FINAL PATAKI BUDGET: SPEND NOW, CUT TAXES LATER
FISCALWATCH MEMO January 17, 2006
By E.J. McMahon

Governor George Pataki's final Executive Budget would increase state spending at well over twice the inflation rate[1] while initiating a new round of significant state tax cuts that would not become fully effective until two years after he leaves office.

As shown in the chart below, the state funds spending hike (excluding federal grants) for fiscal 2007 is the second largest Pataki has proposed in his 12 years as governor.

State Spending Changes Proposed by Governor Pataki

Source: New York State Executive Budget.

The rate of increase for the coming year is more than double the rate of inflation. However, repeating what has been a familiar pattern in recent years, the spending total is inflated by some factors that don't reflect an expansion of existing programmatic expenses. The largest is $764 million in added expenses related to the takeover of local Medicaid and the takeover of Family Health Plus program. Another $530 million in new spending would finance a $400 property tax rebate for homeowners living in school districts outside New York City that are able to cap their annual spending increases.[2]

Even with these two factors excluded from the total, the state funds spending hike would come to 4.8 percent—still well above inflation.

The overall Pataki record

Pataki's final Executive Budget would allow state funds spending to grow to about $75 billion, compared to just under $43 billion when he took office in 1995. Including Health Care Reform Act (HCRA) programs previously carried off-budget, state funds spending during Pataki's three terms will have risen by 76 percent. Measured on an all-funds basis (including federal grants), the budget totals nearly $111 billion—up about 79 percent from the $62 billion all-funds total for fiscal 1995. Actual and projected consumer price inflation for the same period totaled about 34 percent.[3]

New York's State Budget, FY 1995-2007
Source: New York State Executive Budget

Tax cuts: a mixed bag

Based on the forthcoming report of a tax reform commission chaired by supply-side economist Lawrence Kudlow, the Executive Budget calls for the largest reductions in state personal and business income taxes since the original Pataki income tax cut package of 1995, along with repeal of New York's estate tax and a new education tax credit for families living in under-performing school districts. But of these $3.4 billion in total state tax cuts, only $345 million would take effect in fiscal 2007.

The budget also calls for a $1 per-pack increase in the state's $1.50 per pack cigarette tax, which is expected to raise $308 million next year, plus roughly $150 million in fee and fine increases. As a result, not including additional STAR offsets in local property taxes for homeowners, the proposed fiscal 2007 budget calls for net state and fee increases of at least $200 million.

What's driving state funds spending?

Here is a breakdown of categories that account for nearly 99 percent of the $4.6 billion state funds spending increase. These include STAR payments, which are properly accounted for in the governor's budget as a spending item.

Sources of Added State Spending in FY 2007

   

Change (in $millions)

 

Takeover of local Medicaid costs

764

 

STAR (including "STAR Plus")

679

 

School Aid

577

 

Public Health (including HCRA)

513

 

Mental Hygiene

445

 

Pensions and Health Benefits

405

 

Debt Service

395

 

Higher Education

281

 

Judiciary

211

 

Transportation

210

 

Corrections

116

 

The Executive Budget as opening bid

As noted in previous FiscalWatch memos concerning the annual Executive Budget, the spending figures in the Governor's proposal traditionally are viewed as the floor for further negotiations with the Legislature, which invariably wants to spend more on nearly everything.

Since he took office as governor in 1995, Pataki's recommended changes in state funds spending ranged from a cut of 4.2 percent in fiscal 1996-97, his second year in office, to a high of 8.5 percent in 1998-99, the budget introduced before his first re-election campaign. During his first 10 years in office, his average proposed spending increase was about $1.2 billion, or 2.3 percent. But when the Legislature got through with it, the state funds budget ended up growing nearly twice as much—by an average of $2.16 billion, or 4.25 percent.

Last year, the Legislature and the governor agreed to add about $1.2 billion to Pataki's original spending proposal, converting an already generous 5.4 percent spending increase into a whopping 7.6 percent rise. If this pattern holds in 2006—which is, significantly, an election year—the result will be a 9 percent state funds spending increase.

The bottom-line outlook

Because roughly 90 percent of his proposed state tax reductions would not take place until after he leaves office, it would be a stretch to call the governor's final spending plan a "tax-cutting" budget. However, Pataki has laid out a strong pro-growth, pro-investment tax policy agenda that could serve as a benchmark for his successor.

The ultimate viability of the tax cuts and other key priorities, such as the education tax credit and the new STAR rebate linked to a cap on school spending, will depend to a great extent on Pataki's ability to hold down spending as a lame duck.

Notes

  1. The Executive Budget forecasts that the composite Consumer Price Index (CPI) of New York will grow 2.8 percent in state fiscal year 2006-07, which begins April 1. See page 127 of the budget's Economic and Revenue Outlook: Analysis and Methodology volume.
  2. The cap would amount to 4 percent a year or 120 percent of the CPI, with exceptions for capital spending and enrollment increases.
  3. This estimate is based on the federal Bureau of Labor Statistics estimate of CPI for all northeast urban consumers, using a base month of March and applying the Executive Budget inflation forecast cited above.

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