Balancing New York State’s 2008-09 Budget

Frank MauroTrudi RenwickFiscal Policy Institute

Ron Deutsch, New Yorkers for Fiscal Fairness

March 2008

Economic Context

• Four years of moderate job and income growth in New York appear to be coming to an end.

• The U.S. economic expansion since mid-2003 was heavily fueled by debt, much of it related to an unsustainable housing bubble.

• Wall Street’s turmoil bodes ill for New York and the nation.

•  Mortgage foreclosure problems will worsen in New York.

NYS Adjusted Gross Net Total Wall Income (NYSAGI) Capital Gains Street Wages the level AGI change

($ millions) ($ millions) ($ millions) of AGI from prior year

1996 347,981 22,441 24,534 13% 47%1997 383,179 31,563 28,790 16% 38%1998 417,996 38,929 33,602 17% 35%1999 448,531 48,330 35,116 19% 36%2000 508,934 62,302 48,777 22% 46%2001 481,001 29,450 49,813 16% 114%2002 459,919 20,398 40,278 13% 88%2003 473,778 28,455 38,025 14% 42%2004 525,964 51,196 46,203 19% 59%2005 571,916 64,411 51,616 20% 41%2006 631,683 81,071 63,590 23% 48%2007 686,008 93,151 76,308 25% 46%

1996-2000 46% 178% 99% 18% 39%2003-2007 45% 227% 101% 22% 48%

Sources: NYSAGI and Capital Gains, New York State Division of the Budget; 2005-2008 are DoB projections (2007 from 21-day amendments, Feb. 12, 2008). Wall Street Wages from NYS DoL: 1991-1999 on SIC basis; 2000-2008 on NAICS basis. 2006-2008 Wall Street wages are FPI projections.

Capital Gains and Wall Street Wagesas a share of

Capital gains and Wall Street wages accounted for half of the growth in New York's personal income tax base from 2003 to 2007

While the economic slowdown takes center stage, New York also needs to understand and address

four “troubling trends.”

• The deterioration in job quality—less economic security, fewer benefits

• Wage-productivity gap—New York’s productivity grows but outstrips wage growth

•  The reality that just getting a job isn’t enough to lift families out of poverty—the increase in the working poor

•  The widest income gap among states between rich and poor and between the rich and the middle class

$172.396 Billion

$49.438 Billion

108.6%

15.7%

0

20

40

60

80

100

120

140

160

180

? $200,000 AGI > $200,000 AGI ? $200,000 AGI > $200,000 AGI

Bill

ions

of D

olla

rs

0%

20%

40%

60%

80%

100%

120%

Source: New York State Division of the Budget.

Absolute Change Percent Change

Change in New York State Adjusted Gross Income: 2003-2008

New York's income growth since 2003 has been concentrated among the top five percent.

Governor Spitzer estimates that New York is facing a $5 billion budget gap.

• How best to balance the budget, and what to do if revenues decline more?

• Cut back on school aid, property tax relief and other new commitments?

• Raise fees and close corporate loopholes?

• Raise taxes?

6.40%

6.80%

7.20%

7.60%

8.00%

8.40%

8.80%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

State Fiscal Year

Spending Adjusted for Movement of HCRA Disbursements "on budget"

With HCRA on Budget

Minus STaR Disbursements

Note: 2002-03 and 2003-04 disbursements have been adjusted to account for the payment in 2003-04 of $1.9 billion of obligations incurred in 2002-03.

Spending from all state funds for current services, as a percent of personal income.

Current services spending relative to the size of the economy returned to traditional levels after a decline in the mid to late 1990s.

General Fund

Special Revenue

Funds Total

State FY 1989-90 $7,732.9 $4,421.1 $12,154.0State FY 1994-95 $6,205.4 $5,179.9 $11,385.3State FY 2006-07 $6,653.7 $4,904.1 $11,557.8

Average Annual Change1989-90 to 1994-95 -$305.5 $151.8 -$153.7

1994-95 to 2006-07 $37.4 -$23.0 $14.4Average Annual Percent Change1989-90 to 1994-95 -4.31% 3.22% -1.30%

1994-95 to 2006-07 0.58% -0.45% 0.13%Total 17 -Year ChangeAmount -$1,079.2 $483.0 -$596.2Percent -13.96% 10.92% -4.91%

Personal Service expenditures in millions of SFY 2007 dollars

Since 1990, New York State's expenditures for employee wages and salaries have declined in real terms by more than half a billion dollars, almost 5

percent.

New commitments without new revenues

Important (expensive) commitments made in last several years without any new revenue streams to pay for them– Family Health Plus Takeover and Medicaid Cap - $1

billion this year; $1.35 next year and $2.5 billion in 2010-11

– STAR – From $2.5 billion in 2001-02 to $6.0 billion in 2010-11

– CFE Settlement - $5.5 billion in new foundation aid by 2010-11. Facilities investment in 2005-06 budget.

Are New Yorkers overtaxed?

$0.47$1.44

$4.22

$6.12

$7.32

$8.97

$11.21$12.01

$12.77$13.23

$14.08

$15.43 $15.82

$0

$4

$8

$12

$16

$20

1994-05 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Revenue impact, in billions of tax cuts enacted in 1994-95 through 2005-06.

The tax cuts enacted since 1994 are reducing state revenues by over $16 billion.

New York State has cut its top personal income tax rate by more than 50 percent over the last 30 years -from 15.375% to 6.85%.

6%

8%

10%

12%

14%

16%

1976 1980 1985 1990 1994 1997 2003 2007

Top rate on investment income

Top marginal tax rate

Top rate on earned income

1987 PIT cuts

1995 PIT cuts 2003 Increase

1976 1985 2003 2004 2006

New York 15.375% 9.5% 7.7% 7.7% 6.85%

New Jersey 2.5% 3.5% 6.37% 8.97% 8.97%

Connecticut 0 0 5.0% 5.0% 5.0%

New York's top state personal income tax rate is at an historical low relative to New Jersey and Connecticut.

Note: The tax rates shown above are for wages, salaries and business income. Prior to 1991, Connecticut taxed the interest, dividends and capital gains of high income residents but it did not tax business income, wages, salaries and other income. From 1978 through 1988, New York employed a dual rate system in which it applied a higher top rate to investment income than to wages, salaries and business income. For 1985, the top rate applicable to investment income was 13.5%.

Corporate income tax revenues have fallen substantially relative to the size of the economy.

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

State Fiscal Year

Total Collections including Audits

Without Surcharge

Normal Collections

Corporate income taxes as a percent of personal income

Note: Includes the state's main income tax on general corporations (the Corporate Franchise Tax, Article 9-A & 13), as well as the Corporation and Utilities Tax (Article 9), the Insurance Tax (Article 33) and the Bank Tax (Article 32).

Over the past 30 years, NYS has shifted the tax burden and greatly reduced tax revenues by having cut personal income tax rates from the top and bottom rather than adjusting the state's tax brackets and the personal

exemption amounts for inflation.

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

49,000 78,000 107,000 136,000 165,000 194,000 223,000 252,000 281,000 310,000

New York Adjusted Gross Income, from $20,000 to $313,000, of Families of 4 - weighted average of standard vs. itemized deductions - includes Household Credit

Cha

nge

in A

mou

nt o

f Ta

x D

ue

The families in this range are paying more in taxes than they would be if NYS had adjusted its tax brackets and personal exemptions for changes in the cost of living rather than cutting brackets from the top and the bottom, as it has done.

Families in this range and above are paying less in taxes because of NYS

having chosen to cut tax brackets from the top and the bottom of the bracket

structure.

The 2003 tax increases did not have the negative economic effects that Governor Pataki predicted.

7,800

8,000

8,200

8,400

8,600

8,800

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total nonagricultural employment

Source: US Department of Labor. 2007 annual employment level projected based on 11-month change.

Following the 2003 adoption of the 3-year temporary increase in the top rate on the personal income tax, the number of high-

income returns grew significantly.

0

50

100

150

200

250

300

350

400

450

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

Nu

mb

er o

f H

igh

-In

com

e R

etu

rns

in T

ho

usa

nd

s

Source: New York State Division of the Budget, , Economic and Revenue Forecast, Executive Budget 2007-08

Policy Issues

Governor Spitzer is proposing to raise approximately $434 million in 2008-09 by

closing tax loopholes. • The tax code should not allow certain taxpayers to

avoid taxes they would otherwise owe through the use of unintended loopholes. Allowing one business or one group of businesses to use a loophole, unfairly shifts that tax liability to others.

• Closing loopholes forces all businesses and individuals to compete on a level playing field.

• The reforms proposed by Spitzer will generate over $434 million in previously uncollected State tax revenue.

Examples of corporate tax loophole closing proposals in 2008-09 Executive Budget:

• “Amazon Tax” • Study tax policy toward non-

residents. Amend Definitions of Gain from Sales of Real Property for Nonresidents and “Presence in New York” for Residents Usually Outside the Country.

• Require reporting on Tax Shelters

• REITs and RICs Reform. • Require Non-Profit Tax-

Exempt Organizations to collect sales tax on certain sales, rentals and leases.

• Qualified Production Activities Income (QPAI) Decoupling.

• Classify Credit Card companies doing significant business in NY as taxpayers under the Bank Tax

• Merge fuel taxes into a single Petroleum Business Tax.

• Capital Base rate reduction and cap elimination.

• Restructure fees and minimum taxes on Limited Liability Companies (LLCs)

Economic Development

INITIATIVES• $1 billion for Upstate

Revitalization Fund.• Power for Jobs and Energy

Costs Savings Benefit extended through June 30, 2009.

• Brownfields program reformed.

• $400 million Housing Opportunity Fund to improve the availability of affordable and supportive housing statewide.

COST SAVINGS

• Eliminate inefficiencies in the Power for Jobs and Energy Cost Savings Benefit programs effective July 2009.

• Empire Zone Reform – tighten up eligibility and eliminate benefits for businesses not living up to promised job creation: expected savings $50 million.

• Neighborhood and Rural Preservation Program reforms resulting in $4.9 million of savings.

Many feel the Empire Zone program is so flawed it should just be eliminated. Governor Spitzer

proposes to keep the program but reform it.• Of the 9,600 companies in Empire Zones, about 3,000 were meeting less than

60 percent of their goals to bring new jobs to the region.

• New rules would make it harder to obtain benefits and eliminate eligibility for firms not meeting promised capital investment and job growth targets

– Businesses must generate job growth in three years rather than five

– Value of new economic growth must equal 20 times the value of the tax break – up from 15

– Future Empire Zone projects restricted to companies exporting a substantial amount of goods outside New York, in order to avoid simply redistributing economic activities

– About 180 companies around the state would be dropped from the program in a few days due to not meeting the state's standards. between different communities.

How can we reduce pressure on property taxes?

• Provide Revenue Sharing at Statutory levels

• Gradual State takeover of County share of Medicaid costs based on ability to pay

• Increase state share of education revenues

• Replace STAR with a middle class circuit breaker – Little/Galef Bill

Executive Budget includes a $1.46 billion (7.5 percent) increase for school aid. This brings the cumulative, two-year school aid increase under

Governor Spitzer to $3.2 billion.

INITIATIVES

• Foundation Formula

• Contracts for Excellence

• Reforming High Tax Aid.• Universal Prekindergarten.

Increases funding for Universal Prekindergarten to a total of $452 million, providing funding for over 120,000 four-year-old children to receive these services, an increase of over 27,000.

COST SAVINGS• Foundation Aid. Reduced by $93

million by phasing in the program at a slower rate and reducing the minimum and maximum increase provided to districts.

• Preschool Special Education. Requires school districts to assume a greater portion of the costs

• BOCES Reform. Reduces funding by $31 million and redistributes.

This year, Medicaid spending is projected to be $46.3 billion, an increase of 2.7 percent. Overall health care budget proposals include a few new initiatives and significant cost saving measures.

INITIATIVES• Universal Access for Children

– use state funds to expand Child Health Plus despite federal objections

• Doctors Across New York – provide incentives for doctors to practice in underserved areas

• Encourage Ambulatory and Primary Care and reduce hospitalizations - part “initiative” and part cost saving measure

• Medicaid eligibility “portal” – Foster care eligibility until 21

COST SAVINGS• Overall Cost Containment.

Reduces overall costs by $980 million.

• Preferred Drug List. Saves $36 million by expanding drugs covered by the State’s Preferred Drug List (PDL) and expanding the Clinical Drug Review Program.

• Nursing Home Reimbursement. Saves $85 million by not allocating nursing home rebasing funds from the prior year.

While for the most part, cost containment measures in the health care sector target providers, not beneficiaries; increased

“assessments” on insurers may make it harder for employers to offer health insurance benefits.

Decreases in pharmacy reimbursement Medicaid audit savings Acute and long-term care reimbursement methodologies Partial elimination of inflationary increases for hospitals, nursing

homes and home care providers Increased assessment on insurers Reductions in planned premium increases for managed care,

managed long-term care and Family Health Plus Better managing high cost users Eliminating the inflationary increase for the Early Intervention

Program.

Economic Security Agenda

INITIATIVES• Increase child support pass through

from $50 to $100 per month

• Comply with court order on SSI invisibility

• Increases shelter allowances for public housing residents – helps public housing but decreases food stamps for recipients

• Moves non-OTDA programs from the TANF block grant to the general fund.

• Funds Summer Youth Employment and some TANF initiatives

COST SAVINGS• NO INCREASE IN THE BASIC

GRANT – DESPITE 18 YEARS SINCE LAST INCREASE

• Child care funding included in the Flexible Fund for Family Services

• Funding for education and training less than $100 million

• Increased local share of TANF and Safety Net by two percentage points

• Increase in TANF financing for the Earned Income Tax Credit

Economic security concerns

• Welfare grant increase – 18 years• Fund EITC from the General Fund• Earned income disregard/185 percent rule• More funds needed for education and training

– Time to take EITC out of TANF Block Grant– Fund Transitional Jobs and Career Pathways proposals

• Child Care out of the Flexible Fund• Good time to strengthen UI system• Minimum wage needs to be increased

New York's Basic Cash Assistance Allowance has not been increased since 1990. It has lost more than a third of its purchasing power since then.

96%

93%

90%

88%

86%

83%

81%80%

78%

76%

74%73%

71%

69%

67%

65%

63%

60%

70%

80%

90%

100%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Inflation adjusted Basic Allowance for a Three Person Family (Pre Add plus HEA plus SHEA) as a Percent of 1990 Basic Allowance.

$464,677

$172,072$121,201 $128,677 $104,828 $77,478 $94,278 $97,128 $86,628

$130,556

$170,374 $138,367

$140,002

$60,443$119,788 $96,680

$92,174

$93,070

$113,620$112,370

$112,370

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

SFY 2000-2001

SFY 2001-2002

SFY 2002-2003

SFY 2003-2004

SFY 2004-2005

SFY 2005-06 SFY 2006-07 SFY 2007-08 SFY 2008-09 -Proposed

Th

ou

san

ds

Health and Other non-OTDA Programs

FFFS Initiatives

Employment and TANF Services-FFFS Initiatives

Source: NYS Division of Budget and Flexible Fund for Family Services Plans

TANF Funds available for employment, training and education are not sufficient. Even if we include the social services districts' FFFS allocations for TANF services and employment services,

only a small fraction of the "surplus" goes these initiatives.

$338,100

$304,000

$340,400

$408,000

$375,000$388,900

$365,739$376,256

$301,500 $301,500

$329,500

$392,600

$367,100$381,000

$352,289 $360,102

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

SFY 2000-2001 SFY 2001-2002 SFY 2002-2003 SFY 2003-2004 SFY 2004-2005 SFY 2005-06 SFY 2006-07 SFY 2007-08

Th

ou

sa

nd

s

Total Child Care

TANF Transfers to the Child Care BlockGrant including FFFS Transfers

Flexible Fund for Family Services

Use of TANF funds for child care peaked in 2003-04. Even when transfers from the FFFS and legislative child care initiatives are included in the totals, fewer

TANF funds went to child care in 2007-08 than were allocated for that purpose in 2005-06.

This trend is not consistent with the new emphasis on meeting federal work requirements.

Source: NYS Division of Budget and Flexible Fund for Family Services Plans

$7.1

5

$7.1

5

$7.1

5

$7.2

5

$7.2

5

$5.1

5 $5.8

5 $6.5

5 $7.2

5

$7.2

5$8.2

5

$8.5

0

$8.7

6

$9.0

2

$9.2

9

$8.3

0

$8.8

1

$9.0

7

$9.3

5

$9.6

3

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

Jan. 2007 Jan. 2008 Jan. 2009 Jan. 2010 Jan. 2011

Nom

inal

(Ja

nuar

y) d

olla

rs

1.NY minimum if unchanged 2.Federal minimum

3.Federal poverty guideline (3-person family) 4.Match NY peak July, 1970

Year-to-year projections assume 3% annual increase in CPI. Federal poverty guideline for 2008 estimated by FPI following HHS methodology.

To restore the minimum wage to its July 1970 purchasing power, New York would have to increase its minimum wage to $9.63 by January 2011.

$406

$567

$405 $405 $405 $405

$585

$534

$300

$350

$400

$450

$500

$550

$600

$650

1999 2006 2007 2008

One half average weekly wage

NYS Maximum UI Benefit

New York State's maximum weekly Unemployment Insurance benefit has not kept pace with wage growth.

Source: Average weekly wages from the Bureau of Labor Statistics. 2007 and 2008 estimated based on NYS DOB forecasts of growth in wage per employee in the contained in the Multi-year Financial Plan Projections, October 31, 2007.

Federal economic stimulus needs to pass the three “T” test: timely, targeted and temporary! Recently approved federal stimulus package meets

these tests but could have gone further.

• Rebates are timely, targeted to lower income families and include rebates for lowest income taxpayers.

• Accelerated depreciation provision may further reduced state revenues• No state fiscal relief included. In 2003 Congress increased FMAP and

general revenue sharing – New York received $2 billion of $20 billion program

• Did not include an extension of unemployment insurance benefits beyond 26 weeks

Reductions in federal grants to New York put pressure on state and local governments

• New York depends on the Federal government for almost one third of its total revenues (31.65%) $35.6 billion

• President’s budget would cut grants to New York State by $1 billion – in nominal terms; $1.7 billion if factor inflation – outside Medicaid cuts

• Cuts in almost all domestic discretionary programs– Education; employment services and training; Head Start; LIHEAP– These cuts come on top of seven years of cuts – single year cuts

sometimes not dramatic cumulative impact great

• Presidents budget may be dead on arrival but will influence spending targets set in the congressional budget resolution

Federal policies can encourage state initiatives to expand services to low and moderate income New

Yorkers or create roadblocks.

• Child Health Plus expansion – best example. New budget funds child health plus (not adequately) at the expense of Medicaid. Threatens to restrict eligibility to 200% of poverty. August CMS directive

• Food Stamps. Benefits will be strengthened in the new Farm Bill…House makes improvements permanent; Senate version only funds for 5 years.

• Numerous Medicaid cuts by regulation that will impact New York

• New budget proposes to reduced reimbursement rates for certain services; e.g. family planning and administration

• Significant cuts to Medicare spending while holding harmless Medicare Advantage plans

Better Choice Budget Campaign Revenue Raising Options

• Increase top marginal rates of the personal income tax• Restructure and economic development subsidy programs

(Empire Zones and IDAs)• Close remaining corporate tax loopholes• Force lower prescription drug prices• Enact “Bigger, Better Bottle Bill” and reclaim unclaimed

deposits• Stop contracting out work to pricey private consultants if

state workers can do the work

BCBC: Supported By:

• Over 100 major human services, faith-based, labor and grassroots organizations

• Representing hundreds of thousands of New Yorkers

• Sign on to our Statement of Support at:

www.abetterchoiceforny.org

• For moe detailed policy positions:

www.fiscalpolicy.org