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Pedestrians on Park Avenue in New York, Oct. 12.
Photo:
Jeenah Moon/Bloomberg News
States and cities have enjoyed a revenue high from federal pandemic relief and surging capital gains. But the buzz won’t last and the hangover could be painful, as New York’s Citizens Budget Commission warned this week.
The March 2021 American Rescue Plan Act gave states and localities $350 billion, plus $129 billion for K-12 education and $30 billion for mass transit. The putative purpose was to help governments cope with budget shortfalls from the pandemic, but most didn’t need the extra money since their economies were quickly recovering.
The actual purpose was to assist Democratic states and cities with pre-existing budget problems. Consider New York City, which will receive more than $25 billion in federal Covid funds from all sources, according to the Citizens Budget Commission. New York City has been using some of these funds to cover recurring expenses, notably for schools and to cope with rising homelessness.
When Covid funds run out, the city will have to cover these expenses with general tax revenue. This “federal fiscal cliff” amounts to $82 million this year and will grow to $1.1 billion in fiscal 2026, the watchdog warned the City Council. It gets worse. The city comptroller in August projected that the city would face an $870 million budget gap this year, $6.4 billion in 2024, $7 billion in 2025 and $9.6 billion in 2026 as spending increases faster than tax revenue. These projections don’t account for union collective-bargaining agreements that increase public worker pay and benefits.
Democrats may want to raise taxes when the fiscal crisis hits, but the city already squeezes residents with a top tax rate of 14.78%, state and city combined. The top 1% already pay 42% of city income tax, and Mayor
Eric Adams
can’t afford to lose more of them to Florida.
The watchdog also dinged the city for not reporting the impacts of its federal Covid spending. Maybe because there weren’t any that were positive. New York City’s Department of Education received $4.8 billion from the American Rescue Plan, yet 23% of its fourth-graders scored proficient or better on math this year, compared to 31% in 2019.
Many states face a similar pandemic fiscal cliff, and it will be far steeper in states like Illinois, New York and New Jersey where Democrats have relied on federal pandemic relief to avoid a spending reckoning and reward their public-union friends. This year’s stock market rout will also hurt states with progressive income taxes that rely on high earners to pay their spending bills.
They shouldn’t bet on Washington bailing them out again.
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Appeared in the November 9, 2022, print edition as ‘New York City’s Looming Pandemic Cliff.’
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