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Next Year's Tax Hike


Next Year's Tax Hike

May 6, 2002
Urban PolicyNYC

In a single year, New York State's finances have been knocked out of kilter by a deep stock market slump, a national recession and an unprecedented terrorist attack aimed right at the heart of its tax base. The result, says Gov. Pataki, has been a loss of $7 billion in revenue.

You might think that news would lead the state to tighten its belt for the 2003 fiscal year, which began last month.

Well, think again.

While details remain sketchy, it appears Gov. Pataki and the Legislature have agreed to boost spending by at least $1.7 billion for fiscal 2003, not counting federal grants.

* Not a single major program will be cut.

* Not a single employee will lose his or her job, though some 4,000 workers (less than 2 percent of the payroll) will get a nice financial send-off to early retirement.

* The total state budget will rise by nearly three times the inflation rate.

If the state has so much less money, how can it possibly manage to spend so much more? The answer stems from one of Pataki's undeniable accomplishments: the accumulation over the past several years of a $3 billion budget surplus, which can be used to offset the budget shortfall.

These reserves explain why New York, despite the unique economic blows it has sustained in the past year, is actually in better short-term fiscal shape than many other states (certainly better than California, which faces a budget gap of $20 billion-plus).

But the new state budget will blow most of the reserve wad without doing much to curb the fast-rising trajectory of government spending for the future. The all-important budgetary baseline is virtually untouched - which will lead to big problems just down the road.

When he first unveiled his budget proposal in January, Pataki projected spending to grow by another 5 percent a year in each of the next two years, for budget gaps of $2.8 billion in fiscal 2004 and $3.2 billion in fiscal 2005. But in the wake of this week's budget agreement, next year's gap is likely to be closer to $4 billion. And there will be much less the way of reserves available to fill next year's hole.

The latest budget accord is eerily reminiscent of the swollen 1990 election-year deal struck by then-Gov. Mario Cuomo. Untenable on its face, that budget fell apart immediately after the election, leading to a memorably disruptive midyear cut in school aid and a fresh wave of tax and fee hikes.

For all the problems of the past year, New York's economy remains in better shape than it was back in 1990, thanks in no small measure to the tax cuts and regulatory reforms of Pataki's first term. However, the shortsighted 2003 budget threatens to put New York back on the self-destructive path of the Cuomo era.

The pattern for this week's deal was established last October, barely a month after the World Trade Center attack, when Pataki allowed the Legislature to add $500 million to a "bare-bones" 2002 budget that was already up 7 percent over the previous year.

Then, in January, Pataki and the Legislature agreed to a Health Care Reform Act (HCRA) extension worth roughly $3 billion over four years, including targeted raises for health-care workers belong- ing to the union led by Dennis Rivera.

Aside from its political implications, the deal was widely attacked on the grounds that it relied on billions of dollars in new federal Medicaid assistance that was unlikely to materialize. But many critics failed to recognize that, in the short term, HCRA 2002 was deliberately overfunded.

By raising health-care provider fees and cigarette taxes, and by diverting more spending into murky off-budget accounts, the deal appears to have freed $300 million to $700 million to close part of this year's state budget gap.

This - and not merely a desire to join the governor in pandering to Rivera - explains why the Legislature was so quick to rubber-stamp the package. Besides, HCRA won't be in the red for at least three more years - an eternity in Albany terms.

The good news in this week's budget deal is that Pataki and the Legislature reportedly have resisted the temptation to "decouple" New York State's tax code from the accelerated depreciation provisions of the new federal tax bill. While this will lead to an additional loss of state tax revenue over the next couple of years, it will at least avoid giving employers another good reason for steering investments from New York to other states.

Another positive aspect of the budget was the governor's commitment, from the outset of the process, to avoid delaying scheduled tax cuts that will be worth about $300 million this year. But there is no guarantee those tax cuts will survive after next year. And next year won't be pretty.