Market malaise weighs on state finances

The financial market slump has big implications for state finances in California and New York.

The big picture: The ugly market for stocks and bonds — well into its second year — has pushed down both banker bonuses and new tech stock IPOs, key drivers of tax revenue for the giant coastal states.

State of play: The states, which — financially speaking — did relatively well in recent years, now see budget shortfalls growing in the future.

• A recent report from the New York state comptroller showed Wall Street bonuses slumped 26% in 2022, as a downturn in trading and new securities offerings effectively ended what had been an incredibly profitable pandemic on the Street.
• The budget recently introduced by New York Gov. Kathy Hochul projects a deficit of $5.7 billion starting next fiscal year. In contrast, the year that just ended left the state with an $8.7 billion surplus.
• Meanwhile, in California, Gov. Gavin Newsom introduced a budgetary plan in January that forecast a budget gap of nearly $23 billion in the coming fiscal year. (Just a few months earlier the state was projecting a surplus of nearly $100 billion.)

Between the lines: A lot of this is about the Fed.

• The Fed raised short-term rates more than 4 percentage points in a year, its fastest move since the early 1980s, as it battled inflation.
• The switch sent the S&P 500 down 19.4% in 2022, its worst showing since 2008.

Context: Tech companies — many based in California — were hit the hardest by rate hikes.

• Since the value of tech stocks declined so much, the number of firms going public plummeted as well. Tech IPOs were down roughly 94% last year, meaning fewer massive paydays for founders and employees.

• The downturn in markets will also hurt capital gains tax revenue, which the California governor's office expects to drop 29% this fiscal year. (These are the taxes that individuals and investors owe on their investment gains.)

Be smart: California's highly progressive personal income tax revenues tend to be pretty volatile because they're skewed heavily to the top 1% of earners. Those wealthy people typically have lots of stock-based compensation, which can swing wildly with markets.

• New York's tax receipts are also dependent on the fortunes of Wall Street, with some 22% of state tax revenues tied to Manhattan's securities industry, according to the comptroller's office.

The bottom line: Wall Street giveth and Wall Street taketh away.