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Deja Vu All Over Again: The Right Way to Cure New York's Looming Budget Gap

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Deja Vu All Over Again: The Right Way to Cure New York's Looming Budget Gap

By E. J. McMahon October 1, 2002
EconomicsBudget

This report analyzes New York State government’s fiscal history over the last three and a half decades, with a particular focus on Governor Pataki’s accomplishments. It finds that fiscal crises are always preceded by periods of higher-than-normal spending, and that reducing spending is the only successful way to solve a crisis. Tax increases, such as those passed in the early 1970s and 1990s, exacerbate crises by reducing economic activity.

The report finds that Governor Pataki has a mixed fiscal record. In his first term, Pataki limited the annual growth in real, inflation-adjusted spending to a mere 0.6%, or a mere 0.3% if his STAR program is treated as a tax cut. This enabled him to eliminate a $5 billion budget gap—roughly the size of the gap which the state is estimated to face next year—while substantially reducing taxes. In his second term, however, the growth in real spending increased dramatically to 2.9% a year, or 2.1% if STAR is excluded. New tax cuts were also much smaller than in his first term.

The report also uses an econometric model, STAMP, to estimate how many jobs were created by the Governor’s first-term tax cuts, and how many would be lost if taxes were raised next year. STAMP estimates that the Governor’s income and sales tax cuts created at least 117,000 jobs since 1995—nearly one in five total new jobs. STAMP also finds that raising the income tax by imposing a $2.7 billion surcharge, as proposed by some union-affiliated groups, would cost the state 46,000 jobs.

The report concludes with specific recommendations on how the next Governor can reduce spending to close the budget gap, and rejuvenate the economy through broad-based tax cuts.

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