BY E.J. McMAHON
Somewhere within that vast fog bank of a FY 2022 Executive Budget that Governor Cuomo began to roll out today is a structural budget gap, opened during the pandemic recession and temporarily obscured by piles of federal cash that will eventually be gone with the wind.
Once all the temporary federal COVID-19 relief is gone in another year or two, there will be a bigger state budget hole to fill—creating a problem similar to the one Cuomo himself inherited 10 years ago, when Barack Obama’s stimulus aid expired, leaving parts of the state budget high and dry.
By nightfall today—the constitutional deadline for the governor’s budget submission to the Legislature—the crucial financial plan details, appropriations bills and supporting legislation still had not been released.
It’s clear, however, that Cuomo is content to push the pandemic hangover into the future, blaming the federal government for all the discomfort along the way.
While complaining of unfair treatment by Washington, he is proposing a record All Funds budget of $193 billion—up about $300 million from the current year and $20 billion from FY 2020, thanks mainly to added injections of federal aid that started with the CARES Act last March.
The governor’s 2022 budget is built on a baseline assumption, which Cuomo calls a “worst-case scenario,” that President-elect Biden’s proposed stimulus bill will yield at least $6 billion in additional federal aid to the state, or $3 billion in each of the next two state fiscal years. He’s demanding much more from Washington, calling $15 billion a “fair funding scenario,” but not counting on it.
Excluding federal aid and capital bond proceeds, Cuomo’s state operating funds budget would be up $1.2 billion over the $102.2 billion total for FY 2021, which ends March 31. The 2021 budget, in turn, spent slightly more ($20 million to be exact) than the FY 2020 budget, which ended after the pandemic began.
Most notably, Cuomo’s FY 2022 budget includes an increase of $2 billion, or 7.1 percent, in aid to public school districts—the largest single category of state-funded spending. In nominal terms, this looks like the biggest school aid hike ever proposed by a New York governor, and in percentage terms it ranks second only to Eliot Spitzer’s 8 percent aid increase in FY 2007 (which proved unsustainable).
The school aid hike would be made possible by an extra $4 billion in federal education aid approved as part of the $900 billion supplemental COVID stimulus bill in December—which Cuomo, in the course of complaining of federal mistreatment, never got around to acknowledging in his budget presentation earlier today. But when that aid disappears, the state will be left to fill the hole.
On the revenue side, the headline features of the proposed budget are (a) postponement of about $400 million worth of small, ongoing cuts in personal income tax (PIT) on households earning less than $321,000; and, most significant, a $1.5 billion tax increase via a temporary PIT surcharge on New York taxpayers making more than $5 million. Targeted taxpayers who choose to prepay their anticipated added 2022 and 2023 taxes in 2021 will be credited for those payments in later years, the governor’s budget briefing book indicated.
However, New York’s highest earning 1 percent of taxpayers already generate more than 40 percent of state PIT receipts, and raising their rate will give them an incentive to move, as Cuomo himself frequently points out.
The tax hike is also unnecessary. To begin preparing for the disappearance of currently temporary federal aid, Cuomo instead should be proposing a multi-year reduction in state spending, starting with school aid. Reductions in school aid should be targeted to the wealthiest areas of the state, and the impact on district staffing can be minimized by adding a freeze on all public-sector wages, including teacher salaries, which would save a combined $2 billion for all government employers at the state and local level.
He should also revisit the goal—abandoned in his second year in office—of providing localities with significant added mandate relief. He should slash the state capital budget, including virtually all planned “economic development” spending, and stretch capital infrastructure dollars further by reforming statues that inflate construction costs, especially the prevailing wage law. To raise more revenues, he should close tax loopholes and repeal economic development subsidies, starting with the $420 million a year doled out to producers through the nation’s biggest Film Production Credit.
How we got here
- The pandemic-induced national recession—and the impact of Cuomo’s New York State on PAUSE restrictions on normal business and social activity—blew a huge hole in state revenues. State taxes in the current fiscal year are expected to total $5 billion less than in FY 2020, which ended last March 31. This is an improvement over the $8.1 billion tax revenue decline originally projected by the governor last April.
- By the end of March it was clear the economy was crashing, but the state operating funds budget—the spending the state pays for out of its own revenues—was never reduced. Instead, after holding school aid flat, Cuomo and the Legislature agreed to a slightly increased state operating funds budget that spent billions more than the state could afford, and said the federal government would have to make up the difference.
- Through the CARES Act and other channels, the federal government has provided the state with at least $10 billion in direct, bottom-line financial plan relief, not including reimbursement of expenses directly related to coronavirus response. As a result, the current year budget gap has been eliminated—as repeatedly predicted in this space in recent weeks, based on revenue projections by the state comptroller.
EJ McMahon is a senior fellow at the Empire Center for Public Policy.