NY Governor Faces Pressure to Raise Taxes Amid Budget Crunch

New York Gov. Kathy Hochul (D) is facing pressure from progressive groups and lawmakers to raise taxes on the wealthy and find new revenue streams, with the state facing multibillion budget gaps in the years ahead.

The push comes as Hochul prepares to give her State of the State address in early January, outlining her priorities for the new legislative session and upcoming budget negotiations. Invest in Our New York, an advocacy group launched in 2021 to raise taxes on the rich and corporations, is backing bills that would impose an additional tax on investment income and an heir’s tax for inheritances over $250,000.

The powerful Black, Puerto Rican, Hispanic, and Asian Legislative Caucus—a group of roughly 70 lawmakers—is supporting higher tax rates for millionaires and a credit limit on the state’s pass-through entity tax.

Hochul has said she won’t raise income taxes, and she has instructed agency heads to keep spending levels flat from the year before. She also has said the state is considering limiting financial support for migrants. With every seat in the Assembly and Senate up for grabs in next year’s election, pushing politically unpopular tax hikes in a state with one of the highest tax burdens may prove challenging.

Still, New York’s grim fiscal outlook means tax fights are poised to take the stage ahead of the April 1 state budget deadline, particularly as New York City grapples with its own budget challenges. And lawmakers have shown some interest in raising taxes on high-income earners in the past, with both chambers last year including tax increases for filers making over $5 million in their budget proposals.

“Part of the dynamics that make this year different from last year, one of them is the projected budget deficit, one of them is the governor’s communication around flat spending,” Carolyn Martinez-Class, the Invest in Our New York campaign manager, said in a December press conference. “I think that’s a massive concern to the Legislature and to other stakeholders. So those conditions create some possibility and urgency around the package of bills.”

‘Not Sustainable’

Like many state leaders, Hochul has been able to lean on budget surpluses the last two years because of strong stock market gains and the influx of federal Covid-19 money. But New York, which relies heavily on personal income taxes from high earners, is contending with a drop in tax collections with high interest rates and persistent inflation contributing to weaker economic growth.

Tax revenue declined in 40 states, mostly because of steep declines in personal income taxes, according to a November report by the Urban Institute, a Washington-based think tank. The largest revenue drops were in California and New York, where total state tax revenue declined 34.3% and 18.3%, respectively, in the second quarter of 2023 compared with the previous year.

When money was still rolling in, New York shored up its rainy day reserves and bought the state some time to grapple with dwindling revenue, Lucy Dadayan, principal research associate at the Urban-Brookings Tax Policy Center, said in an interview. But states, particularly those that made permanent tax cuts, soon will have no choice but to look for new funding streams, she said. In fiscal 2023, New York accelerated income tax cuts for the middle class and offered one-time property tax rebates to more than 2 million residents, decreasing tax collections by $2.9 billion.

“They can weather any fiscal challenges for a short time, but this is not sustainable, that’s the problem,” Dadayan said of the economic headwinds states are facing.

New York’s tax revenue is expected to decline $9.6 billion, or 8.5%, in fiscal year 2024 compared with 2023. The state is projecting budget gaps of $4.3 billion in fiscal 2025, growing to $9.5 billion in 2026 and $7.7 billion in 2027.

Meanwhile, Comptroller Thomas DiNapoli has raised concern about the number of people leaving the state and its impact on personal income taxes, the state’s largest revenue source. In 2021, more resident taxpayers were lost than during the previous two recessions combined, he reported—a decline concentrated among people with incomes below $100,000.

Tax Bills on the Table

Invest in Our New York has backed five bill proposals that promise to collectively raise $64 billion in their first year of implementation.

Two of the largest revenue raisers include a proposed billionaire’s tax (S1570), which would raise $20 billion in its first year and $1.5 billion thereafter by taxing the increase in value of a billionaire’s assets at a rate of 8.82%. Another bill, S2059, would raise $21 billion annually by adding 10 new brackets to the state’s personal income tax structure, incrementally increasing rates for single taxpayers earning at or above $450,000 and married taxpayers earning at least $500,000.

The other pieces of legislation the group has endorsed include S2162, an additional tax on long-term capital gains, and S1980, which would raise the tax rate on corporations with incomes over $2.5 million and change the amount of global intangible low-taxed income companies would include in tax calculations. Another bill, S2782, would establish taxes on inheritance income and gift income and lower the estate tax threshold.

The Black, Puerto Rican, Hispanic, and Asian Legislative Caucus has also voiced support for changes to the state’s personal income tax structure, increasing rates for millionaires, and adding a $500,000 tax bracket. Its agenda also includes expansion of the earned income tax credit, lowering of the estate tax threshold, a tax on investment appreciation, and more.

The caucus also has called for new limitations to the state’s pass-through entity tax, a workaround to the $10,000 federal deduction limit for state and local taxes. The PTET allows certain entities, such as S corporations and partnerships, to pay state income tax at the entity level instead of having their individual members pay the tax as they usually would. New York provides the individuals a credit for the state taxes paid. The credit is currently 100% and thus brings in no additional revenue to the state. The caucus has called on New York to follow Connecticut’s lead and credit only 87.5% of the tax.

E.J. McMahon, founding senior fellow at the Empire Center for Public Policy, a fiscally conservative think tank, said proposals to raise taxes on the wealthy would hit a major revenue stream for the state by encouraging millionaires to leave.

In tax year 2021, millionaires made up less than 2% of filers but contributed 45% of the state’s personal income tax revenue, according to the Citizens Budget Commission. A December report by the Fiscal Policy Institute found the state gained more millionaires between 2020 and 2022 than it lost, driven by strong financial markets.

“That does not mean millionaires returned to New York and millionaires hit by tax increases don’t care about it,” McMahon said in an interview. “It meant that their capital gains surged because the market was surging.”