January 23, 2002. A critical assessment of federal, state and local policy options. FPI’s three budget reports:

Also distributed at the briefing: a group press release, below, and an updated edition of the State of Working New York 2001.

Groups Propose More Balanced and Economically Sensible Approach to Balancing State Budget; Call on Federal Government to Address Revenue Aspects of Governor Pataki’s $54 Billion Plan

ALBANY – Faith-based organizations, health and social service providers, labor unions and research organizations are calling upon Governor George Pataki and the State Legislature to balance the state budget in a  “more balanced and economically sensible manner.”  Citing a recent paper by Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics, and Peter Orszag of the Brookings Institution, the groups reminded Governor Pataki that cutting state and local services during a recession will make the situation worse rather than better. They also called for immediate action of the tax revenue portions of the $54 billion recovery plan that Governor Pataki presented to the federal government last year.

In their recent paper, which was published by the Center on Budget and Policy Priorities, Stiglitz and Orszag point out that while some state officials apparently believe that reducing spending is preferable to raising taxes, “economic analysis suggests that tax increases would not in general be more harmful to the economy than spending reductions.  Indeed, in the short run (which is the period of concern during a downturn), the adverse impact of a tax increase on the economy may, if anything, be smaller than the adverse impact of a spending reduction, because some of the tax increase would result in reduced saving rather than reduced consumption.”  Stiglitz and Orszag conclude that the least damaging type of temporary gap closing action during a recession is a tax on the portions of income that are least likely to be spent.

“A balanced approach to balancing the state budget makes good economic sense, but is also important from a societal perspective that the pain of balancing the state budget be spread more fairly and that counter-productive cuts in essential services, from education to mental health, be avoided,” said Frank Mauro, Executive Director of the Fiscal Policy Institute.

Roger Benson, President of the New York State Public Employees Federation (PEF) underscored the need for greater balance: “The budget needs to have shared sacrifices but it does not require any sacrifices from the wealthy and big business.”

David R. Jones, Chief Executive Officer and President of the Community Service Society, said, “In times of economic hardship, government must give priority to the needs of the most vulnerable New Yorkers.  Temporary, modest, tax increases on those with the greatest ability to pay would give the State and the City the ability to minimize budget cuts to vital programs.  This is just, humane, and economically sensible fiscal policy.”

The groups pointed out that the conclusions that Stiglitz and Orszag reached in their paper can assist New York State in balancing its budget in the aftermath of the September 11th attacks:

1.  Tax increases on higher income households are the least damaging mechanism for closing state fiscal deficits in the short run.  Reductions in government spending on goods and services, or reductions in transfer payments to lower income families, are likely to be more damaging to the economy in the short run.

2. Given the existence of balanced budget rules at the state level, some form of federal fiscal relief to states is warranted since state spending reductions or tax increases would be counter productive at this time – restraining the economy at a time when it is already slowing.

Based on the Stiglitz-Orszag analysis, the groups recommended a temporary two-year personal income tax surcharge on the portions of taxpayers’ incomes above $100,000. “Even a very low rate surcharge (of one percent or less) can provide billions of dollars that would allow us to avoid property tax increases and steep cutbacks in education and other essential services,” said Mauro.

“It is also essential that the Governor and New York business, labor and civic leaders  work with President Bush, the New York Congressional delegation, and the leaders of the U. S. House and Senate to secure direct federal assistance for the tax revenue that the state is losing as a direct result of the September 11 attacks,” said Mauro. “No state should have to run its economy into the ground to make up for losses that are a national responsibility.”

Governor Pataki’s original $54 billion request for federal assistance asked for $9 billion to cover lost tax revenues. “The budget that Governor Pataki presented yesterday, that projects unprecedented reductions in state income tax collections, makes clear that this aspect of the Governor=s plan needs to be resolved in one way or another,” said Mauro.  “Even if it means a temporary advance from the federal government pending a detailed reconciliation of how much of the revenue loss is directly related to the international attack on the World Trade Center.”  Based on the projections in Pataki’s budget, Mauro estimated that this advance should be approximately $5 billion.