close the budget gap.

Compared to a cumulative deficit of $27.1 billion projected in the Mid-Year Fiscal Plan Update of the previous year’s adopted budget (released in October 2023 for the three-year period from SFY 2025-26 to SFY 2027-28), the budget for FY 2025 projects a gap of $13.9 billion, a significant reduction. This assumes a strong economy, which is expected to grow by 2.4 percent from 2024 to 2025, leading to employment growth of 1.7 percent and optimistic wage growth of 3.7 percent (nominal). This growth, combined with temporary Tax increases on the state’s top earners have led to an optimistic forecast of $236 billion higher tax revenues this year, compared to last year’s forecast of $222.4 billion for fiscal year 2024. Notably, last year’s passed budget assumed a GDP growth rate of 0.9 percent for 2024.

In its fiscal year 2022 budget, New York codified temporary increases to its personal income tax (PIT) and corporate income tax (CFT). PIT rates were increased for individuals with annual incomes above $1 million, and new tax brackets were created for taxpayers with incomes above $5 million and $25 million. The CFT rate for corporations with annual profits above $5 million was raised from 6.5 percent to a “cliff rate” of 7.25 percent, with that rate imposed on all net income rather than just the incremental value above $5 million. (Similar tax cliffs exist within the Income taxAn income tax (or personal income tax) is levied on wages, salaries, investments, or other types of income earned by an individual or household. The United States imposes a progressive income tax, where rates increase with income. The federal income tax was created in 1913 with the ratification of the 16th Amendment. Although it is barely 100 years old, the income tax is the largest source of tax revenue in the United States.
(with the lower rates for top earners being phased out.) The franchise tax provision expires on December 31, 2026, while the increased PIT rates expire on December 31, 2027.

These extraordinary measures have still not resulted in a balanced state budget, and the situation is likely to worsen in the coming years as these measures expire. In 2024, the state is expected to have a deficit of $2.4 billion, a figure that will rise to $7 billion the following year and will increase even further as these additional taxes expire.

An obvious solution that some lawmakers might consider is to extend these high taxes further or to enshrine them in law permanently. But caution is needed. At some point, higher tax rates can reduce overall revenues due to behavioral changes, and excessive tax increases can hinder economic growth. To survive in the long term, it is in New York’s interest to shed its reputation as an anti-business state, as its 49^th Ranking in the Tax Foundation Country index for the corporate tax climate. Higher taxes on businesses and capital owners also impact the middle and lower classes in the form of higher prices, making life in the state increasingly unaffordable even for those who do not directly write a check to the state and local governments. Taxpayers are gradually voting with their feet, and U.S. Census data shows that New York lost the largest share of its population to other states last year (most recent data, July 2022 to July 2023). At the end of 2023, the number of workers was 185,600 below pre-pandemic levels. In addition, New York’s labor force participation rate of 61.3 percent is lower than the national average of 62.5 percent. This is clearly not conducive to broad Tax baseThe tax base is the total amount of income, wealth, assets, consumption, transactions or other economic activities taxed by a tax authority. A narrow tax base is not neutral and is inefficient. A broad tax base reduces the cost of tax administration and allows for higher revenues at lower tax rates.
and long-term economic and tax revenue growth in the state.

Importantly, had policymakers limited spending for fiscal year 2025 to the levels projected in the still-generous fiscal year 2024, the state would have run a surplus in the current year and could have potentially either put more money in its nest egg for future economic shocks like the COVID lockdowns or cut taxes to attract more businesses. In fiscal year 2024, the state expected to spend a total of $231.6 billion in 2024-25, which would have resulted in a surplus of about $5 billion if revenue projections hold. Instead, the state now expects to spend $239.1 billion. Even that high number isn’t set in stone, and we could see it continue to rise over the course of the fiscal year.

Therefore, it seems that revenue is not the issue here. Instead, New York policymakers should take a close look at the state’s spending situation, which appears to be spiraling out of control, particularly its main drivers – public education and Medicaid. Medicaid spending is expected to top $100 billion this fiscal year, a figure that is expected to rise to a legally nominally capped $109.6 billion in 2027-2028, an increase of 9 percent. However, this does not include some items such as funding for distressed hospitals, the Healthcare Safety Net Transformation Program, etc., which are funded through other budget mechanisms. This obviously comes at the expense of the transparency and accuracy of the state’s healthcare budget, as well as the resulting overspending. The capped portion of the state’s share of Medicaid for 2024-25 is approximately $31.3 billion, up from last year’s estimate of $30.1 billion.

In addition, public education, which consumes about 28 percent of the state budget, is expected to cost the state $30.2 billion, a 5 percent increase from the last fiscal year. This is despite the fact that the number of students has actually fallen by 231,000 since 2014, when the school budget was $21 billion. This is probably not sustainable and is putting increasing pressure on state finances.

Even more troubling is that the state’s dependence on federal funds for its spending has grown to 40 percent of its budget since the pandemic. In 2024-25, the state expects to receive $94.2 billion from the federal government. While these high revenues are currently expected to continue in the next few years due to the Infrastructure Investment and Jobs Act (IIJA) and the inflationInflation occurs when the general prices of goods and services across the economy rise, thereby reducing the purchasing power of a currency and the value of certain assets. Fewer goods, services and bills can be paid for with the same salary. It is sometimes called a “hidden tax” because it leaves taxpayers with less wealth due to higher costs and “cold tax” while increasing the government’s purchasing power.
Given the Reduction Act (IRA), it is risky to assume that federal funding will remain this high indefinitely. Things could change very quickly, potentially leaving the state in the lurch. The potential end of federal SALT deduction limits and the expiration of the higher PIT and CFT also create uncertainty in tax revenues, depending on the extent to which taxpayers change their income returns from year to year and the state’s compliance with federal tax law. So if a balanced budget is the goal, New York policymakers must address the dramatic increase in spending, especially against the backdrop of an uncertain fiscal environment.

Good tax policy is important, of course. But it may not be enough for New York. And without a plan, there is always the risk that the state’s already uncompetitive taxes could get even worse.

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