Download FPI`s Suggestions for Dealing With New York State`s Budget Gap

New York State’s 2003-04
Economic and Budget Outlook
Fiscal Policy Institute
One Lear Jet Lane
Latham, NY 12110
(518) 786-3156
(518) 786-3146 (fax)
[email protected]
What is the Fiscal Policy Institute?

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)
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2
As Yogi Berra said, it seems
like Deja Vu all over again.

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.

2002 is also a gubernatorial election year and the
recently adopted budget for 2002-03 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)
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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)
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The tax cuts enacted since 1994 will reduce state revenues
by more than $16 billion per year when fully implemented.
Revenue impact, in billions, of tax cuts enacted in 1994 through 2001
$16
$15.2
$15.6
$14.4
$14
$13.0
$13.4
$11.8
$12
$10
$9.4
$8
$7.4
$6.1
$6
$4.2
$4
$2
$1.4
$0.5
$0
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Fiscal Policy Institute (FPI)
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2002-03
2003-04
2004-05
2005-06
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(M i lli o n s o f D o l la rs )
If it were not for the tax cuts enacted since
1994, New York would have almost $60 billion
in tax revenues available to meet the pressing
needs of its residents.
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
1995-96
1996-97
1997-98
1998-99
Total Tax Revenues
1999-00
2000-01
2001-02
2002-03
2003-04
Revenue Impact of Tax Cuts
Fiscal Policy Institute (FPI)
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By the end of the 2003-2004 state fiscal year, the cumulative
impact of tax cuts will be nearly $80 billion, while current
services and capital projects together will receive less than $60
billion.
Billions of dollars of cumulative fiscal impact: SFY 1994-95 to SFY 2003-04
$80
$79.4
$60
$50.5
$40
$20
$6.0
$0
Tax cuts
Current services
Debt Service
Fiscal Policy Institute (FPI)
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Capital projects
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How big is the state budget gap?



In October 2001, the NYS Budget Director said that
state revenues could be down as much as $3 billion
in 2001-02 and $6 billion for 2002-03.
In the January 2002 Executive Budget, Governor
Pataki estimated the budget gap at $1.1 billion for
2001-02 (all attributable to the decline in tax
revenues as a result of 9/11) and $5.7 billion for
2002-03 ($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 2002-03 revenue shortfall gap may be as big as
the budget director projected last fall.
Fiscal Policy Institute (FPI)
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How is the state 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 2001-02 Gap
 $3.3 Billion in Reserves to be Used in 2002-03:
 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)
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
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)
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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 200304 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, 2002.
 In adopting the 2002-03 budget, the legislature
increased the use of one-shots to avoid many of the
Governor’s proposed service cuts.
Fiscal Policy Institute (FPI)
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11
Can’t we continue to use the
TANF surplus money?
In order to close the budget gap for
2002-2003, the governor exhausted the
surplus we had accumulated over the
first five years of the TANF program
 No sense that TANF block grants will be
going up, will have to cut back other
uses of the block grant to cover cash
assistance requirements.

Fiscal Policy Institute (FPI)
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12
New York's TANF fund balances in
Washington are shrinking and will be almost
exhausted by the end of the next fiscal year.
Total unobligated balances in millions.
$800
$752.0
$761.0
$572.6
$600
$400
$182.5
$200
$0
$0.0
9/99
9/00
9/01
9/02 (projected)
9/03 (projected)
P roj ection for FFYs ending Septem ber 30, 2002 and Septem ber 30, 2003 base d on proposals in Ja nuary 2002 Executive Budget to spend $918 m illion in reserves and other unspent TAN F funds from prior y ear TANF block grants in the
state fiscal y ear tha t runs from April 1, 2002 to March 31, 2003.
Fiscal Policy Institute (FPI)
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13
TANF numbers just don’t add up:
(ESTIMATES IN MILLIONS)
Basic Federal Block Grant = $2,400
 Cash assistance payments = 1,000
 Tax Credits (EITC, CDCC) =
438
 Transfers (Title XX, ChildCare) 710
 BALANCE, ALL OTHER
= $252
 Current spending on all other:


$460 MILLION PLUS $345 MILLION ON TAP
Fiscal Policy Institute (FPI)
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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)
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New York City has gone from
boomtown to slowdown.
Percent Change in Payroll Employment
New York City New York City Suburbs
Upstate
July 1999 to July 2000
2.6%
2.2%
1.2%
July 2000 to July 2001
-0.5%
0.7%
0.2%
July 2001 to July 2002
-2.3%
0.3%
-0.6%
Since July 2001, payroll employment in New York City has declined by 117,300.
Fiscal Policy Institute (FPI)
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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)
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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, cuts in
spending in the local economy have a more
negative effect during an economic downturn
than high end income tax increases.
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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.
Fiscal Policy Institute (FPI)
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19


Since higher income families tend to have lower
propensities to consume than lower-income families,
the least damaging approach in the short run involves
tax increases concentrated on higher-income
families.
Spending that would be reduced if direct spending
programs are cut is often concentrated among local
businesses. By contrast, the spending by individuals
and businesses that would be affected by tax
increases often is less concentrated among local
producers.
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Stiglitz and Orszag conclude that

“if anything, tax increases on higher income
families 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.”
Fiscal Policy Institute (FPI)
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21
New York State has cut its top personal income tax
rate by more than 50% over the last 25 years.
Top marginal tax rate
16%
Top rate on investment income
14%
1987 PIT cuts
12%
10%
1995 PIT cuts
Top rate on earned income
8%
6%
1976
1980
1985
1990
Fiscal Policy Institute (FPI)
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1994
1998
2001
22
FPI’s Suggestions for Dealing With
New York State’s Budget Gap

Some progressivity must be returned to
the State’s Personal Income Tax.
 FPI suggests 7/10ths of 1% surcharge on
portion of income over $100,000, and
another 7/10ths of 1% on portion over
$200,000.
 This would raise $2.7 billion to $3 billion
per year.
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23
FPI’s 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)
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The corporate income tax represents a
declining share of state tax revenues.
Corporate franchise tax revenue as a percent of own source revenues
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
1977
1979
1981
1983
1985
1987 1989 1991
State Fiscal Year
1993
Fiscal Policy Institute (FPI)
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1995
1997
1999
2001
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FPI’s 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.
 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.
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