The Shaky State Budget: A Preliminary Overview and Analysis BY E.J. McMAHON

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McMahon_Edmund J.
New York finally has a new state budget—more or less.  

NEW YORK, NY, July 7, 2010 — On June 28, the Legislature passed the last in a series of appropriation bills authorizing spending for the state’s 2010-11 fiscal year, which began April 1.  Gov David Paterson promptly vetoed thousands of line items added by the Legislature, mainly legislative pork-barrel “member item” spending.  He also vetoed the Legislature’s attempt to restore $419 million in school aid reductions.  As first suggested here, Paterson goaded a deadlocked Legislature into action by using his executive budget powers to craft spending “extender” bills that raised the specter of a government shutdown.   

While total spending in the adopted budget does not appear to be much larger than Paterson originally proposed, it is likely to create much bigger problems down the road.  The budget gap for 2011-12, which the next governor elected in November will have to close, has been estimated at $7.5 billion.  But even before reaching that point, the state’s 2010-11 budget–like its deficit-ridden predecessor–shapes up as a flimsy house of cards that could begin to collapse before the year is out.

Spending

The “all funds” budget, including all federal aid, comes to $136.5 billion, up 5.7 percent from last year, according to the governor's Division of the Budget (DOB).  However, DOB says this includes a $2.1 billion education aid payment that was deferred from the previous year due to the state’s cash shortage.  Adjusting for this change, and for accounting complexities related to temporary federal aid that is passed through to localities, DOB projects total spending is projected at $134.4 billion.  This is an increase of 2.4 percent over the adjusted figure for last year.  On the same adjusted basis, state operating funds spending is up 0.3 percent, the smallest increase since the mid-1990s. 

But to get a clearer idea of the state’s recurring spending commitments, a further adjustment is necessary.  Adding back temporary federal stimulus funds used to supplement state funds in each of the last three years, state operating spending under the new budget is up a whopping 8.4 percent over 2007-08, although both personal income and private-sector economic activity in New York has dropped sharply during the Great Recession. 

Including the DOB adjustment, this year’s budget will depend on at least $5.7 billion in temporary federal “stimulus” funding.  This equates to $5.7 billion in recurring state spending that must be permanently cut or funded with tax increases in order to balance the budget after the stimulus expires—which could be as soon as this year.

As usual, the Legislature failed to produce an updated financial plan clarifying expenditure totals before it voted on the budget.  Paterson’s DOB is not expected to release its own complete update until 30 days after the passage of the last budget bill—which will be around July 28.

Tax Increases

The 2010-11 budget will be financed in part by $1.2 billion in tax and fee increases, on top of a record $8 billion in statewide taxes and fee hikes adopted last year.  Most of this year’s new levies were included in a revenue bill passed by the Assembly but still awaiting action by the state Senate as of early July.    

They include:

* Temporary reinstatement of sales tax on clothing purchases under $110, which is expected to raise $330 million.

* Imposition of state income tax on the investment income of nonresident partners in New York-based hedge funds—a move Mayor Michael Bloomberg called “the best thing that ever happened to Connecticut,” whose governor immediately invited New York firms to move to her state.  Assuming that doesn’t happen, the tax is projected to raise $50 million.

* a restructuring of the state STAR tax credit program that will effectively boost New York City's resident income tax by another 6 percent for high-income households.  This is expected to raise $120 million.

* A further reduction in allowable itemized deductions for taxpayers earning over $10 million.  The wealthiest taxpayers will now be able to claim deductions for only 25 percent of their contributions to charity.  The additional philantropy tax will raise $100 million this year and $135 million thereafter.

* Deferral of tax credits earned by businesses that invest or create jobs in New York, which is expected to raise $100 million this year.  The deferred tax breaks—including investment, research and development, and brownfield development credits–will balloon to nearly $1.9 billion over the following two years, to be repaid (without interest) starting in 2013-14.

* An $1.60 increase in the state cigarette tax, raising the total to a prohibitive $3.40 per pack—highest in the nation.  The $290 million tax hike was adopted by both houses and signed into law as part of a separate bill in mid-June, was hailed by anti-smoking advocates. 

* New taxes on “private label” credit cards issued by retail stores and on Internet hotel booking websites, such as Expedia, expected to raise $30 million.

Borrowing

Paterson claimed that the budget contained “absolutely no borrowing.” This is true only in the narrowest technical sense, however. 

Instead of selling deficit bonds to investors, the state will effectively borrow up to $2 billion from taxpayers over the next three years through the tax credit deferrals included in the revenue package. Another $1.5 billion will be borrowed during the same period by “amortizing” a portion of the state’s projected contributions to the state pension fund — a gimmick that theoretically could continue in perpetuity, if necessary.

The annual borrowing tab from these sources: $342 million in 2010-11, rising to $1.6 billion by 2012-13.

Risky Assumptions

The new budget also relies on a variety of assumptions that might not pan out, including:

$250 million in “workforce savings” that have yet to materialize;

a $300 million fee related to the installation of electronic slot machines at Aqueduct raceway, although a vendor has yet to be chosen;

$70 million in savings attributed to renewed regulation of health insurance policies—an estimate that is dubious, to say the least;

$220 million from more aggressive tax audits (as if state tax collectors were not already aggressive); and

$150 million in taxes from sales to non-Indians on Indian reservations—an overdue move, but one that will be strenu
ously resisted by upstate tribes.

The budget also assumes that Congress will extend “enhanced” Medicaid funding first made available under last year's mammoth federal stmimulus bill.  New York’s share would come to $1 billion in 2010-11, and another $1 billion in 2011-12.  However, the Medicaid funds were removed from the House version of the bill, and a measure including a reduced amount of Medicaid funding recently stalled in the U.S. Senate.  As a result, Gov. Paterson is pressing the Legislature for a contingency plan to cover the shortfall if Congress doesn't extend the funding.

Edmund J. McMahon directs the Manhattan Institute's Empire Center for New York State Policy.

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eHeziThe Shaky State Budget: A Preliminary Overview and Analysis BY E.J. McMAHON

Comments 1

  1. Democrats are playing good cop,bad cop with Paterson who is not running the bad cop cutting spending and the good cops Democrats in the Assembly and Senate voting not only not to cut, but attempting to increase spending for their political supporters.After the November elections, the taxpayers will be hit big time with taxes.The only good Democrat is a defeated Democrat.

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