Wall Street Bonuses, NY Tax Revenue Seen Lower In 2008

by Leroy Baker, Tax-News.com, New York

21 January 2008

Personal and business tax revenues are expected to take a significant hit in 2008, with the ongoing credit-related turmoil in the securities industry expected to lower Wall Street bonuses this year.

According to an estimate released last week by New York State Comptroller Thomas P. DiNapoli, average Wall Street bonuses in 2007 declined just 4.7% from record levels in the prior year to USD180,420, even though the credit crunch and market turmoil have battered profits in the finance industry. However, DiNapoli predicted that the future for bonuses, and - for state and city tax revenues - "is not so bright".

“The securities industry rewarded employees who performed well in 2007," he observed. “And, despite the decline in bonuses from last year, State and City personal income tax collections remain strong. But the future is not so bright. The losses sustained in the securities industry during the second half of 2007 are a fairly clear indicator that tax collections, especially from business taxes, will erode in 2008.”

DiNapoli noted that bonuses have historically declined at a slower rate than profits because Wall Street firms use bonuses to retain top producers. While many firms sustained heavy losses from collateralized debt, business units involved in mergers and acquisitions, especially overseas, and equity underwriting had a record year.

DiNapoli’s office estimated that the bonus pool paid by the securities industry to its employees in New York City totalled USD33.2 billion, 2% less than the record USD33.9 billion in 2006. The average bonus of USD180,420 in 2007 dipped 4.7% from 2006, reflecting the slightly smaller pool and the employment gains in the securities industry. Wall Street added 9,600 jobs during the first 11 months of 2007, a 5.4% increase.

Actual bonuses vary by individual and by firm, ranging from hundreds of dollars for clerical and support staff to tens of millions of dollars for high performers and key executives. Bonuses in 2007 will be dramatically lower for workers in mortgage-related businesses, but higher for employees in areas that showed strong performance in 2007, such as mergers and acquisitions, equity underwriting and trading.

DiNapoli also noted that business and personal income tax collections from Wall Street activities account for up to 20% of State tax revenues and 9% of City tax revenues. He estimated that Wall Street bonuses alone will generate nearly USD2.3 billion in personal income tax revenues for New York State and another USD630 million for New York City, down only slightly from last year’s level. Tax collections from Wall Street activities in 2008, however, are likely to decline sharply because the ongoing credit crunch will adversely affect business activity.

DiNapoli’s office also tracks the performance of the seven largest financial firms headquartered in New York City. The seven firms earned USD39 billion in profits during the first half of 2007, an impressive gain of 41% over the prior year, but then lost USD28 billion during the second half of 2007. Total pre-tax profits for the seven firms totaled USD11 billion in 2007, which is less than one fifth of the USD60 billion record set in 2006. Employee compensation, which includes bonuses, consumed 61% of the firms’ revenues in 2007, up from 45% in 2006, no doubt reflecting the firms’ efforts to retain high-performing employees.

For the past decade, the State Comptroller’s office has released its estimate of the annual bonuses pool paid to securities industry employees who work in New York City (whether they are City residents or commuters). Bonuses paid by New York City-based firms to their employees outside of the City (whether in domestic or international locations) are not included. The Comptroller’s estimate also does not include stock options that have not yet been exercised, which could increase the value of bonuses realized by employees by billions of dollars.

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