New York State’s Budget Outlook Fiscal Policy Institute One Lear Jet Lane Latham, NY (518) September 26, 2002

Fiscal Policy Institute (FPI) 2 It seems like Deja Vu all over again. The Fiscal Policy Institute (FPI) was an outgrowth of a broad based Coalition for Economic Priorities that was formed in 1989, at the beginning of New York State’s last fiscal crisis. In its second year of operations, this coalition succeeded in getting the Governor and the Legislature to delay the remaining steps of the overly generous 1987 personal income tax cuts. In early 1991, many of the Coalition members joined together to create the Fiscal Policy Institute to serve as a source of research, analysis and public education on state tax, budget and economic issues.

Fiscal Policy Institute (FPI) 3 How is this election year like other election years? The 1990 budget was precariously balanced through spending cuts and revenue increases but shortly after that November’s election, Governor Cuomo called a special session of the legislature to make more cuts is also a gubernatorial election year and the recently adopted budget for is using billions of dollars of reserves and one-shots to get past November 5th with as little pain as possible - - very limited tax increases and only modest budget cuts.

Fiscal Policy Institute (FPI) 4 Why does NYS have a budget gap? The Governor says we have a budget gap primarily because of the World Trade Center disaster. In one sense he is right. State tax revenues are down by billions because of (a) the direct impact of the disaster (the loss of thousands of lives and the destruction of 26 million square feet of prime office space) and (b) the indirect impact on numerous industries - from hotels to apparel manufacturing. But in another sense, we have a budget gap because of the overly generous tax cuts of recent years. The tax cuts enacted in 1994 through 2000 are reducing tax revenues this year by over $12 billion.

Fiscal Policy Institute (FPI) 5 The tax cuts enacted since 1994 will reduce state revenues by more than $16 billion per year when fully implemented.

Fiscal Policy Institute (FPI) 6 The resources generated by the 1990s boom have been used primarily for tax cuts.

Fiscal Policy Institute (FPI) 7 The tax cuts enacted since 1994 have driven an effective reduction of 25%+ in the resources available to meet the pressing needs of NY residents.

Fiscal Policy Institute (FPI) 8 How big is the state budget gap? In October 2001, the NYS Budget Director said that the WTC disaster could reduce state revenues by $3 billion in and $6 billion for In the January 2002 Executive Budget, Governor Pataki estimated the budget gap at $1.1 billion for (all attributable to the decline in tax revenues as a result of 9/11) and $5.7 billion for ($4 billion due to 9/11 and $1.7 billion attributable to the state’s “structural” deficit). The Senate and the Assembly initially estimated a smaller gap than the Governor but it now looks like the revenue shortfall gap may be as big as the budget director projected last fall.

Fiscal Policy Institute (FPI) 9 How is the budget gap being closed? In the Executive Budget, the Governor proposed to close the gap by using up most of the cash reserves that the state had built up over the last several years. $1 Billion in Reserves Used to Close Gap $3.3 Billion in Reserves to be Used in : Fiscal Responsibility Reserve - $1.5 Billion TANF (Welfare Reform) Surplus - $885 million Refund Reserve Account - $547 million Public Authority Balances - $200 million Environmental Protection Fund - $120 million Various Other Reserves - $415 million

Fiscal Policy Institute (FPI) 10 What does this mean for next year? Unless the economy recovers quickly, revenues will not grow sufficiently to cover the costs being covered this year by reserves that won’t be available next year. The Governor’s January 2002 projections for counted on strong revenue growth (over 5.25%) but still projected a gap of $2.8 billion. There are other risks. The Governor’s January 2002 Health Care Bill, for example, counts on a substantial increase in federal aid beginning October 1, In adopting the budget, the legislature increased the use of one-shots to avoid many of the Governor’s proposed service cuts.

Fiscal Policy Institute (FPI) 11 Can’t we continue to use the TANF surplus money? In order to close the budget gap for , the governor exhausted the surplus we had accumulated over the first five years of the TANF program If recession worsens NYS will have to cut back other uses of the block grant to cover cash assistance requirements.

Fiscal Policy Institute (FPI) 12 New York's TANF fund balances in Washington are shrinking and will be almost exhausted by the end of the next fiscal year.

Fiscal Policy Institute (FPI) 13 Isn’t the recession over? Most economists think the national recession is over. But recessions do not affect all parts of the country equally. For example, New York, New England and California did much better than the rest of the nation during the recession of the early 1980s, and much worse during the recession of the early 1990s. During the current recession New York was doing better than the nation as a whole until September 11th. But since the attacks, our economy has suffered greatly. New York City which had led the state’s boom during the late 1990s has lost over 100,000 jobs since September 11th, and the losses are growing.

Fiscal Policy Institute (FPI) 14 New York City has gone from boomtown to slowdown.

Fiscal Policy Institute (FPI) 15 In September 2002, the Rockefeller Institute of Government, in its quarterly State Revenue Report, reported that state tax revenues nationwide, in the April-June 2002 quarter, had declined by 10.4 percent compared to the year before. This is the worst quarter of decline since the Institute began to track state tax revenues over eleven years ago. In New York, revenues were down 19.4% -- only three states (MA, CA, OR) experienced greater revenue losses State tax revenues have now declined for four straight quarters. This is worrisome not only because of the persistent weakness, but also because the decline seems to be accelerating

Fiscal Policy Institute (FPI) 16 New York Needs to Balance Its Budget in an Economically Sensible Manner NYS needs to press the case for federal reimbursement of tax revenue losses directly attributable to the international attacks of September 11th. Governor Pataki raised this issue (asking for $12 billion of such help) in his October 2001 request for $54 billion in federal help, but since then the emphasis has shifted to federal money for other purposes. Some members of New York’s Congressional delegation are still pushing for such aid.

Fiscal Policy Institute (FPI) 17 New York State Needs to Balance Its Budget in an Economically Sensible Manner At the state level, the Governor and the Legislature need to balance state budget in a balanced and economically sensible manner. As Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics, and Peter Orszag of the Brookings Institution have explained in Budget Cuts vs. Tax Increases at the State Level: Is One More Counter- Productive than the Other During a Recession?, cuts in spending in the local economy have a more negative effect during an economic downturn than high end income tax increases.

Fiscal Policy Institute (FPI) 18 According to Stiglitz and Orszag: Macroeconomic theory tells us that in a recession, both tax increases and spending cuts are harmful to the economy --- because they reduce aggregate demand. However, the adverse impact of a tax increase may be smaller than the adverse impact of a spending reduction because some of the tax increase would result in reduced saving rather than reduced consumption. Some types of spending reductions would reduce consumption on a dollar for dollar basis and therefore be more harmful to the economy than a tax increase. And some tax increases are more harmful to the economy than others.

Fiscal Policy Institute (FPI) 19 Stiglitz and Orszag conclude that “if anything, tax increases on higher income households are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower- income families, are likely to be more damaging to the economy than tax increases focused on higher-income families.”

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Fiscal Policy Institute (FPI) 21 Economically Sensible Suggestions for Dealing With New York State’s Budget Gap Some progressivity must be returned to the State’s Personal Income Tax. A 7/10ths of 1% surcharge on portion of income over $100,000, and another 7/10ths of 1% on portion over $200,000 would raise $2.7 billion to $3 billion per year. This would make New York State’s top PIT rate the same as North Carolina’s.

Fiscal Policy Institute (FPI) 22 Economically Sensible Suggestions for Dealing With New York State’s Budget Gap New York used to have 3rd highest income tax rate of all the states with income taxes. It is now 19th out of 42 with a top rate of 6.85%. In September 2001, North Carolina raised its top rate from 7.75% to 8.25% for 3 years (2001 through 2003). Massachusetts postponed scheduled income tax cuts and raised its tax on income from capital gains.

Fiscal Policy Institute (FPI) 23 The corporate income tax represents a declining share of state tax revenues.

Fiscal Policy Institute (FPI) 24 Economically Sensible Suggestions for Dealing With New York State’s Budget Gap Profitable corporations that tap New York markets must pay their fair share of state taxes. Earlier this year New Jersey enacted legislation closing $1B in corporate loopholes. Corporate loopholes (such as Toy R’ Us’s Geoffrey the Giraffe and Sherwin-Williams’ royalty scams) must be closed. The Corporate Alternate Minimum Tax must be restored to its previous levels to provide a floor under the state’s corporate income tax.