Bloomberg reported today that losses on Wall Street have are going to cause years of lost city and state tax revenues.

From Bloomberg,

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.

“If the World Bank’s prediction that the large investment banks will book up to $1 trillion in writedowns because of the mortgage crisis is true, then Mayor Bloomberg is absolutely right,” said Lynn Turner, former chief accounting officer of the U.S. Securities and Exchange Commission. “These guys won’t be paying taxes for some time.”

While 20 percent of state revenues and 9 percent of city revenues are substantial enough, this only scratches the surface on the effect that the credit crunch will have on the city.

As Andrew Cuomo goes after the banks for their involvment in the ARS market, the death of this market means that municipalities in New York and the rest of the country will find it much harder to raise debt.  Add on to that the monoline blowups and we see a city that will either have to pay more to finance its services and programs or find it cuttting them to keep a balanced budget. Many of these services make many New York neighborhoods desireable places to live.

In addition, overall downsizing across Wall Street will lower income taxes and, more importantly, steer jobs and their wages away from the city.  It is my contention that incredible renter demand is the tide that lifts all real estate in New York, and if we see that demand ween, look out below.  Today it was announced that Wall Street is increasingly outsourcing its “grunt work”  overseas. (hat tip AR).  While a small piece of a much larger trend, the young professional is an important demographic to the New York City economy.  As Wall Street bonuses shrink, the many merchants with businesses in the city will hurt as well.

The last blow for New York real estate will be a rise in property taxes to try to cover these lost revenues.  In June it was announced that an anticipated property tax cut may have to instead be a tax hike.

This all has a very reflexive ring to it, and reminds me of a classic “boom-bust” cycle that would make George Soros proud.  What convinces me more is that there are many people out there who beliieve that New York City real esate is untouchable and will escape this crisis relatively unscathed.  While foreign investment may soften the blow, I think the New York real estate market could be a ticking time bomb.