What if we lose too many rich people?
To the delight of the city’s rat population (and the dismay of the rest of us), garbage was not getting picked up as quickly as usual this summer. Facing a sudden budget shortfall resulting from the COVID-19 pandemic, Mayor Bill de Blasio and the City Council cut $106 million from the Department of Sanitation’s budget in June, leading to reduced trash collection. The mayor has since walked back some of the cuts under pressure from business executives. But the piles of garbage — literal and proverbial — may only grow bigger. This may be the beginning of a prolonged budget crisis for the city.
New York is facing an estimated $13.5 billion revenue loss through 2022. Typically, it takes three or four years for a recession to impact the city’s tax revenue. But because the pandemic closed businesses and confined people to their apartments (or drove them out of town) almost overnight, there was an immediate impact on the city’s tax collection. “This [crisis] came fast and furious,” said Maria Doulis, vice-president of the Citizens Budget Commission. “It was unprecedented to suffer a steep decline in current-year revenue in the middle of the fiscal year. Now it’s very serious.”
Beginning in mid-March, sales and income-tax revenue fell precipitously, requiring the state to make immediate adjustments to the budget. At the end of June, the City Council and the mayor agreed to a budget for 2021 that included a variety of cuts and shifts that would save the city $1 billion. But there are no easy answers for what comes next. Making matters worse: de Blasio and Cuomo don’t get along, the NYPD’s political grip on City Hall remains firm, and it is possible that Donald Trump might be reelected.
The wealthy leaving the city:
The New York Times estimates that roughly 5 percent of New York City residents left town this spring and summer. This is evident in Manhattan’s housing market, where vacancies are rising, rents are falling, and sales prices are (finally) in decline. Seeing their work dry up, some moved to places where rent is cheaper to wait out the crisis. Many of the most affluent spent lockdown in second homes which now — after more than six months —could technically be considered their primary residences. The “flight to the suburbs” narrative is a bit overblown, but it’s still happening some in New York City. The longer it takes for these people to return (or be replaced by other high-earning professionals), the more damage the city’s budget will endure — damage that could lead to drastic cuts to services like trash pickup and the subway system. Those cuts, in turn, could incentivize more New Yorkers to leave the city (either temporarily or permanently), creating yet more holes in the budget — a vicious cycle.
Rich people may be part of the reason the city is unaffordable, but they also pay a lot in taxes and tend to spend more when they eat out, shop for clothing, hire personal trainers, buy art, remodel their homes, or go to the opera. In the worst-case scenario, this cycle spirals out of control, ushering in a new depression rivaling the mid-1970s crisis that almost led New York City to bankruptcy.
Where those well-off people reside — and where they end up paying taxes — will have an outsize effect on city (and state) budgets. Personal income taxes made up 13.8 percent of all revenue for the city in 2016, and workers earning more than $500,000 paid 47.7 percent of the city’s personal-income tax. On the state level, personal-income taxes made up 30.7 percent of revenue in 2016, and workers earning more than $500,000 paid 46.2 percent of New York State’s personal-income tax. If the city and state can no longer collect taxes from the wealthiest residents — many of whom have decamped to homes in Connecticut and Florida — their budgets will have to compromise dramatically. Sales-tax revenues would presumably fall as well, and property-tax revenues might fall, too, should the loss of population cause home valuations to drop across the board.
New York City has been steadily losing population for a few years now — in part because it has become unaffordable. And recent legislation aimed at taxing the wealthy — like the 2019 “mansion tax” and the new cap on state and local tax deductions implemented by the Republican tax law in 2017 — may offer further incentive for wealthy New Yorkers to relocate.
Cuomo versus de Blasio
The mayor and the governor are both Democrats, but they are hardly chummy. The two openly feuded over MTA funding in 2017 and even wrestled over who had the authority to shut down the city when the pandemic hit in March. Their relationship — or lack thereof — could have huge consequences in the coming budget crisis.
While the State Legislature has given the Metropolitan Transit Authority and Cuomo the authority to borrow money to cover short-term operating expenses during the pandemic, it has so far balked at the idea of giving that authority to de Blasio — despite his repeated pleas to borrow $15 billion. Cuomo has lectured the city on the ills of borrowing to cover operating expenses, but the city has had borrowing authority since the 1970s and hasn’t yet fallen into fiscal oblivion. It took out $2 billion in loans, for instance, in the aftermath of 9/11.
Trump to City: Drop Dead
Might the city get a bailout from the feds? The city benefited from a federal-aid package earlier in the pandemic, receiving $1.9 billion. But Congressional efforts to pass another aid package have stalled.
More concerning is President Donald Trump’s hostility toward his home city, which he abandoned early in his presidential term for Florida. Trump, in his reelection campaign, has declared that he is the only man who can save the suburbs from the carnage in the “Democrat cities.” Carnage that is, to a large extent, nonexistent. His Department of Justice labeled New York City an “anarchist jurisdiction” this month. But walking the streets of Manhattan, where many New Yorkers are happily sipping $25 cocktails at outdoor streeteries, one might wonder where — exactly — the “anarchy” is.
Can we tax our way out of this?
But raising taxes on millionaires at this particular moment in time could backfire, given that the budget crisis has been largely triggered by … millionaires leaving the city to avoid paying taxes here. The fear is that rich people have the resources to pick up and move, and you don’t want to drive even more of them to Palm Beach for good. There are other options as well. For instance, taxing marijuana — but we’d have to legalize it first, and it wouldn’t be a silver arrow for the city’s budget problems even if it was legalized.
Or stick it to the labor unions?
If the city can’t find the money, it will have to resort to more cuts. The revised 2021 budget — announced in June — doesn’t actually contain all that many, according to Doulis, and the plan calls for that $1 billion to be found in unspecified labor savings. A failure to find those savings could result in as many as 22,000 layoffs, according to de Blasio. The Citizens Budget Commission notes that more than 95 percent of municipal employees don’t pay anything toward their health-insurance premiums, and a modest contribution would result in $531 million in savings. The unions would no doubt have something to say about that.
The revised budget also cut $474 million from the NYPD budget. Most of that comes from specifying a one-time reduction in overtime expenses that won’t recur; overtime spending for the NYPD has ballooned in recent years, from about $600 million in 2014 to $820 million in 2020. Amid a wave of protests across the country sparked by George Floyd’s murder in May, activists have been calling for cuts to NYPD’s budget. But it’s a politically thorny path to take for de Blasio, particularly given his fraught relationship with the cops.
In fact, almost every path forward for the city is thorny. And external factors beyond the mayor’s control will ultimately determine how the budget crisis pans out. Chief among these factors is, of course, how the pandemic unfolds. If the city is forced into another lockdown, it’s not hard to see how the situation could spiral out of control.
In other words, be prepared to deal with more garbage.