What Happened to NY's Budget Deficit?

(3 Min. Read)

‍When the State enacted the Fiscal Year (FY) '26 current year budget in May 2025 (for April '25 – March ’26), the predictions for the state’s longer term fiscal health were sobering. At the time, the Budget Division (DOB) estimated FY '27 (beginning April 1, 2026) would confront a $7.5 billion deficit, roughly 5 percent of the total budget. 

As FY '27 approached, we saw a steady improvement in the State’s fortunes, with projected outyear deficits declining in the subsequent financial plan updates released by DOB. On January 20^th, when the Governor released her proposed budget for FY ’27, the projected $7.5 billion deficit for the upcoming fiscal year was gone, replaced by a $3.5 billion surplus. The current FY '26 budget, which was balanced when enacted, is now projected to end the year with a $2.4 billion surplus. 

How did we go from deficit to surplus? 

Amidst the complexity of a $260 billion All Funds Budget, the answer is relatively simple. The Budget is formulated by projecting revenues and expenses, neither of which can be known with certainty given fluctuations in taxpayer behavior and the difficult to predict variables that impact spending. As we approach the end of the current fiscal year and the beginning of a new one, DOB can refine its revenue and spending projections based on actual experience and data. State tax revenues, primarily personal income tax collections in FY '26 and FY '27, are projected to increase significantly from earlier estimates and these increases, when combined with lower-than-anticipated spending growth, are driving the turn from deficit to surplus. The $5.9 billion surplus that the State is expected to realize in the current and subsequent fiscal years is being used to support $2.5 billion in new investments (i.e., childcare being a large component) and to lower projected budget gaps in FY '28 and beyond.

How do the state’s surpluses and the healthy revenue picture translate into what we can expect during budget negotiations?

The Governor’s Budget for FY '27 increases state spending by 5.7 percent, on top of the 11 percent increase in FY '26. The Legislature can be expected to increase spending beyond the Executive proposal by using more of the surplus to support additional spending (and less to close outyear gaps). While there have been calls to increase taxes, the Governor has repeatedly stated her opposition to an increase in the personal income tax rate, which is now the third highest in the nation, with NYC’s combined city/state personal income tax rate being highest in the nation. Thanks to the robust continued growth in organic tax receipts, the New York State Legislature should be able to increase spending by a modest amount beyond the Governor’s proposal, without increasing taxes. Of course, an economic downturn, the migration of high income earners out of New York or unanticipated measures at the federal level could find New York State once again digging itself out of a deficit situation. But that is for another day...

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