Balancing the City Budget

Yet before the new administration even takes office, a chorus of voices will all cry out that the city’s budget is already out of balance. Ever since the fiscal crisis of 1975, New York City and Albany have budgeted through the adoption of a four-year financial plan that forecasts tax receipts and expenditures. The typical practice for both state and city budgeting offices is to modestly underestimate future revenues, leading to forecasts where expenditures grow faster than revenues and the state or city is unable to cover its expenses in future years. In a $116 billion budget, even a small variance in the expected revenue growth rate has a multibillion-dollar effect on the forecast revenue three years from the present. Consequently, the current New York City financial plan estimates that the city’s expenses will exceed its revenues by a total of $17 billion from fiscal year 2027 through 2029. This figure will be deployed to make the case that, far from considering any new programs, Mayor Mamdani will need to start reducing costs.

However, these forecast “gaps” rarely materialize, as research from the Fiscal Policy Institute has shown. Instead, as the budget is negotiated, the forecasts are upgraded with more realistic revenue assessments showing that the city will in fact be able to cover its current expenses. Recent years indicate that, barring a recession, the city’s budget is basically structurally balanced in that revenues and expenses roughly match.

In this respect, the new administration will be in better fiscal shape than critics will claim. But real challenges are waiting in the wings due to the Eric Adams administration’s reluctance to implement existing progressive policy measures. The 2022 law limiting class sizes in New York City will require more than 14,000 new teachers, at a cost of about $1 billion by 2028. Emergency housing vouchers, such as the City Fighting Homelessness and Eviction Prevention Supplement (CityFHEPS), are expected to cost $1 billion more than currently budgeted for, and expanded eligibility could lead to billions of dollars in new annual costs. And a hiring freeze throughout Adams’s tenure has left about 15,000 positions unfilled, generating over $1 billion in annual savings, but at the cost of a demoralized and less effective city workforce.

These fiscal challenges should be taken seriously, but they need not lead to despair. The city has a fundamentally strong tax base that sees steady annual growth in revenue from its high-earning population, partly driven by the still-booming securities industry. While fiscal conservatives are prone to invoke memories of the fiscal crisis, the city’s budget at that time relied on a large share of short-term borrowing to cover its annual expenses that could not be paid for out of current tax revenues; today the city and state both run annual surpluses and can cover their expenses with current revenue.

Federal Cuts Are Coming to the State Budget

This story gets considerably more complicated with the state’s fiscal outlook. Like the city budget, state budget forecasts typically underestimate future revenue, leading to media reports about a $26.8 billion budget gap. Just as with the city budget, these gaps typically disappear outside of recessionary periods.

And yet Albany does face a very real budgetary challenge from the federal reconciliation legislation known as the One Big Beautiful Bill Act (OBBBA). The OBBBA cut federal taxes by $4.5 trillion over the next ten years, paid for through a combination of higher deficits and $1.1 trillion in cuts to Medicaid and the Supplemental Nutrition Assistance Program (SNAP).

These federal funding cuts will flow through to New York, putting serious pressure on the budget. By the state’s estimate, the annual impact on the budget will be about $4.5 billion in lost federal funding per year, primarily driven by the elimination of Obamacare subsidies for lawfully present immigrants. The real costs may be higher by billions of dollars, as the state has found ways of undercounting some of the lost federal funds.

Fortunately for the Mamdani administration, these cuts will not directly impact the $7 billion in annual federal funding that the city receives. However, if the state is unable to manage its own finances, it might absorb some of the impact of these cuts by reducing the $19 billion in annual funding it directs to the city. That is, one of the most important fiscal policy priorities of the new administration will be putting political pressure on the state government to manage OBBBA impacts without implementing spending cuts.

Tax Increases Will Be Necessary

These fiscal challenges are surmountable, for the simple reason that the state and the city are both in a sound economic position to raise taxes given the stock of upper-middle- and high-income earners. But making this move as a matter of policy will mean overcoming the influence of the extremist anti-tax movement, which has successfully pushed decades of aggressive tax cuts for the rich while blowing up the federal deficit.

Even the Democrats’ relatively narrow focus on taxing billionaires speaks to the success of the anti-tax movement. Financing social democratic programs is expensive, and it requires everyone to pay higher taxes. Part of the strategy of the OBBBA was to give large tax cuts to the well-off and the rich, not just the billionaires. This is why the bill is so costly, even to the point of requiring draconian spending cuts — there are simply far more “well-off Americans” than there are billionaires. The top 20 percent of income earners, households earning over $120,000, will receive 70 percent of the benefit of OBBBA tax cuts. The tax cuts are definitely skewed toward the rich, with $1 trillion of the $4.5 trillion in cuts going to the top 1 percent. But our fiscal problems fundamentally come from an unwillingness to accept the necessity of broad-based taxation to finance social programs. The idea that taxing a handful of billionaires is sufficient to achieve social democracy remains a progressive fantasy.

The OBBBA signals a potential paradigm shift in US fiscal policy, in which states will be forced to choose between raising taxes (anathema even to most Democrats) and allowing a dual social crisis of rising hunger and the widespread loss of health insurance. As long as this reality is recognized, the state should be able to recapture a share of the tax cuts given to New York’s richest through tax increases to cover the costs of OBBBA spending cuts. And no, the wealthy won’t just pack up and leave — New York’s top 1 percent move less often than all other income groups. And when they do move, they move to other high-tax states like New Jersey and California.

Paying for the Mamdani Proposals

The new administration’s policy agenda will depend on getting these challenges sorted out. Doing so will require a high degree of fiscal sobriety, paired with the recognition that these challenges are actually manageable — so long as we can collectively overcome our fear of taxes.

If the underlying fiscal situation can be sorted out, there is a realistic path to paying for the Mamdani agenda. Free buses, according to the city’s Independent Budget Office, would cost around $700 million per year, which is almost entirely accounted for by the fare revenue that would no longer be collected. Childcare is probably the most fiscally interesting proposal, with cost estimates ranging from $2.5 billion to $6 billion per year, depending largely on assumptions about uptake rates and worker compensation. The rent freeze does not itself cost money, but the city will need to subsidize building upkeep so that unprofitable rent-stabilized buildings do not fall into disrepair. And the plan to build two hundred thousand units by borrowing $70 billion is likely to be financed by multiple mechanisms including long-term debt and spread out over many years of construction, such that it would likely raise annual debt service costs by around $3 billion per year.

These costs would all be covered by Mamdani’s proposed tax increases, which are designed to raise $10 billion annually. There will inevitably be a conflict between raising taxes to cover the OBBBA impacts on older programs and raising taxes to pay for new programs, but the city and state economies are strong enough to handle the tax burden. The challenge will be twofold: managing trade-offs in the city budget among competing progressive policy priorities, and overcoming the anti-tax sentiment that forecloses social democratic fiscal policy. But if Mamdani can show that a socialist mayor can run the country’s most complex city without fiscal collapse, he’ll do more than deliver free buses — he’ll rewrite the rules of what’s politically and economically possible in America.