How Much Additional TANF Spending Can New York Afford?

March 27, 2000. New from the Center on Budget and Policy Priorities, and specific to New York:

How Much Additional TANF Spending Can New York Afford?
New York Can Increase Use of TANF Funds While Maintaining A Rainy Day Reserve

Early in 1999, Congresswoman Nancy Johnson, chair of the Human Resources subcommittee of the Ways and Means committee, sent a letter to all governors that urged them to spend more of their TANF funds or risk having Congress take some portion back. This warning was made more concrete by several congressional attempts later in the year to rescind some unspent TANF funds, even though none of these attempts was successful. In March 2000, Representative Johnson sent another letter to the governors, noting that progress had been made in increasing the use of TANF funds but again suggesting that future TANF funding would be safeguarded only if states continue to make efforts to spend the funds they are now receiving.

This message, however, appears to have made some states less likely, rather than more likely, to support additional TANF investments. The possibility that TANF funding could be reduced in the relatively near future — through a rescission of unspent funds or a reduction in future allocations when TANF is reauthorized in 2002 — has left some policymakers concerned that states could be left holding the bag for any new initiatives or additional spending on existing programs. In some states, the threat of future TANF cuts appears to be a serious impediment to productive and innovative uses of TANF funds.

States that avoid spending their full TANF allocation for fear of future congressional cutbacks may be creating a self-fulfilling prophecy. All of the 1999 congressional proposals to rescind TANF funds would have distributed the cuts based on each state’s share of total unobligated balances for all states. Thus, states that had left substantial amounts of TANF unspent would have faced deep cuts, while states that had spent or transferred all of their TANF funds would not have had funding reduced. In other words, the more a state’s unspent TANF balance continues to grow because annual spending remains below the annual allocation, the greater the likelihood that the state’s TANF funds will be reduced in future congressional action.

This suggests that the best way for a state to protect its TANF funding is to use more TANF funds in the very near future. The question then arises as to what level of increased spending is appropriate and safe. If a state were to increase TANF spending up to the full amount of the annual block grant, it would still retain all unspent TANF funds accumulated in prior years. These surplus funds could be kept as a rainy day reserve, but they also could be spent on one-time non-recurring expenses without creating an unsustainable future funding obligation. At the same time, increasing spending so that it equals the annual TANF grant amount would give a state a strong argument that its annual TANF allocation should not be reduced at the time of reauthorization.

The remainder of this paper analyzes New York’s use of TANF funds in federal fiscal year 1999 and compares this with each state’s TANF allocation for federal fiscal year 2000, as a way of assessing the opportunity for increased TANF investment in the state. This paper also analyzes the amount of funds New York transferred from TANF to the social services block grant or child care block grant in 1999. As discussed below, many states transferred a substantial amount of TANF funds to these other block grants last year. The analysis relies primarily on data from the ACF-196 TANF financial reports that states are required to submit to the U.S. Department of Health and Human Services.

The difference between 1999 spending and 2000 allocations provides a sense of how much the state might be able to increase its use of TANF funds without dipping into funds accumulated in prior years. The results of this comparison, however, should be viewed as an approximation and not a precise illumination of the room for additional investment. For several reasons, spending in FY 2000 could differ from the FY 1999 level. For example, spending in FY 2000 could be higher than in FY 1999 as a result of state contracts with service providers that include cost-of-living adjustments, wage increases for state or local employees working on TANF programs, implementation of new services or benefits, or the continued implementation of previously authorized program expansions such as in child care. On the other hand, further reductions in cash assistance caseloads or the elimination of programs or services could reduce spending in 2000 relative to 1999.

Despite these limitations, the comparison of 1999 spending and 2000 allocations provides an important indication of the availability of funds for additional investment. Table I below suggests that New York could increase the use of TANF funds.

TABLE I: New York’s Use of TANF in Federal Fiscal Year 1999 As Reported on ACF-196 TANF Financial Reports
(all $ figures are in millions)

TANF expenditures and transfers, FY 1999 FY 2000 TANF grant FY 2000 grant compared with adjusted FY 1999 total Difference as a percent of adjusted 1999 total Unspent TANF funds as of the end of FY 1999
$2,020.2 $2,450.9 $430.7 21% $1,122.9

The table shows that New York use of TANF funds in FY 1999 totaled $2,020.2 million. This figure includes direct spending and any transfers from TANF to the social services and child care block grant that were made in 1999. It reflects use of funds from the state’s 1999 block grant allocation plus any spending or transfers from carryover funds that occurred during fiscal year 1999.

Table I shows that New York’s TANF allocation for FY 2000 totals $2,450.9 million, which is $430.7 million higher than the total for FY 1999 after the adjustment for the large transfer amount. [The FY 2000 grant amount presented here includes the state’s basic TANF allocation plus an $8 million High Performance Bonus for FY 1998, awarded in December 1999.] This suggests that New York’s FY 2000 TANF grant could support an increase in spending of 21 percent over the fiscal year 1999 level. If the state were to increase TANF spending to equal its annual TANF allocation, the state would be able to retain the $1,122.9 million in unspent TANF funds it reported at the end of FY 1999.

TANF Funds Transferred to the Child Care and Social Service Block Grants

The ACF-196 TANF financial reports reveal that transfers to the social services block grant (SSBG) and the child care block grant (CCDF) increased substantially in 1999 and represented a significant share of the use of TANF funds in many states. This occurred in large part because the TANF regulations established a prohibition on the transfer of TANF from carryover funds, beginning in fiscal year 2000, but allowed states to make such transfers in fiscal year 1999.

It is useful to identify the transfer amounts for two reasons. First, these transfers were made by administrative action in some states and thus may not have been well publicized. Second, because some states transferred TANF funds to avoid the new restriction, they may not have had concrete plans on how and when to spend those funds. While the ACF-196 reports identify transfer amounts, they do not provide information on the portion of transferred funds that were spent in 1999.

Fortunately, other TANF financial data — HHS data on TANF funds states drew down from the federal treasury as reimbursement for TANF-allowable expenditures — can help identify whether states spent the funds they transferred in 1999. When a state transfers TANF funds to SSBG or CCDF, those funds are not drawn down from the federal treasury. Instead, the transfer of funds effectively is a transfer of spending authority. States can draw down TANF funds transferred to SSBG or CCDF only when allowable expenditures within those block grants are made. Thus, if the amount of TANF funds the state drew down from the federal treasury — a reflection of actual TANF outlays that were made during the year — is well below the total amount of expenditures and transfers reported on the ACF-196 reports, it is possible that the difference reflects funds that were transferred but not spent.

Table II provides information on TANF transfer amounts in New York and an indication of the extent to which transferred funds were actually spent.

TABLE II: New York’s TANF Transfer Amounts in Fiscal Year 1999
(all $ figures are in millions)

Transfers to the Child Care Block Grant Transfers to the Social Services Block Grant Total expenditures and transfers (from ACF-196 reports) Actual TANF Outlays Does it appear state spent most of the transferred funds?
$269.6 $244.0 $2,020.2 $1,646.5 No

The table shows that the New York transferred $269.6 million of TANF funds to the child care block grant and $244.0 million to SSBG in fiscal year 1999, for a total of $513.6million. [The figures reflect transfers from fiscal year 1999 TANF grants, as well as any transfers to the Child Care Block Grant from FY 1997 and FY 1998 carryover funds that were made during fiscal year 1999.] These transfers reflect a substantial share of the overall use of TANF funds, $2,020.2 million, as indicated by the state’s ACF-196 TANF financial report. Data from HHS on TANF funds received by the state indicate that actual TANF outlays totaled $1,646.5 million. Because the difference between actual outlays and reported expenditures and transfers is roughly $370 million, while the total transfer amount was $513.6 million, it appears that New York may not have spent most of TANF funds that it transferred to SSBG and CCDF.

New York's Income Tax System Among the Best for Working Families in 1999

Most Relief Comes from the State Earned Income Tax Credit Enacted in 1994

New York has among the lowest income tax burdens in the country for low-income working families.1

  • Of the 42 states with income taxes, only Vermont and Minnesota do a better job than New York in shielding both poverty-line incomes and minimum wage-earnings from income taxation.
  • New York is one of only four states in which near-poor two-parent families of four — those with incomes at 125 percent of the poverty line — receive a refundable tax credit rather than having an income tax liability (32 states) or no liability (6 states).
  • For near-poor single-parent families of three, only Vermont and Minnesota provide higher refundable tax credits than New York. Four states provide smaller credits while these families have no income tax liability in seven states and a positive income tax liability in 28 other states.
  • Since 1991, New York has increased its two-parent four-person family income tax threshold — the income level at which such a family has state income tax liability — by $9,000. Only Pennsylvania, California, Minnesota and Colorado have increased their income tax thresholds by greater amounts.
  • Only nine states (Arizona, Minnesota, Pennsylvania, Vermont, Rhode Island, Colorado, Connecticut, California and Maryland) had higher 1999 income tax thresholds for two-parent families of four than New York’s $23,000.
  • Only six states (California, Minnesota, Vermont, Rhode Island, Colorado and Maryland) had higher 1999 income tax thresholds for single-parent families of three than New York’s $21,800.
  • New York is one of eleven states that has already enacted legislation which will increase its income tax thresholds in the future and one of the three states, together with Maryland and Massachusetts, which will use an expanded state EITC to accomplish this threshold increase. New York’s EITC is scheduled to increase from the current 20 percent of the federal EITC to 22.5 percent of the federal EITC for the 2000 tax year and to 25 percent of the federal EITC for 2001.

Most tax relief for low-income families comes from the state EITC.

Virtually all of this tax relief for low-income working families is attributable to New York’s Earned Income Tax Credit (EITC). Enacted in 1994, during Governor Cuomo’s last year in office, the state EITC is a powerful tool for supplementing the income of working families and offsetting the regressive burden of state and local sales, excise and property taxes. In 1994, New York set its state EITC at 7.5 percent of the federal EITC for 1994, 10 percent of the federal EITC for 1995, 15 percent for 1996 and 20 percent thereafter. The multi-year tax cut enacted in 1995 under Governor Pataki accelerated the EITC’s implementation, increasing the state EITC to 20 percent of the federal EITC one year early, in 1996. The 1995 tax cut, however, contributed very little in terms of reducing the tax burden on low-income working families on a continuing basis, despite its current $5 billion per-year price tag.

Since 1994 the income level at which a two-parent family of four incurs positive tax liability has risen from $14,000 to $23,000. Over 90 percent of this increase is due to the EITC enacted in 1994. Likewise, the income threshold for a one-parent family of three has nearly doubled, rising from $11,500 to $21,800. Almost 90 percent of this increase is due to the 1994 EITC.

Income taxes on poor New York families have decreased substantially since 1994. A two-parent four-person family with income at the 1999 poverty level would have paid $116 if the pre-1994 law were still in effect, but receives a $490 refund under current law. Likewise, a one-parent three-person family with income at the poverty line receives a $697 refund under current law but would pay $82 in state income taxes if the pre-1994 law were still in effect. The 1994 tax cut accounts for 94 percent of these declines; the 1995 tax cuts — despite costing $4.8 billion per year — account for only 6 percent of these savings.

The scheduled expansion of the New York State EITC will provide additional relief to low-income working families in 2000 and 2001.

State income tax burdens for New York’s low-income working families will decrease even more when the 1999 increase in the NYS EITC begins to take effect. Under legislation enacted in 1999, the NYS EITC will increase to 22.5 percent of the federal EITC for 2000 and 25 percent of the federal EITC for 2001. If the expanded NYS EITC credit had been in effect in 1999, the tax credit for a family with minimum wage earnings ($10,712) would have been $954 rather than $763, a savings of $191.

Unfortunately, the continuation of the 25 percent state EITC has been tied in law to the continuation of the state’s ability to use federal Temporary Assistance to Needy Families (TANF) block grant funds or state matching (Maintenance of Effort, MOE) funds to pay for the state EITC. Specifically, the law increasing the state EITC from 20 percent to 25 percent of the federal EITC provides that this rate will revert back to the 20 percent level beginning with any tax year in which any federal action (as certified by the Commissioner of the Officer of Temporary and Disability Assistance):

  • materially reduces or eliminates New York state’s TANF block grant allocation,
  • or materially reduces the ability of the state to spend federal TANF block grant funds for the EITC or to apply state general fund spending on the EITC toward the state’s TANF maintenance of effort (MOE) requirement.

In practice, New York is moving to use TANF funds to pay for a substantial portion of its state EITC.2 For example, the Governor’s most recent Executive Budget projects using TANF funds to cover $174 million of the $420+ million that the state EITC is expected to cost during the 2000-2001 fiscal year.

While there are arguments for and against using TANF funds for this purpose, as long as the authorization to do so remains in effect, there is no justification for making the continuation of this particular tax reduction contingent on federal welfare policies while having no similar “fiscal prudence” trigger for the other $13.5 billion in annual tax cuts that are now on the books and either in force or scheduled to take effect over the next several years.

In addition, this provision has significant technical shortcomings,3 and it will create a great deal of uncertainty for a very vulnerable population over the next two years as the U. S. Congress considers the reauthorization of the 1996 federal welfare reform law that established the TANF block grant mechanism. This law is currently scheduled to expire on September 30, 2002.

In recognition of the importance of the EITC in providing tax relief to a very hard-working but frequently-ignored population, this so-called “reversion” provision should be repealed. If state legislators believe that the state’s overall tax reduction program is too large to be sustained without this use of federal funds, it should reduce or eliminate other less meritorious tax cuts that are scheduled to take effect over the next several years.

 

March 22, 2000

Endnotes1. State-by-state comparisons and rankings in this report come from the Center on Budget and Policy Priorities (CBPP) report, State Income Tax Burdens on Low-Income Families in 1999, March 2000. Current tax thresholds and tax liabilities (credits) are also taken from the CBPP report. Calculations of historic and prospective tax thresholds and tax liabilities (credits) were done by the Fiscal Policy Institute. 

2. The final TANF regulations adopted by the U. S. Department of Health and Human Services last April gave the states the ability to use TANF block grant funds to pay not only for EITC expansions but for the entirety of the portions of state EITCs (whether pre-existing and/or new) that are actually refunded to TANF eligible families. TANF block grant funds can not be used to cover either the portions of state EITCs used by TANF eligible families to reduce their tax liabilities to zero or any portions of state EITCs going to taxpayers who are not TANF eligible. To take maximum advantage of this opportunity, New York State recently amended its state TANF plan to define all families with children that meet New York’s financial criteria for the EITC as being TANF eligible, although they would not be able to receive traditional cash assistance unless they met other more restrictive criteria.

3.  For example, this provision makes the continuation of a part of the state’s tax law subject to a determination by a state administrative official that a federal administrative, statutory or regulatory change has “materially” reduced the state’s ability to use funds for a particular purpose without giving any guidance as to what would and what would not be material in such a context.

Table 1  

New York State’s 1999 Income Tax Thresholds*

1993 Law  

Without the Cuomo (1994) or Pataki (1995) Tax Cuts

1994 Law  

With the Cuomo (1994) but Without the Pataki (1995) Tax Cuts

1999 Law  

With both the Cuomo (1994) and Pataki (1995) Tax Cuts

With the Expansion** of the NYS EITC to 25% of Federal EITC
Two-parent family of four $14,000 $22,260 $23,000 $23,854
Single-parent family of three $11,500 $20,500 $21,800 $22,774
* A threshold is the lowest income level at which a family has state income tax liability. The threshold calculations include earned income tax credits, or other general tax credits, exemptions and standard deductions. Credits that are intended to offset the effects of taxes other than the income tax or that are not available to all low-income families are not taken into account.** The New York State EITC will increase from 20 percent of the federal EITC to 22.5 percent in 2000 and 25% in 2001.
Table 2  

New York State Income Tax Liability*

1993 Law  

Without the Cuomo (1994) or Pataki (1995) Tax Cuts

1994 Law  

With the Cuomo (1994) but Without the Pataki (1995) Tax Cuts

1999 Law  

With both the Cuomo (1994) and Pataki (1995) Tax Cuts

2001 Law  

With the NYS EITC equal to 25% of Federal

Two-parent family of four
With minimum-wage earnings ($10,712) $0 ($763) ($763) ($954)
With poverty-level earnings ($17,028) $116 ($455) ($490) ($632)
With near-poverty-level earnings ($21,285) $301 ($90) ($140) ($238)
Single-parent family of three
With minimum-wage earnings ($10,712 $0 ($763) ($763) ($954)
With poverty-level earnings ($13,290) $82 ($647) ($697) ($879)
With near-poverty-level earnings ($16,613) $216 ($373) ($423) ($735)

*Negative liability is a refund to the taxpayer.

Counterbudget 2000-2001: The Budget Reform Section

March 2000. FPI prepares the Budget Process Reform section of Counterbudget, which is coordinated and published each year by SENSES, the Statewide Emergency Network for Social and Economic Security. Counterbudget provides an analysis of the Governor’s Executive Budget Proposal and its impact on low-income New Yorkers focusing on the programs and policies identified as priority issues by the SENSES network of over 2500 human service, religious, labor, economic development and low-income organizations – issues including economic development, public assistance, health care, hunger and nutrition, housing, taxes and revenues, and the budget process. For a copy of the complete report, please contact the Fiscal Policy Institute.

Budget Process Reform

Adopting New York State’s Annual Budget in a Timely Fashion

Background

The most visible shortcoming of the current system has been the legislature’s inability, since 1984, to adopt a budget by the start of the state fiscal year on April 1st of each year. On several occasions, these budget delays have extended into August. In practice, the New York State Legislature does not actually adopt a budget. The Governor submits a complete plan of revenues and expenditures for the ensuing fiscal year to the Legislature early each year in accordance with the State Constitution. Nor is the Legislature required by the Constitution or any other law to do so. What the Legislature does do is act on bills that authorize the spending of money for particular purposes (known as appropriation bills) and bills that establish or change laws that generate the revenues necessary to pay for those expenditures. In fact, with the exception of scheduled payments of principal and interest on the debt that the state has incurred, the State Constitution makes very clear that no money can ever be paid out of the state treasury or any funds under the management of the state “except in pursuance of an appropriation by law.” This is the so-called “power of the purse” that rests with the legislative branches of most democracies. An “appropriation by law” is a duly enacted bill that authorizes specified amounts of amount to be paid out of the state treasury for specified purposes. This situation is further complicated in New York State by a constitutional provision that says that “Neither house of the legislature shall consider any other bill making an appropriation until all the appropriations bills submitted by the governor shall have been finally acted on by both houses, except on message from the governor certifying to the necessity of the immediate passage of such a bill.”

So, when news reporters or other observers indicate that the Legislature is late in adopting a state budget (or that the legislature has missed the Constitutional or statutory deadline for the adoption of the state budget), they are referring to the fact that the state has begun a new fiscal year without the legislature having passed appropriations bills covering the wide variety of purposes for which the state government spends money. In recent years, much of the anguish and turmoil that used to be associated with such delays has been eliminated by the adoption by the legislature of temporary appropriation bills for which the governor has issued messages of necessity. While the practice of adopting bi-weekly or monthly appropriations bills has eliminated most of the real pain that used to be associated with budget delays, the process still involves a great deal of uncertainty and brinksmanship. Such delays also undercut the state government’s credibility with many media observers and many members of the public.

To date, the Governor and the Legislature have adopted three kinds of “reforms” that they felt would eliminate or reduce the delays that have come to characterize the state budget process. The first kind of “reform” involves the idea of a fast and/or early start to the budget process to deal with the fact that the New York State Legislature has a much shorter period of time in which to consider and act on the Governor’s budget than the legislatures in most other states have to act on their Governor’s budget proposals. The Governor’s Executive Budget must be submitted in mid-January in most years (and, by February 1 in years following gubernatorial election years), thus leaving only 2 to 2.5 months between the time the legislature receives the executive Budget and the start of the fiscal year. In 1992, to facilitate a faster start to the state budget process, a law was enacted requiring the Budget Director, within 30 days of receiving agencies’ budget requests each fall, to submit to the legislature, a “synopsis” of these requests including a schedule of appropriations requested as compared to the prior year, a brief description of the agencies’ funding priorities, and a discussion of any major changes or initiatives being recommended for the coming fiscal year. The Budget Division has implemented this law through a requirement that each agency budget request begin with a “Statement of the Commissioner or Agency Head” that includes such a synopsis. While the 1992 law might be interpreted to require the Budget Director to submit a compilation of these statements to the Legislature, it is not clear that such a step would produce the originally hoped-for effect of jump starting the budget process.

The second kind of “reform” is premised on the belief that one of the main sticking points in each year’s budget negotiations is the inability of the parties to reach an agreement on the amount of revenues that are likely to be received by the state prior to the end of the year for which a budget is being adopted. In 1996, a law was adopted requiring the budget director and the chairs and the raking minority members of the legislative fiscal committees to convene, during March of each year, a “consensus economic and revenue forecasting conference” to assist the Governor and the Legislature in reaching a consensus revenue forecast. That law also requires the director of the budget and the secretaries of the legislative fiscal committees to issue a “joint report containing a consensus forecast of the economy and of receipts for the current and the ensuing state fiscal year” by March 10 of each year. That law, however, does not require the Governor of Legislature to take any action on this staff report nor does it require them in any way to utilize the information presented in that report. This shortcoming has been compounded by the fact that, in practice, these annual staff reports do not actually present a consensus revenue forecast. Instead, these reports indicate that the three parties have not been able to reach a consensus and they characterize the differences that exist between their estimates.

The third kind of “reform” attempts to secure timely action on the budget by subjecting the individual members of the legislature to financial penalties if the legislature fails to adopt a budget by the start of the state fiscal year. A law enacted at a special session of the Legislature in late 1998, and upheld by the NYS Court of Appeals in the fall of 1999, provides that if “legislative passage of the budget … has not occurred prior to the first day of any fiscal year,” the pay of all state legislators will be “withheld and not paid until such legislative passage of the budget has occurred.” Since the legislature does not actually adopt or pass a state budget, this legislation provides that for the purpose of this salary withholding process, “legislative passage of the budget” shall mean that the appropriation bill or bills submitted by the governor along with the Executive Budget have been “finally acted on by both houses of the legislature … and the state comptroller has determined that such appropriation bill or bills that have been finally acted on by the legislature are sufficient for the ongoing operation and support of state government and local assistance for the ensuing fiscal year. As a result of this law, legislators’ pay was withheld for over four months during 1999, disproving the argument of its advocates that it would foster timely budget adoption. In addition to having this very practical shortcoming, this law has the dangerous effect of allowing the Governor and/or the members of one house of the legislature to subject the members of the other house to a prolonged period of having to work without pay.

Governor’s Proposal

As part of a program bill submitted with the 2000-01 Executive Budget, the Governor has proposed that the 1996 law establishing the current Consensus Revenue Forecasting process be amended to require that the Consensus Revenue Forecasting Conference be held in February rather than March, and that the staff report on expected receipts be issued on or before March 1st rather than on or before March 10th.

Recommendation

This recommendation ignores the real problems with the 1996 law – that it simply requires three unelected staff members to make a report on the receipts expected to be received during the next fiscal year with no indication, whatsoever, as to what the Governor and the Legislature are supposed to do on the basis of the information presented in this report. Counterbudget recommends that New York follow the Congressional model where early in each year’s budget process, each house adopts a budget resolution setting forth its revenue forecasts and spending levels for the coming year, with a conference committee process being used to reconcile the differences between those two resolutions. The 13 appropriations subcommittees in each house of Congress than work within the overall dollar limits established by the budget resolution in reconciling competing priorities within their respective areas of responsibility. In 1999, both houses of the U.S. Congress adopted such budget resolutions early in the year. Following the convening of a conference committee to work out the differences between the two resolutions, a reconciled budget resolution was adopted by both houses of Congress on April 15. This was five and one-half months before the beginning of the federal fiscal year, leaving a substantial amount of time for the members of the appropriations subcommittees to work out the details of the two houses’ appropriations bills, for those bills to be processed through the full appropriations committees and to be debated on the floor, and for conference committees to resolve the differences between the two houses’ bills. As a resolution, this action at the federal level is not subject to Presidential approval. New York may want to follow this model or, given the greater relative budgetary powers of the Governor in this state, it may want to utilize a process that involves and requires the concurrence of the Governor.

Counterbudget recommends that the Senate and Assembly each be required to adopt a budget resolution by March 1 of each year, and that a conference committee process be used to reconcile the differences between the two houses’ resolutions in time for the two houses to adopt an agreed-upon budget resolution by March 8 of each year. Each house would then be required to finalize its appropriations bills within the parameters established by the joint budget resolution. The pay withholding sanctions should either be repealed or amended to apply to the intermediate deadlines suggested below and to apply only to the members of the house, committee or subcommittee to which the deadline applies. In this way, for example, members of the Senate could not cause members of the Assembly to miss a deadline and vice versa.

Adopting New York State’s annual budget in a way that increases member and public involvement

Background

The closed nature of New York State’s budget process has led to it being widely characterized as “three men in a room.” This phrase succinctly captures the fact that much of each year’s budget agreement (at least in years when this “process” doesn’t break down and become two men in a room) is worked out, behind closed doors, by the Governor, the Assembly Speaker and the Senate Majority Leader. In fact, most aspects of the annual budget agreements are worked out by these officials’ staffs in preparation for “leaders’ meetings” at which the three leaders themselves attempt to resolve a relatively small number of outstanding issues. Governor George Pataki, Assembly Speaker Silver, and Senate Majority Leader Joseph Bruno have all publicly criticized the “three men in a room” process and have either (a) said that the days of “three men in a room”were over and/or (b) called for this system to be replaced with one that entails greater member involvement. In April 1998, Senator Bruno and Speaker Silver appointed a budget conference committee and nine budget conference subcommittees to help resolve the differences between the “one house” budget bills that the Senate and Assembly had each passed earlier that year. While a good deal of that year’s final budget agreement was worked out privately by the two leaders and their staffs, the conference committee and its nine subcommittees did resolve a number of important differences between the two houses’ budget bills in unprecedented public sessions. This experience raised the hope that there might in future years be greater member involvement through working committees and subcommittees in the development of each of the two houses’ budget bills. This has not yet happened and while, in 1999, conference committees were again used in the budget process they were used to help resolve issue differences between the two houses that were then incorporated into a single set of privately drafted budget bills which were then passed with messages of necessity from the Governor in order to avoid the Constitutional requirement that those bills be available for member and public scrutiny prior to their adoption rather than to resolve differences between two sets of publicly available budget bills.

Governor’s Proposal

As part of a program bill submitted with the 2000-01 Executive Budget, the Governor has proposed that: (a) in any year in which the legislature has not, by March 1, finally acted upon the appropriations bills submitted by the Governor along with the Executive Budget, the Senate Majority Leader and the Assembly Speaker be required to appoint one or more joint conference committees on the budget, and (b) when any such budget conference committees are appointed, they be required to issue their reports on the budget by March 29.

Recommendation

The Governor’s proposal represents a step backwards from the progress made in 1998 in that it provides for the use of conference committees only when a budget agreement has not emerged full blown from some undefined process of private negotiations. It thus views the “three men in a room” process as the norm, and the conference committee process as something be used if the “closed” system does not work. Counterbudget recommends that budget conference subcommittees become a regular, established part of the state’s budget process and that the Senate and Assembly each establish nine budget subcommittees, with jurisdictions consistent with the jurisdictions of the nine budget conference subcommittees that have functioned for the last two years. Each of these nine subcommittees would play the lead role in developing its house’s changes to the Governor’s appropriations and language bills in its area of jurisdiction. To facilitate this process, the Governor should divide his proposals into nine rather than four appropriations and accompanying language bills corresponding to the jurisdictions of these subcommittees. Each house’s budget subcommittee should include the five individuals from that house who serve on the corresponding budget conference subcommittee along with as many additional members as possible consistent with not having any member serve on more than one such subcommittee while having each subcommittee reflect, as closely as possible, the party breakdown of the whole house. Each subcommittee should be required to work within the parameters established by the joint budget resolution that must be adopted by March 8 of each year. These subcommittees should begin their work as soon as the budget is submitted so that they are able to finalize their specific proposals within one week following the adoption of the joint budget resolution (i.e., by March 15). An overall budget committee in each house (corresponding to the overall budget conference committee), or a tenth subcommittee, should handle revenue bills rather than having such bills assigned to one of the nine subcommittees that handle appropriations. The overall budget committee should handle cross-cutting bills submitted with the Executive Budget that do not fall into the jurisdiction of any of the nine budget subcommittees, such as the debt reform and budget process reform bills submitted by the Governor along with this year’s Executive Budget. Each of the two houses should be required to complete floor action on a full set of budget bills by March 22, with the budget conference committee and the budget conference subcommittees being required to reconcile the differences between the two houses bills by March 29.

Requiring the Legislature to consider the multi-year implications of proposed budget agreements before adopting them

Background

During each of the last six years, the Governor, as part of his annual Executive Budget has proposed tax reduction plans that would grow substantially in cost over time. In at least half of these years, the Legislature has reduced the cost of these plans in the short run and increased their cost in the long run, thus exacerbating the state’s structural deficits. The result is the enactment of tax cuts that can only be financed through good luck (such as the current boom on Wall Street or so-called Welfare Windfall) or through reductions in services that would not be acceptable if proposed at the same time as the multi-year tax cuts.

Under current law, the Governor is required to submit a multi-year financial plan only once a year (within 30 days of the submission of the Executive Budget) and that plan is only required to give estimates of what receipts and disbursements are likely to be during the budget year and the two succeeding years, if the Executive Budget is adopted as submitted. No baseline information is provided, thus obscuring the impact of the proposals contained in the Executive Budget. Nor is any information available on the financial plan impact of changes that would not take effect until the third or fourth years following the budget year. For example, this year’s Executive Budget proposes to use the cash balances that have been accumulated over the last several years to cover the cost of various tax reductions during the next two years but it is not required to disclose the impact in subsequent years when those tax cuts will still be in force but the accumulated cash balances will have been used up. In addition, the multi-year implications of the changes embodied in the budget agreements negotiated by the Governor, the Senate Majority Leader and the Assembly Speaker are not disclosed in a comprehensive manner until the next Executive Budget is submitted. This means that when the members of the Senate and the Assembly are required to vote on the bills implementing those agreements, neither they nor the public are aware of the multi-year implications of the actions that they are taking.

Governor’s Proposal

As part of a program bill submitted with the 2000-01 Executive Budget, the Governor has proposed that when the Senate and Assembly “are in agreement and prepared to finally act on the appropriations bills submitted by the governor,” the Division of the Budget shall prepare a report describing the impact of the changes proposed by the legislature in these and other budget bills on the state’s receipt and disbursement estimates for the budget year and the two succeeding years.

Recommendation

The Governor’s proposal represents an improvement over current law but it could be improved substantially. Counterbudget recommends first requiring that a multi-year financial plan be prepared for review by legislators and the public only on a final budget agreement between the two houses means that relevant information will be made available earlier than it is made available under current law but not early enough to have an impact on the outcomes of the budgetary process. It is much more important that such a multi-year financial plan be prepared for the budget packages (i.e., the combinations of appropriations, revenue and other budget bills) that are to be adopted earlier in the process by each of the two houses. This would make extremely useful and relevant information available to the public, the media and legislators for use during the conference committee process when differences between the two houses’ positions are being worked out. Second, the multi-year financial plan submitted with the Executive Budget and the multi-year financial plans for the Senate, Assembly and finally agreed-upon budget packages should all be for five years rather than for three years (the budget year and two subsequent years). Third, a baseline or current services financial plan should be submitted with the Executive Budget in addition to the currently required multi-year financial plan that estimates what receipts and disbursements are likely to be if the Executive Budget is adopted as submitted.

Increasing the stability of state and local public services

Background

In 1987, the state enacted a large multi-year tax reduction program that cost much more than was originally estimated. This estimating error was compounded in the early 1990s by a national recession that hit New York, New England and California with particular force. The result was a series of budgets (and mid-year Deficit Reduction packages) that included substantial reductions in state and local services. The magnitude of these service reductions would have been even greater if a temporary surcharge on the state’s main business taxes and several more narrowly-drawn tax increases had not been enacted. In addition, after the implementation, on schedule, of the first three annual steps of the 1987 tax cuts, the implementation of the two remaining steps were deferred on several occasions.

If the current recovery ends, New York State is likely to find itself in a situation similar to that which it faced in the early 1990s. Over $4 billion in additional annual tax cuts are either currently scheduled to be phased in over the next four years or proposed for enactment in this year’s Executive Budget. While the state is using its accumulated cash surpluses and the three windfalls that are currently propping up state revenues (the Wall Street, Tobacco and Welfare Windfalls) to get through the next two years without deep service cuts, the situation will be very different if there is either a downturn on Wall Street and/or an economic downturn.

Governor’s Proposal

As part of a program bill submitted with the 2000-01 Executive Budget, the Governor has proposed (a) increasing the amount of end-of-year surplus moneys that the state can deposit into its official “rainy day” fund (the Tax Stabilization Reserve Fund) from two-tenths of one percent of its annual General Fund disbursements to one-half of one percent of such disbursements, and (b) increasing the total amount that it may maintain in such reserve fund from two percent to five percent of its annual General Fund disbursements. This program bill also includes language implementing a proposed Constitutional amendment that would require a two-thirds majority of both houses of the legislature to approve any tax increase of $50 million or more.

Recommendation

In anticipating the possibility of a downturn in the state’s economic fortunes, it is logical that the state should set aside more of its current cash surpluses for use in a “rainy day.” The state should not increase the amounts that it can deposit in the Tax Stabilization Reserve Fund (TSRF), however, unless it also changes the rules governing the use of monies from this fund. Under current law, the state may use moneys from the TSRF to balance its budget in bad times, but any monies withdrawn from the TSRF for this purpose are, in effect, loans that the General Fund must repay “… in not less than three equal annual installments within the period of six years or less next succeeding the date of such transfer …” Given this rigidity, the state’s preeminent budget director, T. Norman Hurd, became very wary of ever depositing any monies into this particular fund. Counterbudget, therefore, recommends that the changes proposed in the TSRF by the Executive Budget not be adopted unless they are accompanied by an elimination of the repayment requirement. The proposal to require a two-thirds majority of both houses to pass any bill that increases the revenue from any individual tax or other revenue source by more than $50 million would mean that 21 of the Senate’s 61 members, or 51 of the Assembly’s 150 members would be able to veto any such increase in revenues even if it were supported by the Governor and an overwhelming majority of the Legislature. This would mean, that in the time of a recession, a small minority of one house of the legislature could require that the budget be balanced entirely through service reductions rather than through some mix of service reductions and revenue increases, even a mix that consisted primarily of tax reductions. This proposed super-majority requirement would also be likely to increase the state’s borrowing costs. In its new study of Fiscal Rules and Bond Yields, the Public Policy Institute of California found that states with tax restrictions and those that require super-majorities to increase taxes face higher borrowing costs than states without such restrictions. Controlling for other factors that affect borrowing costs, this study found that states with tax restrictions pay $1.75 million dollars more in interest for every $1 billion of debt than states without such limits.

Counterbudget 2000-2001: The Revenue Section

March 2000. FPI prepares the Revenue section of Counterbudget, which is coordinated and published each year by SENSES, the Statewide Emergency Network for Social and Economic Security. Counterbudget provides an analysis of the Governor’s Executive Budget Proposal and its impact on low-income New Yorkers focusing on the programs and policies identified as priority issues by the SENSES network of over 2500 human service, religious, labor, economic development and low-income organizations – issues including economic development, public assistance, health care, hunger and nutrition, housing, taxes and revenues, and the budget process. Highlights below; for a copy of the complete report, please contact the Fiscal Policy Institute.

Revenue

  • Previously Enacted Tax Cuts Scheduled to Take Effect in 2000, 2001 and Beyond
  • The STAR Property Tax Relief Plan
  • New multi-year tax cuts proposed in the 2000-2001 Executive Budget
  • Phase Out of the Utility Gross Receipts Tax Over the Next Five Years
  • Immediate Relief for Manufacturers From the Gross Receipts Tax
  • Alternative Minimum Tax
  • Corporate Disclosure Law
  • Personal Income Tax

Previously Enacted Tax Cuts Scheduled to Take Effect in 2000, 2001 and Beyond

Background

Under the financial plan submitted with the 2000-01 Executive Budget, billions of dollars of accumulated cash surpluses will be used over the next several years to “protect” the overly ambitious tax cuts which the state has enacted in the last few years, but which are scheduled to take effect later this year or next year or the year after that.

Taken together, the tax cuts enacted in Governor Cuomo’s last year in office and in Governor Pataki’s first five years are reducing state revenues by $9.4 billion during the current fiscal year alone. As the Governor proudly points out, the total value of the tax cuts over the last six years has been about $29 billion – growing from about a half billion in 1994-95 to $4.2 billion in 1996-97 to this year’s $9.4 billion. And under the laws now on the books, that price tag will continue to grow to $11.6 billion in 2000-01 and $13.3 billion in 2001-02.

The Governor defends his strategy for “protecting” the promised future tax cuts by saying these tax cuts are essential to the state’s continued economic revitalization. But the $9.4 billion in tax cuts that have already been implemented have produced no tangible benefit for the state. Almost all of the state’s job growth over the last several years has occurred in the New York City metropolitan area and has been overwhelmingly related to the good times currently being enjoyed by the financial services sector, professional business services, and entertainment and media.

The real test of the Pataki tax cuts is that they have done virtually nothing to stimulate growth in the parts of the state that are not benefiting from the strength of these industries.

Five billion in additional annual tax cuts are scheduled to take effect over the next 5 years. The tax cuts that are currently on the books will reduce state revenues by $11.6 billion during the state fiscal year that begins on April 1, 2000, and by more than $14 billion per year when fully implemented. This means that the Executive Budget that Governor Pataki recently submitted (and the budget that the State legislature is charged with adopting over the course of the next several months) had to accommodate $2.2 billion more in tax cuts than did the 1999-2000 budget.

Of the $2.2 billion in additional tax cuts to take effect during 2000, about $700 million is for the implementation of the third step of the STAR school property tax rebate program for owner-occupied dwellings, while almost $500 million is attributable to the full year cost of eliminating the state sales tax on the purchase of clothing items costing less than $110. The remainder of the $2.2 billion involves a virtually endless list of business tax breaks, many of which undercut the corporate tax reforms enacted in 1987. Some do this by weakening safeguards added by that law, like the Alternate Minimum Tax that ensures that profitable corporations can not use loopholes to reduce their tax liability by “too much.” Others simply add new loopholes or preferences for particular industries or even for particular firms.

Governor’s Proposal

Not surprisingly, the 2000-2001 Executive Budget, does not propose to repeal or reduce any of the tax cuts that are scheduled to take effect in either 2000 or during any of the subsequent years.

Recommendation

At the very least, the Governor and the Legislature should temporarily suspend those tax cuts that are currently on the books but which do not take effect until on or after April 1, 2001. They could leave these tax cuts on the books but eliminate their implementation dates pending a thorough review by a Blue Ribbon commission consisting of representatives of the executive and legislative branches as well as independent experts from outside of government.

This review should include an analysis of the overall fiscal and economic implications of the tax cuts implemented over the last six years and of those scheduled to take effect in the future. It should also include a review of the interaction of the increasing number of special economic development credits that have been established in recent years (and those that have been proposed in this year’s Executive Budget) for businesses that are involved in particular types of economic activity and/or that locate in particular parts of the state. Many of these credits are being created for related purposes and with similar but not identical requirements. The result is that some firms, for the same activity, may be eligible for several different credits, all of which may have job creation as their goal, but with no or inconsistent accountability or reporting requirements.

The STAR Property Tax Relief Plan

Background

One of the troubling previous year tax cuts that the Governor insists on fully implementing is the STAR plan. In 1997, Governor Pataki got the message that by cutting the top rate on the state’s progressive personal income tax, he was cutting the wrong tax, in the wrong way, at the wrong time. In his 1998 State of the State Address, he put a positive spin on this recognition of the fact that the income tax is a fair tax and that the overwhelming majority of New Yorkers do not feel oppressed by it: “Last year we knew it was time to build on the tax cuts of the first two years. From this podium, I told you that it was time to cut taxes again. Different taxes. Oppressive taxes. Property taxes.” It is, however, unfortunate that this focus on oppressive taxes did not take center stage until after the state had cut the income tax by over $5 billion a year with only half of this amount, at most, staying in the New York economy.

While the Governor’s STAR plan addresses an important need, it does so in an inefficient and ham-handed manner. By allocating property tax relief in a way that is unrelated to the amount of a household’s property tax bill relative to its income, it delivers much less relief to those who are truly overburdened by property taxes than would a substantial expansion of the state’s circuit breaker tax credit C at one-half the $2.7 billion fully implemented annual cost of the STAR program C and much more to homeowners for whom property taxes represent a very small percentage of their income.

Under STAR, the amount of tax relief to which a homeowner is entitled can vary with the median home value in his or her county of residence, but not with the magnitude of that household’s property tax burden relative to its income. The plan’s one income test (whether a senior homeowner’s income is above or below $60,000 a year) creates an illogical notch effect, while begging the question of a rational sliding scale based on income. While the Governor reports that some people are being literally taxed out of their homes, his plan does not target its relief to such households. In addition, two taxpayers with the same income and the same size property tax bill could get widely varying levels of relief depending on where they happen to live.

The STAR plan is also flawed in that it provides relief only to homeowners. This ignores the fact that tenants as well pay property taxes. While homeowners pay property taxes directly, tenants, through their rental payments, carry a substantial portion (usually estimated as being more than one-half) of the property taxes paid by the owners of their buildings. But under STAR, neither tenants nor landlords receive any relief. Only the owners of owner-occupied dwellings are helped by STAR. STAR’s only provision for renters is the circuit breaker for New Yorkers with annual incomes below $18,000. These tenants are allowed to count 25% of their rent as going toward property taxes.

Providing property tax relief only to those who own their own homes has an undesirable discriminatory effect, according to the 1990 Census. At that time, over 62% of white, non-Hispanic householders lived in owner-occupied dwellings, while the comparable figures for Hispanic householders was 16.5% and for black, non-Hispanic householders it was a little less than 27%.

Recommendation

To ensure fairness, property tax relief should not discriminate on the basis of geography or on the basis of whether someone is a renter or a homeowner. STAR fails on both of these counts. Enriching the state’s real property tax circuit breaker credit would provide a more targeted, cost-effective means of providing property tax relief to those who are truly overburdened by the current system.

Expanding the circuit breaker would also eliminate the potential for unequal treatment since it provides relief to renters as well as homeowners. In an expanded circuit breaker for higher-income households, this percentage could be adjusted if appropriate.

New multi-year tax cuts proposed in the 2000-2001 Executive Budget

Background

Like the puppy who repeatedly bangs his head on the coffee table, Governor Pataki is proposing $722 million of additional tax cuts to solve a problem that the $9.4 billion of tax cuts was supposed to solve but did not.

Governor’s Proposal

The 2000-2001 Executive Budget proposes a new round of multi-year tax cuts to be layered on top of the tax cuts that are already scheduled to take effect over the next several years. This new set of proposed tax cuts would also be backloaded – meaning that it’s cost starts small but grows rapidly over time. According to the State Comptroller’s recent analysis of the Executive Budget, the new proposed tax cuts would cost only $60 million in 2000-2001, but their cost would grow to $722 million when fully implemented.

Aside from the Gross Receipts Tax discussed below, most of the other tax cuts proposed in the Executive Budget involve efforts to use the tax code to encourage firms to create jobs in areas of New York State where job creation is needed and where it otherwise would not occur.

Recommendation

If these new tax cuts were really affordable, they could be implemented this year. But they can’t be implemented this year without requiring unacceptable service reductions. No additional multi-year tax cuts should be enacted this year. At the very least, however, if there are new tax cut proposals that are worthy on policy grounds, they should be enacted in lieu of some of the tax cuts now on books not in addition to those tax cuts.

While the goal of job creation is obviously laudable, it ignores the experiences of this and other states with such efforts to use the tax code for “social engineering.” The key lesson is that such provisions induce very little, if any, activity that would not have occurred otherwise, and simply provide other taxpayers’ money to those who happen to meet the criteria involved.

None of these provisions should be enacted into law, particularly at this time when the state has not had any time to evaluate the effectiveness or ineffectiveness of the many similar provisions that have been enacted into law in the last several years. If serious consideration is given to any of these (or similar provisions), however, it is essential that certain basic “common sense” safeguards be included:

Tax credits created in the name of job creation should include accountability mechanisms to ensure that the promised job creation actually materializes. Only one of the Governor’s proposals (a tax credit related to an expansion of the Power for Jobs program), however, includes any kind of even quasi-public reporting on the recipients’ employment levels relative to what those levels had been prior to the receipt of the taxpayers’ money.

Tax credits designed to help areas with poorly performing economies should have logical criteria and should not write into law criteria that make permanent some notion of what those underperforming areas may be at a particular point in time. Many of the Governor’s proposals make just this mistake and do it in a particularly ham-handed way, making certain credits available everywhere outside the 12-county MTA region and nowhere within it. This would make tax breaks available for job creation in some areas with vibrant economies while excluding areas, such as the Bronx and Brooklyn, with extremely high unemployment rates and large concentrations of people living in poverty.

Tax credits or other government largesse should not be used to encourage or to reward the creation of jobs at or below the poverty level. Doing this only drives more money out of the federal, state and county treasuries in the form of the income supports that our society appropriately provides to the working poor. Only one of the Governor’s proposed tax breaks has any job quality requirement, and that requirement is extremely inadequate – providing double-value tax breaks if an employer’s average wages paid exceed $8 per hour.

Subsidies should not go to firms that violate environmental, worker safety, or other laws.

In the new information-based economy, investing in K-12 education; ESL, GED, and adult literacy programs; and, training for incumbent workers has greater pay-off than subsidies for low-wage jobs. Education must be protected from corporate welfare.

Subsidies don’t create markets. Retail and service businesses that serve local markets should not be subsidized except in extreme cases.

Piracy is indefensible in all cases. Even those who feel that New York has to compete with other states, should oppose subsidies for intrastate and intra-region relocations.

Explanations of two of the specific tax cuts follow:

Phase Out of the Utility Gross Receipts Tax Over the Next Five Years

Governor’s Proposal

Of the $722 million in new tax cuts being proposed in the 2000-01 Executive Budget, $517 million is for the Governor’s proposal to eliminate the state’s Gross Receipts Tax on the electric and gas utilities and to make those companies subject to the same corporate net income tax that applies to regular business corporations. The $517 million figure is the Governor’s estimate of the difference between the taxes that the utilities would pay to the state treasury if current law were not changed (3.25% of their gross receipts) and the taxes that they would pay if the Governor’s proposal were to be adopted and fully implemented (7.5% of net income.)

Recommendation

Unlike the other tax cuts proposed in the Executive Budget, the elimination of the gross receipts tax on energy companies makes sense from a tax policy perspective. Since the utilities say that they pass this tax fully on to consumers, it represents a consumption tax and is regressive in nature, meaning that it is not related to the consumer’s “ability to pay.” For small marginally profitable businesses, particularly those in industries that involve high energy usage, a 3.25% decrease in utility bills could mean the difference between failing or succeeding.

  1. The utilities, in their advertisements promoting the Governor’s proposal, indicate that they will pass the full value of the elimination of the gross receipts tax on to consumers. The legislature should ensure that any bills that would enact the Governor’s plan or a similar proposal into law, include language requiring the full “pass-along” of the savings to consumers, consistent with the utilities’ advertisements.
  2. While the elimination of the gross receipts tax on energy companies makes sense from a tax policy perspective, it should be done in lieu of tax cuts of equal value that are currently scheduled to take effect over the next several years (or some of the special corporate tax breaks that were implemented in the last several years) rather than in addition to those tax cuts, thus requiring even deeper service cuts or even greater deferred infrastructure investments in future years.
  3. The Metropolitan Transportation Authority, which provides millions of low and moderate income workers in the New York City area with their only means of transportation to work, is funded in part by a special regional surcharge on the Gross Receipts Tax. It is essential that the MTA be protected from revenue losses as a result of the phase out of the Gross Receipts Tax, just as it was protected from revenue losses in 1997 when the Gross Receipts Tax was reduced from 4.25% to its current 3.25%.

Immediate Relief for Manufacturers From the Gross Receipts Tax

Governor’s Proposal

While a 3.25% reduction in the cost of energy (assuming that all of the tax savings are passed on to consumers) will be a welcome break for all consumers, it will not automatically produce any of the economic benefits being attributed to it by the Governor who sees it as a tremendous boon to energy-intensive manufacturing firms. In fact, while the Executive Budget proposes a gradual phase-out of the tax for the utilities (and, therefore, for most consumers), it proposes an immediate program under which manufacturers would be provided with a rebate of the full amount of the gross receipts taxes included in their energy bills during the phase-out period.

Recommendation

To ensure that there are economic benefits to the state from such a rebate program during the phase-out period, it should only be available to firms that, at the very least, agree to maintain their current employment levels in the state.

While the elimination of the gross receipts tax on energy companies makes sense from a tax policy perspective, it should be done in lieu of tax cuts of equal value that are currently scheduled to take effect over the next several years (or some of the special corporate tax breaks that were implemented in the last several years) rather than in addition to those tax cuts, thus requiring even deeper service cuts or even greater deferred infrastructure investments in future years. It also essential that the MTA be protected from revenue losses as a result of the phase out of the Gross Receipts Tax, as it was in 1997 when one part of this tax was reduced from3.5% to 2.5% in two steps.

Alternative Minimum Tax

Background

The state’s annual Tax Expenditure Report shows that business corporations receive an estimated $1.6 billion in tax breaks each year. The current New York Alternative Minimum Tax (AMT) curbs the use of specific loopholes if their use cuts a corporation’s franchise tax below a certain level, but does nothing to capture transfer pricing and other methods of manipulating net income reported. The federal minimum tax requires corporations to use the same financial accounting they use to report to their shareholders to calculate an alternative minimum tax.

As part of last year’s budget adoption process, legislation was enacted that would reduce the AMT from 3% to 2.5% for tax years beginning after June 30, 2000

Governor’s Proposal

The Pataki Administration has attempted to solve this “problem” by dropping many of the state’s corporate loopholes from the state’s annual accounting.

Recommendation

New York could reduce leakage from these tax preferences if it strengthened its Alternative Minimum Tax (AMT). If New York adopted the federal approach, it would improve the odds that a profitable corporation would pay at least some tax. New York should also repeal the 1994 change that allows corporations to carry net operating losses backward and forward in calculating the AMT, in the same way that they can in calculating their regular tax. This effectively allows firms to “income-average,” an option for individuals that was severely restricted in 1984 and eliminated in 1986.

At the very least, the state should close some of the loopholes it added to the AMT in 1994, to ensure that no firm can use these preferences to reduce its tax liability by more than half. Last year’s legislative provision to reduce the AMT from 3% to 2.5% should be repealed as part of the 2000-2001 budget adoption process.

Corporate Disclosure Law

Background

As discussed in the above section, New York has a great number of tax loopholes for corporations. The most comprehensive state record of these tax breaks is the Tax Expenditure Report, which shows an annual total of $1.6 billion. In addition, untold millions more are lost via transfer pricing and other techniques used by large, multi-national corporations to avoid paying their fair share of taxes.

Governor’s Proposal

The Governor has no proposal this session to improve corporate disclosure.

Recommendation

New York State should enact a corporate tax disclosure law. Each corporation should be required to report their gross and net income, deductions and credits, and the amount of New York state taxes paid, much as they already do at the federal level. This would allow taxpayers and policy makers to identify companies in the state that may be making profits but, through the use of clever business structures and tax expenditures, are paying little or no New York taxes. Only with that information can the state truly know how well its tax policies are working.

Specific accountability measures could: Repeal the Investment Tax Credit ($163 million) Reduce the exclusion of subsidiary income ($100 million) Reduce the exclusion of investment income (140 million) Limit Industrial Development Agency’s ability to abate state taxes ($60 million) Reduce abuse of point-of-service exceptions ($75 million) Recover subsidies from firms that do not live up to the conditions of tax abatements ($15 million) Eliminate last step of corporate surcharge reduction ($250 million)

Personal Income Tax

Background

Since the mid-1970’s, New York State has cut its top PIT rate from 15.375 percent to 6.85 percent. Before the 1987 tax cuts, the state’s top rate was 13.5 percent on investment income and 9.5 percent on wages, salaries and business income.

Governor’s Proposal

The Governor has recommended no new changes to the PIT rate. Some of Pataki’s proposed business tax changes, however, may result in different personal income taxes for owners of unincorporated businesses.

Recommendation

By restoring some of the progressitivity that was eliminated by the 1987 and 1995 tax cuts, approximately $1.7 billion could be generated for socially and economically productive investments in the state’s human and physical infrastructure.

Over $400 million could be saved by simply reducing the amount of the tax cut that was given to taxpayers with incomes between $100,000 ($75,000 for singles) and $150,000 in 1997, and by eliminating that final tax cut for taxpayers with incomes above $150,000. This could be done by restoring the top tax rate on the portion of taxable income over $100,000 to the 1996 top rate of 7.125 percent from the 1997 level of 6.85 percent. Thus, a family earning $120,000 would still get the 1997 tax cut on its first $100,000 of taxable income but would pay at the 1996 rate on the portion of its income above $100,000.

An additional $1.3 billion could be generated by establishing an additional tax of 1 percent for the portion of all taxpayers’ income above $150,000 and another 1 percent for the portions of income above $200,000. Even for this small portion of state taxpayers (approximately 3 percent), tax rates would still be well below what they were in 1987. For those with incomes between $150,000 and $200,000, the tax rate would be 7.85 percent compared to the 1987 rates of 9.5 percent on earned income and 13.5 percent on investment income. For those with incomes above $200,000, the tax rate would be 9.125 percent, still below the 1987 rates and below the current top rates in an increasing number of states.

Letter from Nancy L. Johnson sent individually to all 50 governors

March 15, 2000. A copy of the letter below was sent to each of the 50 governors. Ms. Johnson is the chairman of the Subcommittee on Human Resources, Committee on Ways and Means, U.S. House of Representatives.

The Honorable Don Siegelman
Governor of Alabama
State Capitol
600 Dexter Avenue
Montgomery, AL 36130-2751

Dear Governor Siegelman:

As you may recall, I wrote last year urging you and other governors to increase the rate at which TANF money is spent, because there is so much states can do to increase self sufficiency. After 60 years of failed attempts to bring people out of poverty by giving them noncontingent benefits, we have turned a new page and expect – even demand – reciprocity. Using taxpayer money, government helps low-income families, but only on the condition that they work towards self sufficiency. As a result, welfare rolls are down, earnings by former welfare mothers are up, and child poverty is down – way down. This reform has been a triumph for the states. But too many people remain on the rolls, a great deal remains to be done to help those who have left welfare but don’t work, and we can and must do more to help people who leave welfare get better jobs through both experience and training. All these activities cost money, and I urged you to spend your surpluses accordingly.

I am happy to report to you that the Congressional Budget Office’s new baseline shows that you and your fellow governors are responding exactly as I had hoped. Here’s the data. Last year CBO testified before my Subcommittee that at the end of 2002, states would have built up TANF reserves of $22.8 billion. Under the January 2000 baseline, less than a year later, CBO is estimating, based on updated information on state spending, that the balance at the end of 2002 will be only $14.2 billion. Moreover, CBO estimates that by 2002, states will be spending 96 percent of their TANF dollars. Thus, states have now begun to use more of their block grant money and, if the results reviewed above are a measure, to use it wisely.

I am writing again this year to report your progress in using federal resources and to urge you to continue the productive spending in which you are now engaged. We have reviewed the spending patterns in many states and have found a significant change in state spending since 1994. Before states began implementing welfare reform, they often spent 95 percent of their funds on cash benefits and administration. Now many states spend less than 50 percent on cash benefits and spend 40 percent or more on child care, job preparation, transportation, and other activities designed to help families get and keep jobs. These are highly appropriate changes in state spending. They signal that TANF is no longer primarily a welfare program – but a work program.

To push the program further in the direction of work, I hope you and other governors and state legislators will continue making such remarkable investments in activities that promote work. Based on our hearings and discussions with researchers and state officials around the country, I would like to bring four areas to your attention that seem to be strong candidates for additional funding. First, we have learned that a very high percentage of mothers who leave welfare for work have difficulty retaining jobs. Programs that show how mothers can be followed and helped to retain their employment after they leave welfare will provide an example for the rest of the country to follow. Second, no one has yet shown that they can have a significant impact in helping mothers move up the employment ladder to more demanding and better paying jobs. Successful investments in on-the-job training, community college courses, and training mothers for jobs available in their own communities will also be the object of national attention. Third, it has been reported that a large percentage of the mothers left on welfare have serious barriers to work such as addictions, personality problems, and intellectual and educational shortcomings. Again, states that show how mothers with barriers to employment can be better prepared to enter the labor force will provide an example for other states to follow. Finally, we have barely scratched the surface of reducing illegitimate births. Although we have provided $20 million bonuses to five states that reduced their illegitimacy rates, we need to learn much more about actions which government can take to reduce births outside marriage or, equally important, to promote marriage. Similarly, we seem to be at the beginning of a movement to help fathers improve their employability and become better parents as well as better marital partners. I urge all of you to focus on these goals and share with this Committee the programs you have developed that are working.

In reviewing these and similar investments for your own state, I hope you will be careful to avoid supplanting TANF funds. By supplantation, I mean replacing state dollars with TANF dollars on activities that are legal uses of TANF funding. Supplantation, of course, is perfectly legal under the TANF statute. However, if the savings from supplanted federal funds are used for purposes other than those specified in the TANF legislation, Congress will react by assuming that we have provided states with too much money. As the reauthorization of the TANF legislation in 2002 approaches, it would be a shame if a few states followed the suggestions of their budget officials and replaced state dollars with TANF dollars in order to provide tax cuts, build roads or bridges, or in general use funds for non-TANF purposes. It has become increasingly clear that the media, child advocates, Congressional committees, and, at my request, the General Accounting Office, are watching to see if states supplant TANF funds. Thus, it is likely that jurisdictions that do so will become widely known and criticized. Equally important, these jurisdictions could provoke Congress to take actions that would hold serious consequences for every state.

Under the leadership of state governments, with far more flexible federal funding than at any time in our history, we are moving with impressive speed to greatly reduce the nation’s longstanding problem with poverty. States have made this progress because we have turned away from noncontingent handouts and emphasized employment and self-sufficiency. By supplementing the income of low-wage workers with public benefits such as Medicaid, food stamps, housing, and above all, the Earned Income Credit, we have reduced child poverty 25 percent in the past four years. Now, again understate leadership, we must bring the advantages of self-sufficiency to the families that remain on welfare, help keep these low-skill parents productively employed, and find new ways to help them advance to better jobs.

To achieve these new and even revolutionary goals, we must retain all the federal and state resources in the TANF block grant, the U.S. Employment Service, the Workforce Investment Act, and other employment programs. If you and your fellow governors will continue to productively use these resources to help low-income families achieve independence, we will continue to do everything possible here in Washington to insure that the federal resources continue unabated and that we provide you with more and more flexibility in the use of these resources.

Sincerely,

Nancy L. Johnson
Chairman

McCall, agency spar over accountability

March 6, 2000. William Tuthill reports in the Capital District Business Review:

New York state’s array of economic development programs, in which  millions of dollars are annually loaned or given to spur businesses and create jobs,  lack adequate means of measuring their own effectiveness, according to a  report by State Comptroller H. Carl McCall.

There are not enough tools in place to show whether funded projects  have resulted in the increase or retention of jobs, the report said. It is an  argument McCall has made before since taking office in 1993, as did his predecessor, former Comptroller Edward Regan.

The Empire State Development Corp. is the state’s economic  development agency and overseer of business subsidy programs. Its mission is to attract  business to the state, and to help the state retain the business it already has, by providing technical and financial assistance to companies that might  otherwise not settle here.

In a Feb. 10 report, McCall called on the ESD to do a better job  tracking employment at companies receiving grants or loans.

“Taxpayers have a right to know if their multimillion-dollar  investment in job-creation programs is working, and lawmakers need solid information  to determine what programs are the best investments,” McCall said in a  statement accompanying the report.

Empire State Development spokesman Eric Mangan called the report “a   blatantly partisan political attack, long on political rhetoric and short on   facts.” He said officials in the comptroller’s office ignored information the ESD  gave them that would have given a more complete picture of the state’s   job-tracking efforts.

In a written response included in the comptroller’s report, ESD said  the success of its programs cannot necessarily be measured by numbers of  jobs because of economic factors beyond the ESD’s control.

“New York’s economic performance is primarily the result of national-  and regional-level economic forces,” the agency wrote. “We do not believe  that in a private-sector economy, intervention by ESD or other government agencies   offering assistance programs is the primary determinant of economic   growth.”

Still, figures released last year by ESD show that in the three years  up to 1999, companies receiving state assistance exceeded targeted employment  goals by 10 percent, said Mangan, the agency spokesman.

Empire State Development consists of four major economic development entities: the Job Development Authority, The Department of Economic  Development, the Urban Development Corp., and the Science and Technology Foundation.

The first, the Job Development Authority, is financed mainly through  bond financing. The other three are funded by the Legislature. From 1994 to  1998, those three entities received a total of more than $1 billion for a  variety of grant and loan programs.

The Comptroller set out to determine whether Empire State Development  has sufficient program indicators for measuring the costs and benefits of  its job-creation and -retention programs. The Comptroller looked at job  development programs from April 1, 1993, through July 31, 1998.

The report itself was prepared on an “exception basis,” i.e. it   highlights areas needing improvement and does not address areas that may be   functioning properly.

The Comptroller’s Office found there is no integrated system for  combining the data of the ESD’s four agencies. To assess the results of the  agencies’ programs, the auditors had to gather and summarize data from separate  databases.

Between 1993 and 1998, ESD gave assistance to 193 projects that had  set goals for employment. But the agency’s job-tracking system had employment data  for only 143 projects at the time of the review. ESD officials responded  that 47 of the 50 unaccounted-for projects did not have to be on the job-tracking  system for various reasons.

Only a handful of the projects had contractual obligations to attain prescribed employment levels; most only established a target employment  level, and state aid was not contingent on reaching that target.

ESD has made progress in developing performance measures to assess  the cost-effectiveness of its programs, the Comptroller’s report said, but  needs to do more. The auditors reported problems with the reliability of data ESD  uses to track projects’ employment levels.

It is a sentiment echoed by Frank Mauro, a longtime government  watchdog.

“What they’re doing is a step forward, but it is still inadequate  compared to other states,” said Mauro, executive director of the Fiscal Policy   Institute, a Latham-based think tank. “There is progress, but it needs improvement.”

For example, Mauro said, Empire State Development’s data does not  include information about tax breaks and other subsidies state businesses  receive from other sources, such as local governments and industrial development  agencies.

“Most of these projects are getting other incentives,” Mauro said.   “There is no comprehensive accounting of all the incentives and subsidies from all  sources.” Such an accounting, Mauro said, would give a more accurate   measure of whether public assistance to business is paying off.

Other observers argue that not only must ESD improve its job-tracking  system on projects that receive grants or loans, but also must be held  accountable if target employment levels are not reached.

Brian Backstrom, vice president of CHANGE-NY, a conservative think  tank in Clifton Park, said his group has for years promoted stronger  accountability.

“If a company does not follow through and fulfill promises, it should   payback the money,” Backstrom said. “It’s logical, reasonable and perfectly  contractual.”