Wall Street's deep slump is a growing problem for New York City, which is still struggling to ramp up its pandemic recovery.

Why it matters: The city is heavily reliant on personal income tax revenues, which, in turn, hinge on Wall Street. The dismal state of the markets this year is a blow to the ecosystem built around Manhattan's banks, brokerage firms and money managers.

• It also coincides with the slowing flow of federal and state dollars that subsidized city finances throughout the COVID crisis.
• Taken together, it sets the stage for growing pressure on city budgets, likely requiring increased taxes, decreased spending, or a combination of both.

How it works: Booming markets create taxable capital gains for city coffers, as traders and investors make a mint.

• Hot markets also generate deal activity at banks, which advise on mergers and shepherd new bonds and stocks to market — all for hefty fees.
• It also juices the law firms, accountants and advertising agencies that feed off the Street.

What they're saying: "When finance is doing well, that whole ecosystem is doing well. And that shows up as higher personal income tax collections," says Ana Champeny, vice president for research at Citizens Budget Commission, a think tank focused on fiscal issues in New York.

By the numbers: Just one part of the financial services industry — the securities sector, where stocks and bonds are brought to market, traded or sold to investors — accounts for about 23% of the city's 2021 personal income tax revenues, according to the Office of the New York State Comptroller.

• That's because, despite the pandemic, Wall Street had a tremendous 2021 — the Fed's efforts to push interest rates lower to cushion the economy during COVID had sent markets soaring.
• The city's Independent Budget Office (IBO) estimated Wall Street profits hit $61 billion in 2021, just shy of the record hit in 2009.

Throughout the COVID crisis, "you actually didn't see a decline in income tax revenues, in part because Wall Street still did well, especially last year," Champeny says

Yes, but: That's going to change. Wall Street is having one of the worst years on record, with bond and stock prices plunging and a dearth of dealmaking.

• The IBO forecasts Wall Street profits will fall nearly 60% in 2022.

The impact: "Given its outsized role on the tax base, it's potentially quite serious," for the city, says George Sweeting, acting director of the IBO.

• The New York State Financial Control Board estimates that the downturn on Wall Street will contribute to a reduction in city income and business tax revenues of $2.3 billion this fiscal year.
• The market plunge will set back city pension funds, meaning the city will have to kick in billions more over the coming years, says Champeny.
• Longer term, any cutback on office space that may ensue could hurt the city’s already wobbly real estate market — depressing values and, ultimately, property tax collections, Sweeting adds.

What's next: Major banks will start third-quarter earnings season next week, when JPMorgan, Citigroup and Morgan Stanley disclose results.

• The state comptroller's first-half report on Wall Street is also usually published in October — and it'll show just how sharply tax revenues have ticked down this year.