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 slump.

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 2023.

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 plans.

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 forecasts.

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 .

Known unknowns

Municipal financing, one of New York City's longstanding defenses against fiscal shortfalls, also was weakened in the pandemic.

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 since.

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 said.

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 for education.

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."

Sunshine suitors

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 Sunshine State.

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 comment.

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 coming back."

Write to Emily Glazer at emily.glazer@wsj.com and Heather Gillers at heather.gillers@wsj.com

 

(END) Dow Jones Newswires

April 08, 2021 15:33 ET (19:33 GMT)

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