Archive for May 13th, 2009

The New York State Budget is a Travesty!

There was a point in time when I was applauding the Governor for his position on the state budget. Very early on, he was beating the drum of favoring reductions in government spending as the way to solve the state budget deficit. He gave speeches and lobbied for spending cuts. At the end of the day, this positon was abandoned and 80% of the pending budget deficit of approximately $17.7 billion will be bridged by 137 new taxes, fees and charges that New Yorkers did not have to pay before.

Recently, the New York State Legislature passed a$131.8 billion budget, an increase of 10.1% or $12.1 billion over last year. State officials have maintained that the growth in spending is the result of spending the Federal economic stimulus funds. Unfortunately for state officials, we were paying attention in first grade and know how to count. Excluding the federal stimulus funds, state spending increased by 4.7% or $5.9 billion. This increase is greater than the rate of inflation by a long shot and is much greater than the increases in budgets of most businesses around the state.

New Yorkers will have to pay more taxes than before as local politicians would not allow NY to take second place to any other state in terms of the taxes that we pay. For a short period of time we were no longer the highest taxed state in the country, but that lasted for only a nano-second. New taxes, fees and stimulus funds from the government account for almost 80% of the deficit gap. Genuine spending cuts represent only 20% of the deficit reduction.

New York state’s economy will be much worse off due to this increase in spending.  Businesses and families are getting by via cutting costs and doing more with less but the State cannot seem to get it. This stimulus money will not come every year and the tough decsions have simply been put off. This budget does not address the structural problems in the state’s finances that will surely re-emerge when the stimulus funds cease. And how long can these personal income tax increases stay with us until New Yorkers head for New Jersey or Connecticut?

The new taxes which will help to bridge the budget gap are estimated at $4.1 billion consisting of income taxes on taxpayers with incomes above $200,000 (the same group the City Council believes is in need of rent welfare) including sub-S Corps, LLCs and partnerships. New York state residents earning over $200,000 will see a state tax increase of 12.7% and those earning more than $500,000 will pay 23.6% more. These tax increases are scheduled to expire in three years. Do you really think they will?

Running a municipality is just like running a business. You have revenue and expenses. When revenue is down, you have to adjust expenses. Why don’t any of our elected officials understand this? The federal government has been berating anyone who makes a decent living, many of whom are New Yorkers working on Wall Street. Additionally, the state has decided that TV commercials criticizing potential budget cuts are like pouring salt on a slug and they can’t bear to see them so they wilt and continue to spend when there is no money to spend. Is there a backbone out there somewhere? High school biology taught us that vertebrates are supposed to be more evolved than amoebas which seem to be calling the shots when it comes to balancing our budget.

What are the implications for our real estate market? The added taxes will translate into reduced consumer spending which will hurt retailers. Expect downward pressure on retail rents and increased vacancy. While decision makers do not believe so, look for people to leave the City for lower cost alernatives. This dynamic has begun which will add negative pressure to home prices and add downward pressure to residential rents. Lastly, with so many of these taxes aimed at business, look for businesses to also consider lower cost alternatives which will add downward pressure to office rents with incresed vacancies. In order to make ends meet, these businesses will have to continue reducing payroll, adding to an already high unemployment rate.

This year was a great opportunity to make fundamental changes in our financial structure and that opportunity has been missed.

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