Last Updated: 12:09 PM, December 11, 2011
Posted: 9:43 PM, December 10, 2011
Forget all the spin about “reform,” “fairness” and “job creation” emanating from Albany during last week’s lightning-fast special session of the New York state Legislature.
The deal ultimately was all about spending.
Gov. Andrew Cuomo and the Legislature agreed to raise an added $2.6 billion a year in taxes from a relative handful of individual filers who earn at least $1 million, or married couples with income of at least $2 million. Out of that total, the governor and lawmakers are redistributing $690 million in tax cuts to middle-class taxpayers and $250 million to reduce the mass transit payroll tax in the New York City region. Another $140 million will be spent on targeted business tax cuts, upstate flood relief and a youth jobs program.
The remainder, roughly $1.5 billion, will effectively be funneled into school aid and Medicaid spending increases Cuomo already had promised for fiscal 2012-13, which begins next April 1. And all this will still leave him with the task of closing a budget gap he projects at nearly $2 billion.
Rising spending is a well-established trend in New York, as shown in the accompanying chart. Adjusting for average inflation during each fiscal year, the State Operating Funds budget — excluding the permanent, recurring federal share of Medicaid — rose by about 43% under Gov. Mario Cuomo, 35% under Gov. George Pataki and 5% during the combined single term of governors Eliot Spitzer and David Paterson.
In real terms, spending slumped in the early 1990s recession, after growing to unsustainable levels during the boom of the 1980s. But it kept growing after the more severe downturn starting in 2008, thanks mainly to temporary federal stimulus aid that is counted as State Operating Funds spending in our chart.
Pataki temporarily knocked the real spending trend down a few notches early in his tenure, and Andrew Cuomo has now done the same. Unfortunately, Cuomo hasn’t permanently made the growth trend flatter — which is why he just needed to break a promise by increasing taxes, and why he will feel continued pressure to raise taxes even higher in the future.
The growth in the state budget will never be tamed unless and until Cuomo and the Legislature address the structural drivers of growth, which include public employee pensions and benefits, costly capital contracting guidelines and the nation’s most bloated Medicaid program. Because much of the budget consists of transfers to local governments and school districts, including New York City, these structural reforms must apply to them as well.
Political resistance to needed changes will remain intense. Within a day of the tax hike’s passage last week, Assembly Speaker Sheldon Silver was expressing his reluctance to make further spending reductions. Indeed, many of the same people who were advocating an extension of the misnamed “millionaires tax” — backed by public-sector unions — believe the state income tax still hasn’t been raised high enough.
Meanwhile, by jacking up tax rates on wealthy households to one of the highest levels in the nation, the Empire State has harmed its economic competitiveness. Tax increases are simply plowed into higher spending. And, absent reform, spending will continue to grow faster than the economy’s ability to support it.
E.J. McMahon is a senior fellow at the Manhattan Institute’s Empire Center for New York State Policy.