State Comptroller Thomas P. DiNapoli reported late last week that state tax revenues for the first two months of the new fiscal year rose 25.8 percent from receipts the previous year. Do not be lulled into thinking that the increase in revenue over last year and the adopted state budget reflect a return to economic vibrancy for New York.
Instead, the 33 percent increase in income taxes collected is a direct result of federal tax changes that encouraged New Yorkers to take advantage of last years lower tax rates by speeding up transactions to reduce income tax obligations. The sudden burst of cash showered on Albany is non-sustainable. The comptrollers analysis attributes 87 percent of the new revenue as a direct result of increased payments to cover taxes New Yorkers owed as they took advantage of last years lower tax rates.
A better measure of New Yorks economic health is a look at sales tax collections, which rose 4.2 percent from last year and slightly exceeded the collections anticipated by the budget.
While the news is good for New Yorkers who keeping looking for signs that the upstate economy is growing again, it appears that the sudden prosperity is an aberration which is unsustainable. The income tax revenues were primarily the result of economic decisions driven by tax consequences, not increased demand for goods and services, or factory production. In a number of cases, the tax revenues resulted from businesses that took on debt to pay special dividends to shareholders last year to avoid the sharp increase in taxes on dividends paid this year. Those businesses assumed additional risk simply to find ways to avoid higher taxes.
Much of the extra tax payments comes from high income tax bracket individuals, not from men and women expanding their small businesses or finding jobs with higher pay rates. The gusher which will tempt Albany politicians to spend is volatile and weakens prospects for the state unless the funds are used to reduce debt or streamline delivery of services that require one-time expenses.
Sales tax growth is much more indicative of the strength of the economy. The message from that tax is that New Yorkers are not on a buying binge, but are continuing to struggle to make ends meet. However the sales tax itself is just as volatile. It does not take a significant downturn in consumer attitudes to suddenly constrict the flow of sales taxes to the state.
The comptrollers report is a cautionary warning to New Yorkers not to make any judgments about the health of the economy until the June tax receipts are announced. Those numbers should be more instructive about what is ahead.
The best news from Albany, though, is that the Legislature produced an on-time budget and ended the 2013 legislative session by going home Friday without trying to find some way to spend the two-month gusher of cash.