Apr 7, 2023 - Economy

Market malaise weighs on state finances

Illustration: Annelise Capossela/Axios

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.

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.

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