A Blind Eye: Assessing New York's 1999-2000 Executive Budget in Economic, Social and Fiscal Context

February 1999. The Fiscal Policy Institute’s annual budget briefing. Below, text from the briefing book on the 1999-2000 executive budget. Also see Personal Income Tax Changes in New York State: Enacted 1995 Cuts and Proposed 2003 Cuts, which was presented at the briefing in Albany by Michael Ettlinger of the Institute on Taxation and Economic Policy.

• The 1999-2000 Executive Budget turns a blind eye to the major challenges and opportunities facing New York State, failing to even recognize them – let alone to address them.
• Instead it repeats misleading platitudes in an attempt to have New Yorkers view the state of their state through rose colored glasses.
• Rather than acknowledging that the upstate New York economy is floundering, the administration trumpets statewide job creation numbers which sound significant, but when put into context are not significant by historical standards.
• The Wall Street boom is benefiting the state treasury but those resources, while they last, should be invested in programs and services that strengthen the state’s economy for the long haul and make it easier rather than harder for people to move up the socioeconomic ladder.

New York’s Economic Story in the 1990s – 10 Themes

• While 1998 saw some improvement, the state’s recovery is still weak compared to earlier periods.
• Tax cuts have not boosted the economy.
• NYS still lags most urban industrial states. Growth has been concentrated downstate.
• Manufacturing-dependent upstate has been stagnant.
• While there has been some growth in middle income jobs in media, entertainment and computers – much of the job growth has been low-wage and tens of thousands of middle income jobs have been lost.
• Proportionately more of New York’s population has left the state in the 1990s than in any other state and many regions also have seen net declines.
• Both the NYC and NYS economies have been heavily dependent on a volatile Wall Street sector.
• Income inequality has intensified, not only because the rich have gotten richer, but because both the poor and the middle class have seen their real incomes decline.
• The outlook is for national and state economic and employment growth to slow over the next 2 years.

The truth is that the tax cuts have NOT boosted the state’s economy.

• New York’s growth has been slower than that of the rest of the U.S.
• New York has not done as well in this recovery relative to the nation as a whole as it did in the 1980s (prior to the big tax cuts).
• The growth that has occurred in NYS is largely due to the Wall Street boom and is concentrated in the NYC metropolitan area.
• Tax cuts have not been a factor in the Wall Street boom.
• The tax cuts have not averted the stagnation of the upstate economy. Upstate New York has been the worst performing major region in the country during the current expansion.
• In fact, the tax cuts take more money out of the economy than they pump back into it. The personal income tax cuts require $4.8 billion less in infrastructure, health care, education and other important investments each year, but only half of that amount stays in the New York economy. The rest goes to the federal treasury and nonresidents, or is spent on goods and services produced outside the state.

The drop in the unemployment rate is due in part to a decline in the labor force.

• While the state’s unemployment rate has been declining (from 6.1% in December 1997 to 5.5% in December 1998), for some major areas, a shrinking labor force explains the drop in the unemployment rate.
• In the Rochester metro area, unemployment fell from 4% in December 1997 to 3.6% in December 1998, yet resident employment also declined by 5,500 over that12-month period. The labor force fell by 8,100 over that period, because people either dropped out of the labor force (possibly because they became too discouraged), or they left the area.
• Similarly, in the Buffalo area, unemployment fell from 5.2% to 4.5%, but resident employment dropped by 5,000 and the labor force fell by 9,400 people.

The net effect of job shifts has been to erode the middle class.

• There has been some growth in middle income jobs, e.g., New York City has gained 75,000 jobs in media, entertainment, computers and professional services between 1992 and 1998.
• However, over 200,000 middle income jobs have been lost statewide over that period, including: manufacturing (-98,000 jobs), banking (-41,000 jobs), public and private hospitals (-37,000 jobs), and other government (-30,000 jobs).
• Much of the job growth has been in low-wage industries such as retailing, social services, and temporary help services.
• Increasingly, jobs are not providing health insurance benefits: the number of uninsured is rising rapidly in New York and nearly half of the uninsured adults work year-round.

What accounts for the decline in total wage income?

• Several regions were hard hit by the loss of high-paying manufacturing jobs: Long Island, Hudson Valley, Mohawk Valley, Southern Tier, and Central New York (Syracuse area).
• Several thousand jobs have been lost in middle income positions in banking, hospitals and government.
• Although New York City has had the strongest increase in real wages and salaries since 1989, gains have been heavily concentrated among high earners on Wall Street and in corporate headquarters.
• Across the state, much of the job growth has been in low-wage industries.

More people leave New York than anywhere else.

• From 1990-1998, net domestic out-migration has been proportionately greater from New York than from any other state.
• 1.7 million more people – 9.6% of the 1990 population – have left New York in the 1990s than have migrated to the State from other parts of the U.S.
• New York would have suffered a large net population loss were it not for over 1 million (net) foreign immigrants, the most for any state except for California.

The drop in the unemployment rate is due in part to a decline in the labor force.

• While the State’s unemployment rate has been declining (from 6.1% in December 1997 to 5.5% in December1998), for some major areas, a shrinking labor force explains the drop in the unemployment rate.
• In the Rochester metro area, unemployment fell from 4% in December 1998 to 3.6% in December 1998, yet resident employment also declined by 5,500 over that 12-month period.
• The labor force fell by 8,100 over that period, because people either dropped out of the labor force (possibly because they became too discouraged), or they left the area.
• Similarly, in the Buffalo area, unemployment fell from 5.2% to 4.5%, but resident employment dropped by 5,000 and the labor force fell by 9,400 people.

New York City’s growth in the 1990s has been weaker, more dependent on Wall Street and less diversified than in the 1980s expansion.

• For comparable 5-year periods, real earnings grew by $38 billion in the 1983-88 period compared to $22 billion over the 1992-97 period ($1997).
• Wall Street accounted for over half of the growth in real earnings in the 1990s expansion period vs. 23% in the 1980s expansion.
• During the 1980s expansion, 8 sectors had 5%+ shares of earnings growth, while in the 1990s, only 4 sectors have had shares of 5% or greater.

Despite its high poverty rates and great wage and income inequality, New York maintains a regressive state-local tax system.

• A progressive tax system is one in which the portion of a household’s income that goes to taxes increases as its income increases.
• A regressive tax system is one in which that portion decreases as one’s income increases. In other words, a regressive tax system is one in which wealthy households pay a smaller share of their incomes in taxes than do lower income households.
• A proportional tax system is one in which all households, regardless of their income levels, pay about the same portion of their incomes in taxes.
• While it is interesting to note if an individual tax is regressive, proportional, or progressive, the more important question is whether the tax system as a whole is regressive, proportional, or progressive. For most states, the question is whether or not the progressivity of its personal and corporate income taxes and its estate tax balance out the regressivity of its consumption, excise and property taxes.

Are the Pataki tax cuts stimulating the economy?

• While New York State’s income tax cuts do not pass muster on fairness grounds, they also raise questions about the efficacy of tax cutting as an economic development strategy.
• New York’s economic growth over the last several years has been concentrated in the New York City metropolitan area and is more related to the boom on Wall Street than to state tax policy.
• If it were not for the Wall Street boom, New York’s rate of job growth would be even further below the national average than it has been. We must take off our blinders and acknowledge that because of federal deductibility and other leakages, the tax cuts are very likely taking more money out of the state’s economy than they are putting back into it.
• Because of their size, the tax cuts are also forcing significant reductions in services such as health care, education and transit which diminish the state’s economic viability in the long run in addition to their immediate effects.

Why is the 1999-2000 Executive Budget proposing $1.3 billion in budget cuts when New York State has a multi-billion surplus?

• Governor Pataki’s 1999-2000 Executive Budget proposal projects that New York State will end its current fiscal year, on March 31, 1999, with a surplus of $1.789 billion dollars. Some observers anticipate an even greater surplus.
• At the same time, however, the Governor is proposing budget cuts that will reduce state expenditures by $1.3 billion during 1999-2000. If implemented as recommended by the Governor, these budget cuts are projected to reduce state expenditures by about $2 billion during the 2000-2001 state fiscal year.
• This year’s spending cuts are necessary to finance this year’s new tax cuts, to make a contribution to the financing of next year’s new tax cuts, and to somehow atone for last year’s budget growing at greater than the rate of inflation.
• The $1.789 billion surplus is being rolled over to subsequent fiscal years to make a further contribution to financing those tax cuts.

Is there a better way?

• The key problem that New York State faces in balancing its budget in an intelligent manner is that the cost of the new tax cuts scheduled to take effect in 1999-2000 ($1.8 billion) account for 90% of the underlying revenue growth expected during that period.
• For 2000-2001 the problem is more severe, with the cost of that year’s additional tax reductions ($2.1 billion) actually exceeding by a significant amount the underlying revenue growth ($1.3 billion) being projected by the Division of the Budget for that year.
• While the Governor’s plan to roll over the $1.789 billion surplus to 2000-2001 papers over that year’s underlying budget gap a little, as does the $700 million tail on this year’s proposed budget cuts, an additional $1.6 billion in new budget cuts will have to be made next year if the state does not act now to restructure the tax cuts currently scheduled to take effect in the next several years.

Yes, New York State can achieve structural balance without counterproductive service reductions.

• The change in the STAR plan being recommended by the Governor in the Executive Budget (to go from using overall equalization rates to using residential equalization rates) shows that the administration is finally beginning to acknowledge that there are fundamental problems inherent in a program that provides property tax relief based on some overall county and school district averages rather than on the basis of the property taxes actually paid by homeowners relative to their incomes.
• This recognition should open the door to a more fundamental retargeting of STAR that ensures that it provides relief to those who need it without giving relief to those who do not. A greatly expanded circuit breaker can provide more relief to those who truly need it at half or less of the overall cost of the current STAR program.
• Realistic reassessments must also be made of both existing and proposed tax preferences for business and or the recent and proposed personal income tax cuts.