Executive Summary: New York State Economic and Fiscal Outlook FY 2017

February 3, 2016. Vice President Joe Biden once said, “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”

Governor Cuomo’s 2017 Executive Budget advances some bold and progressive proposals that well reflect the values and needs of New Yorkers. In particular, the governor has shown great leadership and vision in forcefully advocating for a first-in-the nation statewide $15 minimum wage. If enacted, the minimum wage increase would lift the incomes of 3.2 million New Yorkers who desperately need a raise. The governor’s proposal to build a system of paid family leave is another important step that would improve the lives of New Yorkers.

The Executive Budget rightly recognizes the need to address issues affecting some of the poorest and most vulnerable residents in our state. It proposes to reduce homelessness and high levels of poverty in many of our upstate cities. It includes a multi-year plan to combat homelessness, together with the development of 10 anti-poverty tasks forces; these are productive ways to recognize that child poverty and homelessness are at record levels across the state.

But, in many critical human infrastructure investment areas, rigid adherence to a two percent spending cap is unnecessarily blocking real progress. Last June, the State Budget Director noted that New York State “is in the best fiscal position in many years … with money in the bank, growing reserves and more surpluses on the horizon.” The state now enjoys its highest credit ratings in more than four decades. Although the recovery has benefitted New Yorkers unevenly, the state’s economy is in the midst of a period of sustained employment and total income growth. Tax receipts are growing at an annual rate of four or five percent. Yet despite the strong current economic and revenue picture, state operating expenditures are projected to increase by only 1.7 percent in FY 2017 from the current year—less than the 1.9 percent projected rate of consumer inflation.

This stark juxtaposition between four to five percent growth in tax receipts and a self-imposed cap on spending of two percent or less define a budget policy best characterized as unforced austerity. It is austerity driven by a policy choice, not by a faltering economy.

Unforced austerity budgeting has severely restrained services in many critical areas affecting New York’s children, families, and their communities. The state has simultaneously put a fiscal straitjacket on local governments by insisting that they live under an artificial and rigid tax cap, limiting property tax increases to two percent or the rate of inflation, whichever is lower. The result is that local government spending in most parts of the state has suffered, with a corresponding deterioration in services from schools to parks to libraries, and an inadequate public response to hardships afflicting many families. It is hard to imagine that a reduction in school and local government jobs of nearly nine percent would be possible without a significant erosion in public services.

In 2007, legislation responded to the final court ruling in the Campaign for Fiscal Equity case, establishing a program for getting the state in compliance with its own constitution and providing adequate funding for at minimum a sound, basic education to all students. That program was abandoned during the Great Recession. In the coming fiscal year, the state is $4.8 billion short of where it should be according to the legislation. Governor Cuomo proposes just $455 million in funds that can reasonably be considered going to fill a gap that is more than ten times that size, an abrogation of his constitutional responsibilities and a betrayal of New York State’s school children.

The Executive Budget also proposes a focus on community schools as a way to help faltering schools to improve, but the $100 million allocation is not nearly enough to implement the program in all the schools that need it. Eliminating the misguided Education Tax Credit and redirecting the proposed $150 million cost to community schools would be a better way to ensure that all students in struggling schools get the resources they need to succeed.

On an inflation-adjusted basis, general-purpose aid to local governments has fallen by 13 percent over the past five years. Declining state aid and capped ability to raise local property taxes have severely constrained local budgets around the state. In the first two years following the imposition of the property tax cap, county governments cut spending on community colleges and public health by 15 percent, fire protection by 14 percent, elder services by 13 percent, and youth services by 28 percent.

On top of the cuts sustained in the past five years of austerity, substantial further budget cuts will be layered on in order to keep within the two percent spending limit. These as-yet unspecified cuts total $9.5 billion over the next three years or an average of $3.2 billion a year.

Perhaps the biggest bombshell in this year’s Executive Budget is the proposal to shift what in two years will be about a billion dollars in CUNY and Medicaid spending from the state’s budget to the City of New York. This is a pernicious, unilateral shift in fiscal responsibility to a local government, essentially punishing the city for its economic and fiscal success.

Some state budget changes are benign enough, but others are more risky. Converting STAR from a directly paid state budget item to a credit against the personal income tax, for example, does little more than shift the expense out from under the cap. But the governor has also proposed a set of extremely ambitious infrastructure proposals. In this case, his ambition is not limited by the tight cap on operating spending because these are capital projects. Devoting resources to our state’s ailing roads, bridges and public transit is a wise investment. However, the funding sources to support these ambitious initiatives are vague at best. The budget should clearly identify funding plans for all of these initiatives, and match spending on the state’s infrastructure needs with the needs of year-to-year operations, without the constraint of a spending cap.

New York’s overall state and local tax system is regressive. The state personal income tax should be made more progressive to offset regressive property and sales taxes that result in an overall regressive state tax system. New York should build on the current income tax structure originally proposed by Governor Cuomo in December 2011, which is set to expire at the end of 2017, by increasing the number of brackets from eight to 12, and making the new structure permanent. This “1% Plan for New York Tax Fairness” would retain the middle class tax breaks the governor introduced then, and generally increase tax rates slightly for the richest 1% of New York’s taxpayers, i.e., those with incomes over $665,000.

If the “millionaires’ tax” is not extended, New York State would suffer a net $2.7 billion revenue drop that would entail a $1 billion tax increase for moderate- and middle-income families (with incomes from roughly $40,000 to $300,000), while the richest 1% would a get a $3.7 billion windfall. The 1% plan would raise income taxes by $2.2 billion, with 17 percent of that amount paid by out-of-state residents.

A sound body of research supports the conclusion that businesses can reasonably accommodate a phased-in $15 minimum wage and that it would be good public policy for New York. Since the government-funded human services sector is one of the state’s biggest low-wage employers. It is important that the state increase funding to make sure that the higher wage floor benefits the many non-profit sector workers providing state human services under state contract or paid through Medicaid reimbursements. Medicaid and other public assistance savings and increased tax payments will help offset the budget costs. On net, there will be no adverse economic effects for New York and the well-being of one-third of the workforce and their families will improve.

We have the resources to make sure this budget is of great value to all New Yorkers. Now we just need the political will to make it a reality.

Complete Briefing Book: New York State Economic and Fiscal Outlook FY 2017