Article | Early belt-tightening led to squander

When George Pataki took office as governor in January 1995, New York state was only feebly recovering from its worst economic downturn since the Great Depression. Pataki wanted to jump-start the economy with lower taxes — but he also had inherited a $5 billion state budget shortfall from Mario Cuomo.

Could the new governor somehow balance the budget while simultaneously keeping his campaign promise to reduce taxes? Critics said it couldn’t be done. Pataki proved them wrong.

Weathering low approval ratings and strident protests from special-interest groups, Pataki slashed the state payroll, halted growth in Medicaid costs, reformed welfare, encouraged privatization of state assets and, last but not least, initiated a series of major tax cuts.

Between 1995 and 1997, state-funded spending actually decreased, after adjusting for inflation. The state’s economy soon took off. By the end of the decade, private-sector job growth in New York actually exceeded the national average. State revenues hit new record levels, even while the tax burden (relative to personal income) dropped to its lowest average level in nearly 30 years.

If the Pataki administration had ended after those first few years, it generally would have been rated a solid success.

Unfortunately, by the end of his first term in 1998, the Republican governor began to retreat from fiscally conservative principles.

After initially promoting market-based deregulation of health care, Pataki expanded the state’s Medicaid and health-care budget to funnel billions of dollars in wage increases to health-care workers, along with added subsidies to an already bloated hospital and nursing home sector.

He allowed state lawmakers to carve out whole new categories of wasteful pork-barrel spending financed by state bonds. He sweetened extravagant, taxpayer-guaranteed pensions for state and local government employees. He failed to follow up a 2000 “debt reform” law with a promised constitutional amendment to firmly shut the door on excessive borrowing. (After tripling under Mario Cuomo, state debt doubled under Pataki.)

Surpluses amassed

To his credit, Pataki did manage to accumulate billions in surpluses while resisting legislative demands for even larger spending hikes than he proposed in his less-disciplined second-term budgets. But when revenues nosedived after the 9/11 terrorist attacks and the bursting of the tech bubble on Wall Street, he squandered the state’s reserves in short order — setting the stage for the massive temporary tax hikes enacted by the Legislature in 2003, which he proved powerless to prevent.

In fiscal terms, Pataki’s last term has been almost precisely the opposite of his first. State spending under the last four budgets is up nearly 40 percent. Nonetheless, thanks to the stimulating effect of federal tax cuts, the (now-subsiding) real estate boom and surging Wall Street profits, Eliot Spitzer will confront a much smaller budget gap than Pataki inherited from Cuomo.

Since the temporary tax hikes of 2003 were allowed to “sunset” on schedule last year, state taxes are once again significantly lower than they were before Pataki took office. Local taxes are another story.

Pataki’s one enduring third-term achievement was to cap annual growth in the locally financed share of Medicaid, which should relieve some of the pressure on county taxes. But the STAR program he initiated in 1998 has provided only temporary relief from soaring school property taxes. That’s because Pataki never pushed hard enough for what he knew was the only real cure — a cap on school tax rates.

In the final analysis, by most fiscal and economic measures, Pataki was an improvement over Cuomo, who also served 12 years as governor. Then again, Cuomo set a particularly low performance benchmark. Pataki’s early accomplishments were overshadowed by his later failures and inconsistencies, which helps explain why on Election Day New Yorkers were so receptive to Spitzer’s promise to change everything on “day one.”

E.J. McMahon is a senior fellow at the Manhattan Institute for Policy Research and director of the Institute’s Empire Center for New York State Policy.