Tax Revenues Strong But Far From Pandemic Boom Concern Persists About Possible Job Cuts and High Interest Rate
Wall Street’s 2023 first half profits of $13 billion were down 4.3% from the same period last year but tracked the industry’s return to pre-pandemic levels of revenue after record profits in 2020 and 2021, according to State Comptroller Thomas P. DiNapoli’s annual report on the performance of New York City’s securities industry.
“The securities industry’s two years of record profits helped stabilize New York’s economy in difficult times,” DiNapoli said. “Since then the industry has maintained profits consistent with pre-pandemic levels. But these are volatile times in America and globally, and Wall Street’s relatively stable profits and employment levels could change quickly. Further declines could weaken New York’s tax revenue from the securities industry and have repercussions for our state and city budgets.”
Securities industry performance is traditionally measured by the pretax profits of the broker/dealer operations of New York Stock Exchange (NYSE) member firms. There are now 132 member firms, down from more than 200 in 2007, before the global financial crisis.
As the Federal Reserve has tightened monetary policy to fight inflation, the industry has seen a 46% decline in revenue from commissions and underwriting activities over the past two years, due to the higher cost of credit and a significant fall off in debt and equity issuances and mergers and acquisitions. Financial firms’ interest expenses were seven times higher in 2022 than in 2021.
Market expectations are generally that interest rates will remain elevated for some time, which could further increase borrowing costs and reduce market activity. However, conditions could change rapidly given the uncertainties of the current geopolitical situation, the political turmoil in Washington and changes in inflation and employment.
Despite losing some of its industry jobs to other states, New York remains far and away the nation’s largest employer in the securities industry. New York state was home to 207,500 securities industry jobs in 2022. By comparison, California had the second highest number of industry jobs at 97,100.
After two years of record highs, bonuses have declined alongside profits. In March, DiNapoli’s office estimated the bonus pool for 2022 was $33.7 billion, 21% smaller than the previous year. It estimated the average bonus for 2022 was 26% smaller at $176,700 and in line with pre-pandemic levels. Bonuses account for an estimated 38% of securities industry wages, more than any other industry in the city.
The average pay for securities industry workers in New York City, including bonuses, was $497,420 in 2022, which was the second highest on record after 2021’s peak of $516,520 ($548,040 when adjusting for inflation). Employees in tech and information services industries have the second highest average salary in the city at $272,410. The average salary in the securities industry in New York State was $473,750, more than twice the average in the rest of the nation ($225,620).
In the first half of 2023, NYSE member firms have increased their compensation expenses by 2.1% over the previous year, which is less than the rate of inflation. It is likely that the overall bonus pool for the year will be smaller than in 2022 as profits decline. Despite an expected decline in the overall average bonus for 2023, the changes will likely vary widely among the various finance subsectors.
DiNapoli is expected to release his annual estimates of the average bonus and bonus pool for New York City securities industry employees in March 2024.
CEO compensation has soared meanwhile, despite declines in profits and average salaries this year and last year, but the jump is likely fueled by incentive packages from high profits during the pandemic. CEOs at New York financial firms took home 328 times the median of all company employees in 2022. In 2021, CEO compensation was 261 times more than the median of all employees at their firms.
In addition to personal income tax collections, the securities industry contributes to city property-related tax revenues as the largest segment of financial services office space tenants in the city. The financial services sector is estimated to occupy approximately 30% of all office space in the city and tends toward the higher-value Class A properties. The office sector accounts for over one-fifth of overall property tax revenues, which are forecast to be $32.6 billion in FY 2024. If the move to hybrid work or cost cutting maneuvers causes financial firms to reduce their office footprints, it could impact city tax revenues significantly.
New York state relies more heavily than the city on tax collections from Wall St. because of its greater dependence on personal income taxes. The industry accounted for $28.8 billion (27.4%) of all tax collections in State Fiscal Year (SFY) 2023, which ended March 31, 2023. About 89% of this came through personal income taxes.
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