New York’s elected officials are working to portray their disastrous population losses as something that can easily be reversed with just a few tweaks to the business environment, more federal aid and more spending from Albany and City Hall. .
Sorry, the municipal bond market seems to be at odds.
For years, city and state bureaucrats had decent weapons to cover up various tax evils. New York’s financial markets and real estate companies, which generate some of the highest revenue and tax revenues in the country, could be counted on to finance the bloat of Albany and City Hall.
Despite constant bashing from class-war-obsessed progressives, these much-maligned millionaires and billionaires generate most of the city’s and state’s tax revenue. The wealthy were willing to pay high taxes and subsidize this largesse because the Big Apple was still the cultural center of the world and because under mayors Rudy Giuliani and Mike Bloomberg the streets remained safe.
It didn’t hurt that wealthy New Yorkers could also deduct much of their municipal and state tax payments from their federal levies. They got another tax break by pocketing their wealth in tax-free municipal bonds.
Then voters elected mayor – not once, but twice – Comrade Bill de Blasio, who took spending to another level. He also left the city descending into chaos by freeing criminals and beating up the police, even before it was fashionable among those on the utopian left.
And in 2018, President Trump capped the Blue State Socialism Grant known as SALT — the state and local tax deduction on federal returns — at $10,000 a year. Suddenly, many of these wealthy people who stayed in town, absorbed the cost of living, paid most taxes and financed the debt, began to crumble.
The Wall Street giants began opening offices in places like Florida and Texas without state income tax, and the rush to exit continued. Census figures through 2019 show millionaires leaving New York at an alarming rate.
As EJ McMahon of the Manhattan Institute recently wrote: “In 2019, according to data just released by the Internal Revenue Service, the number of taxfilers in New York City whose adjusted gross income exceeds $1 million dollars fell to 55,100 from 57,210 in 2018. This 3.7% decrease came even as the number of millionaire filers nationwide rose from 541,410 to 554,340, an increase of 2.4% .
And that was before the pandemic hit.
Who did worse?
Of course, during COVID, de Blasio made things even worse. He shut down the city and turned Manhattan into a playground for criminals and the criminally insane homeless, from which he still hasn’t recovered, even under new Mayor Eric Adams. This caused many wealthier New Yorkers to seek refuge out of state.
Yet bean counters like state budget director Robert Mujica still try to portray what is happening before our eyes as nothing-burger to a docile, leftist media. The rich don’t leave because of high taxes or high crime, as if the census numbers lie.
But there is one place where reality cannot easily be turned, and that is the municipal bond market.
A little background on munis: they often don’t follow the same set of rules as other types of debt, which rise and fall based on broad economic trends and interest rates.
This is because municipal bonds are a tax haven. Even when rates go up and other bonds go down, the wealthy in highly taxed places (i.e. New York) can often be counted on to keep buying city and state debt.
That allure is now eroding, traders and investment bankers specializing in New York State and City bonds tell me. The most logical explanation is not simply too much supply or higher interest rates. The appetite for millionaires should still be there: City and state taxes continue to hit the rich harder than ever.
Moreover, there is no immediate worry of budget shortfalls and bond rating downgrades driving prices down, as city and state coffers are overflowing with federal COVID relief money.
Less need for NY munis
The only explanation, market professionals tell me, is a growing number of wealthy people who no longer need to seek out New York munis as a tax haven – because they now live in Florida.
The Bear Traps report, a research platform, crunched some numbers for me and came up with the following: returns on Florida munis were often higher than New York because there were more less demand for Empire State debt and less demand for taxes. free bonds in a low-tax state like Florida.
This has started to change over the years, but especially at the beginning of February this year. Today, New York bond yields are higher than those in Florida, just as the tax base of wealthy residents of the Empire State has shrunk dramatically.
As one bond trader told me, “The muni market right now is pretty heavy; there is a bond sell-off due to higher rates, but demand is definitely down from the 3 million rich who have decamped to Florida.
The problem, if it persists, is not good for either Mayor Adams or Governor Hochul, who so far have shown little inclination to properly tackle the millionaire flight.
Both make for a good crime game, but neither completely reversed the police funding policies of their predecessors. They talk as well about keeping the rich here, but still taxing them out of state.
If history is any guide (see the budget crisis of the 1970s), this will not end well. Once the federal COVID relief money runs out, Hochul and Adams will be looking at a shrinking tax base, much higher debt-servicing costs, and big fiscal problems — exactly what the markets are warning. Politicians may circle around, but municipal bond prices don’t lie.