The tariff shock is a warning message to Albany

Governor Hochul and the Legislature seem to be ignoring its implications for the FY2026 state budget

New York’s state government has reaped a bumper crop of tax revenue over the past five years—thanks largely to a historic surge in capital gains and Wall Street bonuses ginned up by a doubling of stock prices since the market bottomed out in late March of 2020. Governor Hochul’s Executive Budget projected a further 12.4 percent gain in the S&P this year¹—down by roughly half from each of the previous two years, but still not bad by historical standards.

That was on Jan. 21. A month later, on Feb. 19, the S&P 500 hit its most recent peak. A week later, the governor’s budget director and legislative fiscal staffers agreed that the state’s tax revenue projection could be raised by $550 million to $800 million over the Executive Budget forecast. In the month following that forecast, the S&P tumbled mostly downward. By the March 31 end of the fiscal year, the index had fallen 8 percent from its peak.

But the worst was yet to come.

Since President Trump’s April 2 “Liberation Day” announcement of the most sweeping tariff hikes since 1930, the S&P 500 has fallen another 10 percent, erasing all its net growth in the past year and then some. At 18.5 percent below its most recent high as of the market’s close on Tuesday, the S&P was close to bear territory.

The “global tariff rout,” as The Wall Street Journal described it, has significantly changed at least the outlook, at least on a short- to near-term basis, for New York-based financial markets—and, by extension, for New York State’s revenue base. The economic outlook has taken a turn for the worse—and, fortuitously, the overdue budget for the fiscal year that started April 1 allows time for adjustment, on both sides of the ledger.

It should be obvious that the state’s optimistic late February revenue projection needs to be taken down a few notches.² At the very least, Hochul should cancel her proposed $3 billion “inflation refund” cash giveaway, a profoundly dubious idea to start with. She also needs to take a much harder line against the Legislature’s push to add billions to her already inflated budget, which wasn’t balanced to begin with, and which called for the highest state operating funds spending increase sought by any governor in 40 years.

Flashing yellow

No, the stock market is not synonymous with the economy as a whole, not even in New York, and for all the negative reaction to Trump’s tariffs policy, the economy isn’t in a recession. Not yet, anyway—although if the Democrats who rule Albany want to pretend a downturn isn’t coming, they’re in for an argument from their senior U.S. Senator.³

But Wall Street—that New York-centered constellation of firms and individuals engaged in the buying and selling of stocks, bonds, bundled loans, and money itself—accounts for a larger chunk of New York State’s tax revenue than any other industry. In a good year, like fiscal 2025, it exceeds 20 percent of total tax revenues. Last year’s record-high securities industry bonus pool—just the increase in the pool, not the total bonus handout—boosted state revenues by $600 million, according to state Comptroller Thomas DiNapoli.

And that’s just one element of the total financial sector share of the revenue base, which has been further increased by soak-the-rich tax hikes that have made New York State more dependent than ever on the incomes of millionaire earners, who generate roughly half of the state’s largest revenue source, the personal income tax.

Capital gains, heavily concentrated among high earners subject to higher tax rates, are another crucial factor affected by stock prices (as well as by housing prices). After spiking at an all-time high of $203 billion in 2021, the capital gains income of New Yorkers subsided in the following two years but is estimated to have climbed back to nearly $100 billion in tax year 2024.

As reflected in the following chart from her budget’s economic forecast section⁴, Hochul’s budget assumed a $23 billion jump in capital gains for the current tax year, which would be sufficient to drive roughly a $2 billion increase in tax revenues. But with home sales having further slowed and the stock market now sinking, that number needs to be revisited.

Indirect budgetary effects of a Wall Street downturn also include the impact on public pension funds. The equity investments of the New York State Common Retirement Fund probably garnered a big enough gain in the first nine months of FY 2025 to escape an outright loss, and perhaps support a subpar gain, for the fund as a whole before the year ended March 31.

However, the calendar won’t be as kind to the five New York City pension funds, or New York State Teachers’ Retirement System (NYSTRS), both of which operate on the July 1 to June 30 fiscal year more common to pension funds and budgets in other states. Barring a sharp market comeback within the next three months, the city pension funds and NYSTRS will fall short of their assumed returns of 7 percent and 6.95 percent, respectively, which will push up tax-funded employer contributions in 2026.

Bottom line: the tariff turmoil should be setting off alarm bells at the budget negotiations table in Albany. But the market meltdown appears to be the last thing on the minds of Governor Hochul and state lawmakers. Deadlocked on possible changes (mainly additions) to her proposed $252 billion spending plan, their public comments suggest they aren’t focused on dollars and cents at all but on the many non-fiscal policy issues Hochul injected into her budget legislation, including a change in pre-trial criminal discovery rules (modest at best, but fiercely opposed by progressives), involuntary commitment of the seriously mentally ill, and restriction on the public wearing of facemasks, among other issues.

It’s bad enough that, as noted here a few weeks ago, Hochul and the Legislature are whistling in the dark about likely federal budget cuts. Given a chance to anticipate already reported cuts to some health programs, not to mention likely changes affecting the state’s gigantic and nearly out-of-control Medicaid program, they’ve instead made it clear they’ll wait to see what happens and then come back later in the fiscal year to deal with the consequences, if necessary. Failing to lower their sights in response to the tariff turmoil is even less defensible.

Hochul certainly is entitled to denounce Trump’s tariff policy, which she was quick to do last week. But that doesn’t absolve her of responsibility for managing the budget that she, after all, is ultimately in charge of. The governor’s failure to decisively adjust her budget plan is a colossal failure of leadership.

1. See p. 94 of the Executive Budget Economic and Revenue Outlook volume.

2. In the Executive Budget Economic and Revenue Outlook volume, the governor’s Division of the Budget did cite the risk that the incoming president’s “proposal to implement 10-20 percent tariffs on all imports and 60 percent tariffs on imports from China would raise consumer prices, disrupt supply chains, and provoke retaliatory measures from other global economies”—but made no mention of its possible impact on financial markets. It assumed “partial implementation of tariffs under the new administration.” (p. 23)

3. “Now Trump tariffs are likely to drive New York right into a recession — and it’s going to be worse for New York City and its suburbs,” Sen. Charles Schumer said Monday.

4. Economic and Revenue Outlook, p. 94.