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In recent years New York has faced large bud-get gaps as the state government has increasedspending and the state economy has stagnated.The economic slowdown has created fiscal chal-lenges for state policymakers, but Albany has tooeasily resorted to tax increases instead of pursuingneeded spending reforms. Earlier this year, the leg-islature increased income and sales taxes andadded to the state’s already high debt load. Statetax revenues will rise by an estimated $3.8 billionin fiscal year 2004, and spending will rise at least$4.0 billion. Last year legislators increased spend-ing by $6.5 billion, or 7.7 percent, even though thebudget faced a large deficit.The state fiscal crunch will not be solved withtax increases, particularly if spending keepsgrowing by leaps and bounds. Higher taxes dam-age the economy and shrink the tax base asskilled workers and companies relocate to stateswith more hospitable tax climates. With some of the highest taxes in the nation, New York hasbeen a net loser in domestic migration in recentyears. New York should be cutting taxes toattract businesses and skilled workers, notincreasing taxes.Taxes can be cut and the deficit eliminated by restraining spending. For example, if spendinggrowth had simply been held to the inflation ratesince FY95, total state spending would be $77 bil-lion in FY04 rather than the $95 billion currently projected, and there would be room to balance thebudget and cut taxes. Looking forward, the stateshould launch a thorough review of the entirebudget and cut unneeded programs. New York’sper capita government spending on welfare, edu-cation, housing, and health care is far higher thanthat of other states and needs to be reined in.This study looks at New York’s recent budgettrends and provides specific proposals to cutspending. Savings can be achieved by ending spe-cial interest programs such as business subsidies,contracting out state activities to the private sec-tor, and privatizing services that could be betterperformed by businesses or charities. The New  York government has tried to do too much fortoo long at the taxpayers’ expense. If New York isto again become the beacon for economic oppor-tunity and growth that it once was, the size andscope of the state government must be substan-tially rolled back.
Cleaning Up New York State’s Budget Mess
by Raymond J. Keating
_____________________________________________________________________________________________________
 Raymond J. Keating is chief economist for the Small Business Survival Committee and a resident of Long Island, New York.
Executive Summary 
No. 506January 7, 2004
 
Introduction
 As he was sworn in for his third term asNew York’s governor last January, GeorgePataki faced a large state budget deficit. Thebudget gap was estimated at $2 billion forthe remainder of fiscal year 2003 (endingMarch 31, 2003) and about $9 billion forFY04.
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 Although many observers blamed theeconomic slowdown for the deficit, totalstate spending had risen from $73 billion inFY2000 to $91 billion by FY03, a stunning 25percent increase in just three years (Figure1).
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Clearly, spending growth is the cause of the state’s recent budget woes.Even though spending is the obvious causeof current deficits, Governor Pataki proposed$1.4 billion in tax increases and more borrow-ing in his FY04 budget and proposed only modest trims to spending. The Republican-led state senate and the Democratic-led assem-bly pushed for spending increases and an evenbigger tax increase. Pataki vetoed parts of thelegislature’s budget, but his vetoes were over-ridden.
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Pataki’s budget office estimates thattotal state spending will be $95 billion inFY04, up 4.4 percent from the prior year—a growth rate twice the inflation rate.
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Worse,the final budget included tax increases of more than $3.8 billion for FY04—almost triplethe amount Pataki had proposed.
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I first discuss how New York’s high andrising taxes damage the state’s economy intoday’s climate of interstate competition forinvestment and skilled workers. Next, I dis-cuss the state’s recent spending spree anddetail spending cuts that should be pursued.Many state programs should be terminated,contracted out to private firms, or fully pri- vatized and carried out by businesses or char-ities. New York needs to think more creative-ly about saving taxpayer money than it has inthe past. Privatization and competitive sourc-ing have been implemented in many otherstate and local jurisdictions, and New York isripe for similar reforms. I conclude that thestate’s current fiscal woes should be treatedas an opportunity for state lawmakers tomake tough spending cuts to put the state ona sustainable budget path and improve long-term growth in the state’s economy.
Repeating Old Mistakeswith Tax Increases
The government’s failure to control thegrowth of state spending is having a negativeimpact on New York taxpayers and the state’seconomy. In 2003 the top personal income
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New York’scurrent fiscalwoes should betreated as anopportunity forstate lawmakersto make toughspending cuts.
$63.0$73.3$61.9$66.0$70.6$91.0$63.2$79.4$84.5$95.0505560657075808590951001995199619971998199920002001200220032004
Source: New York State Division of the Budget, www.budget.state.ny.us. FY04 is an estimate.
Figure 1New York State Total Spending underGovernorPataki, FY95 to FY04
   B   i   l   l   i  o  n  s  o   f   D  o   l   l  a  r  s
 
tax rate was increased from 6.85 percent to7.7 percent, and the top state-plus-local ratein New York City increased to 12.15 percent(Table 1). The state sales tax rate wasincreased from 4.0 percent to 4.25 percentwith local sales taxes added on top. In New  York City the combined state and local salestax rate is 8.625 percent. Other recent taxincreases have included a hike in cigarettetaxes, elimination of corporate deductions, a suspension of the $110 sales tax exemptionfor clothing and footwear, and various feeincreases.
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Some of those tax increases aresupposed to be temporary, but high spend-ing and continued deficits could give legisla-tors an excuse to keep the higher tax rates.Table 2 shows that New York’s tax rates areabove rates in other states. New York City’sadd-on taxes make matters worse for stateresidents living in the city.The failure to control spending is alsocausing the government to increase thestate’s debt load. To close this year’s budgetgap, the state is selling $4.2 billion in bondsto be repaid from future tobacco company payments. This policy is a short-term Band- Aid that covers up a lack of spendingrestraint. Besides, the bonds are backed by the state’s general fund in case the tobaccopayments falter and may result in highertaxes down the road.
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The state’s high-debtpolicy is irresponsible because it pushes morecosts onto future generations. In all, theFY04 budget uses $5.1 billion in “nonrecur-ring actions.”
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These are “smoke-and-mirror”provisions that allow legislators to evadetough spending decisions.Tax and debt increases have not solved thestate’s budget problems. Indeed, the statecomptroller projects that New York’s budgetdeficits will be more than $5 billion in FY05and more than $8 billion in FY06.
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Loomingdeficits raise the threat of more tax increases,which would further reduce family incomesand slow state economic growth.Tax increases damage economic growth intwo primary ways. First, higher taxes shiftresources from the more productive privatesector to the less productive government sec-tor. In the government sector, money is spentaccording to political and interest group pref-erences, not according to consumer demandsand market signals that ensure efficient usage.In the government sector, failed programs ordepartments usually get additional resourcesto waste. In the private sector, failure results inresources being reallocated to more efficiententerprises. The government has a strong ten-
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Tax and debtincreases havenot solved thestate’s budgetproblems.
Table 1New York’s Top Income Tax Rates
Income2002200320042005New York State$100K–$500K6.85%7.50%7.35%7.25%$500K +6.85%7.70%7.70%7.70%New York City$100K–$500K3.65%4.25%4.18%4.05%$500K +3.65%4.45%4.45%4.45%Combined State and City$100K–$500K10.50%11.75%11.53%11.30%$500K +10.50%12.15%12.15%12.15%
Source: Author’s compilation based on data from New York Department of Taxation and Finance,www.tax.state.ny.us.
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