Bloomberg reports on the budget gap:

Wall Street’s mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said.

Some companies are seeking refunds from the city on taxes they paid ahead of time, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a “safe harbor,” protecting against penalties for underpayment.

“It will be a number of years before Wall Street starts paying taxes again,” the mayor said at a press conference yesterday in Manhattan. “They will carry forward all of those losses.”

Financial firms posted $501 billion in writedowns and credit losses worldwide since the start of last year, a figure the World Bank predicts may rise to $1 trillion as the credit squeeze sparked by the subprime market collapse worsens. The tax drain is particularly serious in New York, where Wall Street accounts for 20 percent of state revenue and about 9 percent for the city, state Comptroller Thomas DiNapoli has said.

I wonder what portion of revenue comes from industries that are dependent on Wall Street, such as law firms that handle M&A and other transactions, accounting firms, hotels for business travelers, luxury apartment rentals, commercial real estate, and high-end shopping and entertainment. Since manufacturing departed decades ago, NYC has become strictly a boom-time town. This hugely wealthy financial center was a drug-infested war zone during the 1970s bear market. All of its top industries are highly cyclical: advertising always slips in recessions, and these are tough times for the fashion biz as well, as even the wives of multi-millionaires wonder how many $500 shoes they really need.

Emergency Session

New York Governor David Paterson called the Legislature back to work next week in an emergency session to address widening deficits as revenue, including tax receipts from Wall Street, declines. Sixteen of the state’s largest banks sent taxes totaling $5 million to the state treasury in the most recent reporting period, a 97 percent decrease from a year earlier, when they accounted for $173 million in revenue, Paterson said.

The state faces a $26 billion deficit over the next three years and a $630 million shortfall in the current year that began April 1, Paterson has said. The governor yesterday outlined $630 million in administrative spending cuts he intends to apply this year, and he called upon legislators to cut at least $600 million more later in August.

Good luck enacting any meaningful cuts. We learned in the 2005 MTA strike that $63,000 plus full benefits was not enough for the bus drivers:

The sense of entitlement that has been encouraged for decades will ensure that this ends in default, but of course Moody’s or S&P won’t admit that.

New York City won its highest debt ratings in recent years, AA from Standard & Poor’s and Aa3 from Moody’s Investors Service, as Wall Street profits soared and the real estate market boomed. The largest Wall Street firms paid a combined $30 billion in bonuses in early 2007 because of record 2006 profits, Turner said.

New York state has $50 billion of outstanding debt. Ratings range from AAA for bonds backed by personal income taxes or sales tax, to AA for state general obligation debt and AA- for bonds that require appropriations by the Legislature, according to Standard & Poor’s.

“I am worried about the state’s bond rating, and it will start to fall if the governor doesn’t do something about his budget problems now,” Bloomberg said. “The rating agencies are cognizant of what’s happening to our economy.”

The cumulative projected deficit the state faces over the next three years has widened 22 percent since May, to $26.2 billion from $21.5 billion, Paterson said. The current budget is $80.5 billion, excluding capital projects and federal aid.

This is yet another example of the meaninglessness of ratings from the cartel. How could NYC’s huge pile of debt have ever been investment grade? And how can it still retain those ratings after deficits have widened 22% in three months? The answer of course is that they pay S&P and Moody’s good money for those ratings, and that the government supports this sham through special rights for the few agencies it chooses to recognize. In credit ratings as in anything, when the government restricts a market, quality goes down. Does anyone believe that a ratings agency that kept MBIA and Ambac debt AAA until 2008 would survive in a free market?

The only realistic way default could be avoided for NYC’s debt and thousands of other municipal bonds is for the federal government to step in and bail out the states and towns. I would not rule this out, since what is another few trillion when you’re already on the hook for $50-100 trillion?