New York Pays Back $800 Million in Business Tax

By DAVID W. CHEN

New York City, grappling with the aftershocks of the global financial crisis, has been forced to refund more than $800 million to companies that overpaid their taxes this year based on expectations of a more robust business performance.

The refunds — three times the amount typically returned — have triggered deep unease among city budget officials, who are already struggling with weakening revenue and face pressure to slash services and raise taxes.

They come as the city, according to the Bloomberg administration, faces a budget shortfall that is expected to climb to $4 billion over the next two years. And having to give back such a large amount of money is certainly going to make the situation even bleaker.

Each year, companies estimate their tax liabilities based largely on their performance in prior years. And because the first half of 2007 was so lucrative for many financial firms and other companies in New York, many prepaid millions of dollars more in taxes. But with revenues collapsing this year, companies owe the city much less in taxes.

In a departure from previous years, when the companies would simply instruct the city to apply any overpayment to subsequent tax bills, they are demanding the cash now.

The amount the city must pay back is likely to surge again in the next two months, analysts who follow the city budget said, as companies stymied by tight credit markets scramble for additional money to pay for operating expenses and other needs.

“When you’re trying to harness every shekel you’ve got, you start paying attention to everything,” said Carol O’Cleireacain, a former finance commissioner and budget director under Mayor David N. Dinkins who is now a senior fellow at the Brookings Institution. “And this is one of the liabilities they can quantify. So they say to themselves, ‘The lines of credit are frozen, I need money for operating expenses, so why don’t I go and get some of the tax refund back early?’ ”

Through the first 10 months of this year, the city paid out $804 million in refunds to companies, many of them in the financial sector, versus an average of $246 million over the same period the previous three years.

The same dismal development is playing out in Albany, though the increase is less acute. New York State paid out $1 billion in corporate refunds during the first 10 months of 2008, in contrast to the $581 million it paid out during the same period in 2007.

In all, corporate taxes make up $5.4 billion of total taxes paid to the city, or 14 percent, and $6 billion of total taxes paid to the state, or 15.6 percent.

“The impact will be greater here than in the rest of the nation, given the size and concentration of the financial industry in New York City and New York State,” said Kenneth B. Bleiwas, deputy state comptroller for New York City.

And the metropolitan area does not have a monopoly on the refund trend. Scott D. Pattison, executive director of the National Association of State Budget Officers, a professional organization, says the topic has been coming up more often in conversations with budget officials from around the country. It is something he has seen before, he said, but not on this scale.

“That’s usually the pattern,” Mr. Pattison said, “especially at the beginning of really bad times.”

Since Mayor Michael R. Bloomberg unveiled the city’s latest budget projections on Nov. 5, much of the attention from the City Council and advocacy groups has focused on preserving the money that the city sends out the door: tax rebate checks for property owners, financing for schools and programs for the elderly.

But economists and city officials are deeply concerned about the money coming in. And they say that the tremendous surge in tax refunds is emblematic of the tight squeeze that the city finds itself in, both short-term and long-term.

“I don’t remember this being a big issue before,” said Charles M. Brecher, research director for the Citizens Budget Commission, a business-backed watchdog group, referring to corporate refunds. “It seems like a sign of people being in pretty serious trouble.”

The surge in refunds is already contributing to a new $285 million shortfall in the current year’s budget, thus making it imperative, city officials say, to cut programs and raise taxes even earlier than anticipated.

The rise in refund requests also gives the city less wiggle room to do everything that Mr. Bloomberg and the City Council agreed to in June in the city’s annual budget. This helps to explain, city officials say, why the mayor has been so stubborn about delaying the $400 property tax rebate checks that homeowners have been expecting since October. The rebate program is worth $256 million.

The requests also underscore the sobering reality that many of the city’s corporations will not be paying much, if anything, in taxes for years to come. Most companies trying to absorb billions of dollars in losses this year are entitled to spread out those losses over several years, and therefore will not be liable for taxes. That translates, city officials estimate, into a loss of roughly $2 billion in tax revenue over the next few years.

“This will be a continuing issue — figuring out what happens to all those losses from now-defunct or nearly defunct firms, and how those losses will work their way through the system during the course of bankruptcies and bailouts and into the tax system,” said Donald J. Boyd, a former state budget official who is now a senior fellow at the Nelson A. Rockefeller Institute of Government, part of the State University of New York system.

Mr. Bloomberg has called the corporate refunds an “enormous liability.”

City officials say that they cannot legally disclose which companies are receiving refunds, because of state laws concerning confidentiality, privacy and competition. (The New York Times asked more than a dozen major companies that have reported fiscal difficulties this year whether they were among those requesting refunds, but the companies either did not respond or declined to comment.)

Owen Stone, a spokesman for the city’s Department of Finance, said that the requests had “come from a wide variety of business sectors, including financial services and information services.” A handful of companies account for a significant portion of the $804 million, however. Mr. Stone said the city had received two refund requests for more than $50 million and four between $10 million and $25 million.

Just since September, Mr. Stone added, the city has issued 7,757 refunds to companies totaling $261 million. That represents an increase of 18 percent in the number of refunds, and 72 percent in the amount being refunded over the same period last year.

“This is an environment in which liquidity is a huge issue for big and small firms,” said Marcia J. Van Wagner, a deputy in the New York City comptroller’s office who specializes in budget issues. “Everyone needs cash, and cash is king.”