By Emily Glazer and Heather Gillers
New York this week agreed to increase taxes on its most affluent
residents and raise corporate franchise taxes, aiming to boost
public finances without further hobbling an economy hit by the
pandemic and lockdowns that have spurred remote work.
Business leaders say the increases -- which would result in top
earners in New York City being charged the highest combined tax
rate in the U.S. -- could backfire by driving away the very people
and companies the city relies on for its revenue.
The $212 billion state budget plan, passed by the Democrat-run
legislature and backed by unions and advocacy groups, includes more
aid for schools, tenants and small businesses. It also funnels
billions into other progressive causes, including investment in
renewable energy, money to boost nonprofit arts and cultural
centers and payments to workers who don't qualify for federal aid
because of their immigration status.
New York is having a slow recovery. The state's unemployment
rate of 8.9% in February, the most recent data, is second highest
among the 50 states and the District of Columbia.
Executives at New York City's largest employers had rallied
against increasing taxes in calls to state and local officials,
saying higher rates weren't necessary to ensure an economic revival
and would worsen problems by draining budgets if companies and high
earners leave for good.
The risk is especially high, they say, since companies have
discovered in the work-at-home lockdown that they didn't need to
keep employees in New York City. For some, the high cost of a
flagship office in Manhattan is no longer worth it, and they are
taking workers elsewhere, contributing to the commercial-property
Elliott Management Corp., Icahn Enterprises LP, Silver Lake,
Blackstone Group Inc. and Moelis & Co. are among the firms that
have either moved their headquarters or opened new offices in
Florida in the past year. Goldman Sachs Asset Management is
considering plans to expand in Florida, which has no state income
tax. JetBlue Airways Corp. said it was looking at moving its
headquarters to Florida when its New York City lease expires in
A number of other white-collar employers are embracing a hybrid
model that will allow workdays at the office and at home, a shift
already reducing office space needs at some companies. Last month,
Citigroup Inc. told staffers that some should expect to come back
to work only three days a week.
"For every 100 employees, we may need seats for only 60 on
average," JPMorgan Chase & Co. chief executive James Dimon
wrote Wednesday in a letter to shareholders. "This will
significantly reduce our need for real estate."
Mr. Dimon said the bank would continue plans to build its new
Park Avenue headquarters in Manhattan, accommodating as many as
14,000 employees. He supports higher taxes on the wealthy if it
betters society, he wrote, but corporate tax rates should be kept
reasonable and moderate.
Under the new budget, New York state income-tax rates will rise
to 9.65% from 8.82% for single filers reporting more than $1
million of income and joint filers reporting more than $2 million.
It adds two new tax brackets: Income over $5 million will be taxed
at 10.3% and income greater than $25 million will be taxed at
10.9%. The budget also increases New York's corporate franchise tax
to 7.25% from 6.5% through 2023.
"There's never been an experiment like this," said George
Walker, chairman and chief executive of investment manager
Neuberger Berman. "We've never had people leave for over a year and
then ask them, 'Do you now want to move back to this materially
higher tax jurisdiction?' "
New York was the No. 1 state for population loss in the U.S.
from July 2019 to July 2020, according to Census Bureau data. More
than 300,000 New York City households in higher-income
neighborhoods filed change-of-address forms with the U.S. Postal
Service from March to October last year.
New York City's budget deficit in the 2020 fiscal year, which
ended June 30, was a less-than-expected $1 billion, with the
pandemic's economic disruptions offset by a surging stock market.
The city forecasts a budget shortfall of $4 billion-plus in the
2023 to 2025 fiscal years, affecting the more than nine million
people who live and work there.
The New York City Independent Budget Office, a nonpartisan
publicly funded agency, said this week real property tax revenue,
typically a source of revenue growth for the city, was expected to
shrink by $1 billion in the 2022 fiscal year because of
pandemic-related declines in rental income for commercial
properties and residential apartment buildings.
Property values of hotels and retail space fell more than 20% in
fiscal 2021 compared with 2020; office buildings fell 15%, and
multifamily residential fell about 8% in the same period, according
to the city comptroller's office.
The result was the largest decline in property tax receipts
since 1996. Residential and commercial property together made up
about half the city's tax revenue in fiscal 2019.
On the West Side of Manhattan, the $25 billion Hudson Yards
development has hundreds of unsold condominiums, empty offices and
closed shops and restaurants. Roughly $2.7 billion in outstanding
Hudson Yards specific bonds were issued to pay for the 7 subway
line extension and for public parks and housing. The city is
responsible for bond payments if revenue from property owners in
the Hudson Yards district falls short.
A spokeswoman for real-estate firm Related Cos., which developed
Hudson Yards, said there has been momentum in condo sales in recent
months and office tenants are accelerating return-to-work
New York City could see a surging economy if the federal
stimulus -- and the end of the pandemic -- drive growth in the
second half of this year, city officials said.
Tech companies are still drawn to the city, and they could
provide more of a boost. Amazon.com Inc., Facebook Inc. and
Alphabet Inc.'s Google have pledged to expand in New York City,
though some are spending less than their pre-pandemic
Edward Skyler, head of public affairs at Citigroup and a former
deputy mayor in the Bloomberg administration, said the pandemic may
be more challenging than past crises because of remote work, the
uncertain return of tourism and potential cuts to social services
and public-safety budgets.
"We did not see these really big challenges to the city's
financial stability after 9/11 and the financial crisis," he said.
"If you cut the services that protect public safety and quality of
life, then the place becomes less livable. That's the sort of 1980s
spiral that left us with over 2,000 murders a year. That's the
place where you do not want to be."
The number of shootings rose sharply in New York City last year
Municipal financing, one of New York City's longstanding
defenses against fiscal shortfalls, also was weakened in the
In October, Moody's Investors Service downgraded New York City,
citing the fallout of Covid-19, and kept its outlook negative,
meaning the rating could drop further in the next 12 to 18 months.
S&P Global Ratings in December revised its outlook on the
city's AA rating to negative, which typically means a one in three
chance the rating will be lowered within two years. Fitch Ratings
that month downgraded the city to AA- from AA. The moves likely
added to the city's long-term borrowing costs.
Bondholders are demanding more interest to hold New York City
bonds relative to other municipal debt than they did before the
pandemic. Thirty-year New York City bond yields averaged about a
quarter of a percentage point higher than the AAA rate in the year
that ended on March 1, 2020, according to Refinitiv Municipal
Market Data. That average spread has more than doubled in the year
New York City mayoral spokeswoman Laura Feyer said the direct
fiscal impacts of the rating and outlook changes were minimal, and
the city has met all its borrowing needs at attractive rates. The
city had a record $1.4 billion reserve in the 2020 fiscal year, she
The city has begun cutting payroll: It will have 12,000 fewer
workers by fiscal 2022, which the mayor's office estimates will
save $350 million.
New York City officials see mass vaccinations and the Biden
administration's $1.9 trillion stimulus as a turning point. The
federal legislation includes as much as $100 billion in state and
local aid for New York, much of it earmarked for infrastructure,
mass transit and small-business programs. New York City is slated
to receive nearly $6 billion in direct federal aid and $4.5 billion
New York's tax proposals were the focus of talks in past weeks
among the heads of banks, insurers, law firms, real-estate
companies and media firms in the Partnership for New York City, a
nonprofit group that represents the city's business leaders and
nearly all of the city's largest employers.
"We didn't necessarily persuade representatives in the
legislature to go our way," said Steve Swartz, chief executive of
media company Hearst Communications Inc., which employs about 3,000
people in New York City and occupies more than 1 million square
feet in Midtown Manhattan's Hearst Tower. Hearst remains committed
to New York, he said after news of the budget deal.
Mr. Swartz, co-chair of the Partnership, said he and other
members have more worries about persuading highly compensated
finance and professional services employees to return to the city
after months of working remotely.
"We just don't know what the result of this Zoom culture is," he
said. "It's not the question of if they're going to leave, it's if
they're going to come back."
Pressure on New York also comes from geographic competitors. In
February, Florida's chief financial officer sent a letter to the
New York Stock Exchange touting the advantages of moving to the
The chief executives at several financial firms said they were
contacted by Miami Mayor Francis Suarez about Florida's lower taxes
and warmer weather. Mr. Suarez didn't respond to requests for
Blair Effron, who co-leads investment bank Centerview Partners
LLC, said he knows of companies that have moved out of New York or
are thinking about it. He is staying put, he said.
Mr. Effron has worked at the office most of the week over the
past months, and he hopes a majority of employees will join him as
early as this summer. Centerview is primarily an in-office
institution that relies on the kind of collaboration best done in
face-to-face conversations, he said.
He and others say the arts, culture and sports of New York City
are incomparable as well as more accessible with the past year's
decline in housing costs. "If you want to live in a city with all
the benefits of what the city brings," Mr. Effron said, "you're
Write to Emily Glazer at firstname.lastname@example.org and Heather
Gillers at email@example.com
(END) Dow Jones Newswires
April 08, 2021 15:33 ET (19:33 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.