ALBANY — A fight over taxes is expected when lawmakers and Gov. Andrew Cuomo return to the Capitol in January to craft a budget while facing a $3.5 billion funding gap.

Their biggest bone of contention is likely to be the so-called millionaire’s tax on the incomes of high earners.

What amounts to a 29 percent surcharge for single-filers who earn at least $1 million and joint filers making at least $2 million is due to expire at the end of next year.

The Democratic governor, while opposing the tax in his campaign in 2010, has already signed off on two extensions amid pressure from Democrats in the Assembly and the progressive groups that traditionally align with them.

E.J. McMahon, research director for the conservative Empire Center for Public Policy, said Cuomo will enter the year facing his steepest financial hill since 2011, when he inherited a $9.3 billion shortfall from his predecessor, Gov. David Paterson.

Albany’s budget gap, McMahon said, is exacerbated by a $739 million decline in state tax collections this year.

“Because New York is so dependent on the personal income tax,” he said, “this is going to be real challenge.”

Still, McMahon said, the state can afford to scrap the millionaire’s tax while keeping spending within the governor’s annual 2 percent cap, by holding the line on aid to public schools. Money for classrooms represents the largest portion of the fiscal blueprint.

But plenty of others disagree that schools should be squeezed.

Veteran budget analyst Frank Mauro, whose career has included stints as director of the labor-backed Fiscal Policy Institute and secretary of the Assembly Ways and Means Committee, said the millionaire’s tax should be kept.

“It’s a big-ticket item, and it causes no harm to the economy,” he said. “This is not the time to do new things that would be detrimental and dig you into a deeper hole.”

The Fiscal Policy Institute is expected to renew its call for a more progressive tax system. It proposes a “One Percent Plan for Tax Fairness,” with tax rates ranging from 7.65 percent to 9.99 percent for tax brackets starting at $665,000. That is the threshold for the top 1 percent of the state’s earners.

The plan has been endorsed by such wealthy philanthropists as Steven C. Rockefeller, Abigail Disney, Leo Hindery Jr., and Lewis Cullman.

Cuomo is expected to issue his proposed 2017-18 budget in mid-January.

Both legislative chambers will later respond with their own versions, embracing some of the governor’s initiatives while revising or rejecting others, and setting in motion weeks of negotiation leading to a March 31 budget deadline.

The state’s fiscal year begins April 1.

Scott Reif, spokesman for the Republicans who will retain control of the upper chamber, said it’s premature to talk about whether they will be open to accepting more progressive rates for high earners or keeping the millionaire’s tax.

But, he noted, “Our position is we always want to keep taxes as low as possible.”

As for whether the budget gap will prompt cuts to public services, Reif said senators have traditionally ensured agencies “get what they need but not more than they need.”

Staying within the 2 percent spending cap, he said, is “absolutely” doable.

Some observers believe Cuomo will be less resistant to upping taxes on the wealthy, as he faces a potential challenge from a more left-leaning candidate when he runs for reelection in two years. Possible contenders are Comptroller Tom DiNapoli, state Attorney General Eric Schneiderman and Syracuse Mayor Stephanie Miner, though all insist they are focused on their current jobs.

“The governor is going to have to be concerned about the progressive wing of the Democratic Party,” said Mike Burgess, former director of the state Office for the Aging and chairman of the Fiscal Policy Institute’s board of directors.

Cuomo’s moves this year to champion a a $15 per hour minimum wage and a 12-week paid family leave policy, he said, are signs the governor is already aligning with progressives.

The Cuomo administration’s budget spokesman, Morris Peters, said he will not talk about specific proposals until the plan is completed.

McMahon said the state can find money by shelving lucrative tax credits for film and television. He said the program, which subsidizes producers by refunding a portion of their spending, costs the state about $420 million a year.

“It’s difficult to justify this at a time when you’re facing shortfalls,” he said.

Lawmakers, however, have shown no interest in stepping away from the film credits. This year, in fact, they approved similar tax credits for producers of video games.

Advocates maintain the credits stimulate the state’s entertainment industry and draws production companies from Hollywood and beyond.

© 2016 CNHI