New York State of Mind: How Helping the State Will Help Commercial Real Estate

In the 1970s, New York State began to see a tangible reduction in manufacturing. As this occurred, “downstate” (i.e., the New York City metro area), really began to dominate the state’s economy. Today, about 70 percent of all income earned in the state is downstate, and about 80 percent of all personal income tax revenue comes from downstate residents.

This dynamic creates a troubling issue relative to recent hints the Fed has been dropping about the “tapering” off of its seemingly endless quantitative easing program. The various QE initiatives have been extraordinarily helpful to the downstate economy by buoying the financial services industry.

The questions become: what happens to the downstate economy if QE ends, how does this impact the state’s economy, and how will our commercial real estate markets react?

The fact is that the New York State budget is in precarious position and our financial condition is a bit scary. According to a report from the American Legislative Exchange Council, New York State’s economic outlook ranked 49th of all 50 states, with only California’s outlook worse. The report’s economic outlook takes into consideration tax burdens, debt service, number of public sector employees and projected budget balances.

Simply put, our taxes (rates, mostly) and expenses are growing faster than revenue (collections). The ALEC report indicates that our taxes are too high, and the outlook is weak, given our excessive spending and high tax burdens, with too many public sector employees (who have accumulated pension obligations that are ballooning). States like New York, California and Illinois, which fit the profile described above, have seen much slower growth in gross state product since 2001 than states with no state income tax and lower spending, with lower locked-in future obligations.

We have seen personal taxes rise via the extension of the controversial “millionaires tax,” which is likely to be extended for the short to medium term. Also, anyone in the state who pays a utility bill has received a tax increase.

Today, the most successful New York City residents will pay about 60 percent of their income to federal, state and local taxes. Given technologies today, folks are more mobile than ever. Elected officials boast that the state population is rising and the number of jobs in New York is growing rapidly, now exceeding pre-recession levels. However, tax revenue is down. Why? Because the resident earning $2 million per year is relocating and six college grads are moving in, earning $40,000 each. While we have five net new residents and five net new jobs, the tax base has been reduced in this example from $2 million to $240,000. This should be a concern to elected officials, as the top 1 percent of income earners currently pay 43 percent of personal income taxes in the state. An Allied Van Lines study shows that New York State is one of the top five out-migration states in the country, confirming this dynamic.

How many television commercials have we seen recently from states like Texas and Florida attempting to lure New York companies and residents to more favorable tax jurisdictions?

With tax revenue down, rapidly rising non-discretionary spending (particularly pension obligations) is crowding out important initiatives like education, job training and infrastructure. So what can be done?

State officials should continue to foster diverse types of companies and organizations operating in the state. The Roosevelt Island Cornell/Technion model should be replicated. Governor’s Island is calling. The network of vocational schools should be greatly enhanced and expanded. High school dropout rates are far too high, at 26 percent statewide and at around 50 percent in some of upstate’s largest cities. Everyone doesn’t need to go to college, and skilled laborers are in high demand.

The governor should aggressively try to implement the politically unpopular “fracking” of natural gas. This would create tens of thousands of jobs and produce hundreds of millions in needed revenue. Look at what it did for North Dakota and Pennsylvania.

New York should join the other 24 right-to-work states. While another heavy lift politically, from 1977 to 2008, these states have produced double the number of jobs as non-right-to-work states.

Lastly, public-private partnerships should be expanded to address the maintenance and capital investments required by our tunnels, roads, bridges and airports. The money raised here would allow for the pay-down of debt, creation of jobs and job-training programs, and further investments in education. It would also create the ability to reduce taxes, something the state desperately needs.

Doing these things will take great political will and leadership. If the state can achieve these things, our commercial real estate market will thrive even more than it is right now. Our future depends on it.

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