A Reason to Pray for Big Banker Bonuses

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If you are a taxpayer in the Northeast, here is some advice: Get down on a knee, clasp your hands and pray.

Pray for banker bonuses this year. Big ones. Cash, preferably.

New York's state government, and its dysfunctional neighbors in New Jersey and Connecticut, already are in deep financial crisis. Without the tax revenue from Wall Street pay and bonuses, they could find themselves closer to the brink.

Like much of America, you may find the idea of big banker paydays unsettling. After all, it was taxpayers who saved Wall Street's hide. Even now, the finance industry's nose-in-the-air entitlement makes taxpayers feel all the more enraged over the bailouts.

But in the same way banks became addicted to mortgage-backed securities and collateralized debt obligations, so did state and local governments rely heavily on financial-sector wealth. In the broadest sense, the last decade turned the entire Northeast into bankers and traders, all waiting for that bonus check.

Thirty years ago, the securities industry generated less than 3% of all private-sector salaries and wages in New York state, according to E.J. McMahon of the Empire Center for New York State Policy, part of the Manhattan Institute, a conservative think tank. By 2007, these wages accounted for nearly 20% of the total. Similarly, one in five New York state tax dollars came from Wall Street. In New Jersey, the effects were the same: Its income-tax receipts nearly doubled between 2002 and 2007, in large part because of the great credit boom.

Of course, you think states would prepare for a big downturn. Bonuses are supposed to be variable, right?

Nothing could have prepared the region for the last 12 months. New York's income-tax revenue fell by about one-third in the quarter ending last June, the sharpest decrease ever. Overall wage losses in New York were "extraordinary," said Don Boyd, a senior fellow at the nonpartisan Rockefeller Institute of Government, a think tank in Albany, N.Y. "People don't understand the magnitude."

But there was more going on: Much as home building and mortgages helped carry the U.S. economy, Wall Street's apparent successes also hid the structural cracks developing elsewhere. Since 1990, New York state's manufacturing jobs have dropped by about half, a total loss of about 500,000. Those losses came at double the rate nationally, Mr. McMahon said.

Wall Street beautifully, profligately, bridged the tax gap, until it didn't. "Those days are gone," said New York state Comptroller Thomas DiNapoli in an interview. The effects of Wall Street compensation changes, less cash and more long-term stock grants, remain hard to quantify, he said.

Today, New York, New Jersey and Connecticut all face budget crises they seem incapable of taming. New York Gov. David Paterson called for a special session, to be held Tuesday, to address the state's $3.2 billion budget deficit. That number is expected to increase nearly sixfold by 2013. New Jersey Gov. Jon Corzine was rejected by voters last week, in part because of his inability to tame a budget deficit expected to reach $5 billion next year. Connecticut's state budget already is an estimated $600 million behind projections from last spring.

"It's understandable that Main Street would be upset that the industry pays high compensation," said Ken Bleiwas, New York state's deputy comptroller for New York City. "But those payments help support jobs in other industries. We're all connected."

If Wall Street cut bonuses, the banks would be more profitable and pay more taxes. But state officials know that corporations pay taxes at far lower rates than individuals.

A more sensible approach would be to reshape the regional economy away from Wall Street, and budget without expectations of an annual financial-sector windfall. But the money is too big, and too easy, to resist for the time being. That is why across the region, the prayers for big bonuses continue to float to the sky. If you have a moment, you should add yours. We are all bankers now, whether we like it or not.

Write to Dennis K. Berman at dennis.berman@wsj.com