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Wall Street Journal

 

New York's Budget Targets the Golden Eggs

April 03, 2009

By E. J. McMahon

Gov. Paterson came into office with a different attitude.

David Paterson took office as governor of New York on March 17, 2008 -- the day Bear Stearns collapsed. He spent the following nine months warning of worse things to come. But he didn't initially take the easy route of blaming the state's worsening budget gap, most recently pegged at $17 billion, on forces entirely beyond Albany's control.

"This is the result of our increased spending over years and years," the governor said during one of his many fiscal crisis news conferences last fall. He noted that Wall Street had "bailed us out for a number of years," but that now "the well has run dry."

If that talk reminded New Yorkers of former Gov. Hugh Carey -- the tough and effective Democrat who closed the book on the Rockefeller era with his famous 1975 declaration that "the days of wine and roses are over" -- they were in for a disappointment. Mr. Paterson has just agreed to a budget that increases spending 9% (including new federal funds flowing to localities) and boosts taxes and fees by a record amount, including a personal income-tax hike.

After a strong rhetorical start, the governor failed to deliver a budget tailored to the new fiscal realities he had preached. While the Albany Times Union on Dec. 16 quoted a gubernatorial aide predicting an "aggressive set of cuts" that would leave "blood in the streets," Mr. Paterson's December budget proposal called for a 1.1% increase in spending, with little in the way of significant restructuring, consolidation, or downsizing. He called for 137 new or increased taxes, fees and fines totaling $4.1 billion, hitting energy bills and health care as well as consumer items.

This was an ominous sign. In New York, the governor's spending proposal is the floor bid in a legislative negotiating process that generally points in one direction -- up. Any pressure for structural reform was further diminished in February, when the Obama administration served up a stimulus package promising New York nearly $25 billion over two years.

Meanwhile, public-sector unions bankrolled a campaign to raise taxes on the "wealthy," defined as anyone earning over $250,000, and they didn't let up even when the federal stimulus billions materialized. Right on cue, their proposal was embraced by many Democrats in both houses of the legislature. Mr. Paterson publicly refused to bite, repeatedly warning that higher income taxes would weaken the tax base by driving high-income residents away. But he never ruled out an income tax hike, either -- strengthening a widespread impression that he would eventually cave to it.

And so he has. With revenues still eroding as the April 1 start of the 2009-10 fiscal year approached, Mr. Paterson and Democratic leaders last week agreed to a budget deal that approached the worst of all worlds. The $132 billion plan will increase state spending by at least $11 billion from 2008-09, including $6.2 billion of temporary stimulus aid that will be built into future budgetary baselines. It also calls for over $6 billion in higher taxes and fees, half again as much as Mr. Paterson's original plan. This includes $4 billion to come from an income tax hike that will raise the state's top rate by 31% and kick in at $200,000 for single filers.

The income-tax increase is supposed to expire after three years. However, current fiscal and economic trends -- including the scheduled disappearance of stimulus funds after fiscal 2010-11 -- provide little grounds for confidence that the "sunset" will occur without a struggle.

Asked this week if it made sense to raise taxes in a recession, Mr. Paterson replied "none of this makes sense." That's for sure. New York State has already lost 150,000 jobs since last summer, with roughly 130,000 more job losses projected through the end of the year. Tax receipts are plunging, and the governor himself says he doesn't think they've hit bottom yet.

Every new populist outburst over Wall Street bonuses only highlights the state's biggest revenue problem: The geese who once laid Albany's golden eggs are now targets. State Comptroller Thomas DiNapoli called the spending plan approved by his fellow Democrats "essentially a buy-time budget, based on a hope that the economy recovers quickly." But there's no sign of that happening.

Mr. Paterson did succeed in persuading lawmakers to shift some state Medicaid funding from expensive hospital settings to primary and preventive care settings, such as doctor's offices and outpatient clinics, which weren't previously favored by the Medicaid reimbursement schedule. This reform may produce bigger savings down the road, if the state can stick to it despite furious complaints from the hospital industry.

But New York's Medicaid program is still by far the most costly in the country, spending nearly twice the national average per recipient, and it will continue to grow at an unsustainable pace. Indeed, at the governor's behest, the budget also eliminated financial-asset tests and face-to-face screening interviews to determine Medicaid eligibility. And as if to ensure a steady flow of new customers for publicly subsidized health care, the budget also raises state taxes and fees on employer-provided coverage by $850 million.

The new budget generally represents a huge victory for the leaders of New York's public-sector employee unions, who won their soak-the-rich income tax while brushing off Mr. Paterson's call for a pay freeze and other contract concessions. While government workers in California and Ohio are taking cuts in the form of payless furloughs, more than 160,000 New York State government employees will receive an average 3% pay hike this month. Only in the final week of budget negotiations did Mr. Paterson finally get serious with the unions, promising layoffs in the summer if they don't start making concessions. So far they aren't budging.

Despite all the evidence to the contrary, Mr. Paterson at the close of the budget negotiations insisted things were looking up. "If the legislature can maintain this type of discipline over the next few years, then we can actually see the light at the end of the tunnel," he said Monday.

It's probably an oncoming train.

Original Source: http://online.wsj.com/article/SB123879912281488291.html

 

 
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