New York lawmakers are still at least a few days away from a deal on a state budget for the fiscal year that starts April 1, and they might yet get hung up on a few of the hot-button ethics and education reforms Gov. Andrew Cuomo has demanded.

But the most important financial details of New York’s next budget already have been settled — basically on Cuomo’s terms. And there’s some (mostly) good news: Spending growth will be kept below the governor’s 2 percent target.

The bad news?

The Democratic-controlled Assembly and Republican-run Senate have agreed to follow the governor’s lead by making three big moves — in the wrong direction.

First, the governor and the Legislature plan to use scarce state funds to partially compensate for high local property taxes, slapping yet another costly bandage on a gaping wound.

Cuomo’s idea is to create a personal income-tax credit — ranging from an average of roughly $700 upstate to $1,000 downstate — for New Yorkers whose property taxes exceed 6 percent of their incomes.

When fully implemented in 2019, the credit would redistribute about $1.7 billion to roughly half of New York’s homeowners (plus some renters).

That money could be better spent on permanently reducing income taxes across the board and ratcheting down the steep additional “millionaire tax” Cuomo has twice extended since late 2011.

But the Legislature, like the governor, is now less interested in creating a more competitive income-tax code than in creating the illusion Albany is actually doing something about high local property taxes.

The only question now, it appears, is not whether Albany will pass a new state-funded property-tax break, but how it will be structured.

The Assembly has accepted Cuomo’s tax-credit proposal, while the Senate prefers to send an average $458 rebate check to most homeowners.

Either way, the state will continue to spend more than $3 billion on the Pataki-era School Tax Reduction program, better known as STAR.

Result: By 2019, Albany’s will be shelling out more than $5 billion a year to dull the pain of high local taxes rather than curing the underlying disease: high local costs driven by state mandates, especially those related to collective bargaining.

A second mistake involves Cuomo’s plans for the state’s $6 billion windfall from fines and penalties paid by financial institutions that violated various federal or state laws.

New York’s critical mass-transit and highway systems have huge, partially unfunded capital needs.

Yet the governor wants to spend much of the windfall on lower-priority items, including $500 million for high-speed Internet broadband and $1.5 billion for “upstate New York economic revitalization” projects that, based on experience, are likely to include plenty of corporate welfare and capital pork.

Assembly Democrats have accepted Cuomo’s windfall spending plan with minor changes.

Senate Republicans want to add some municipal water and sewer infrastructure funding while curtailing the governor’s ability to divert the money for other purposes — but it now seems inevitable much of the windfall will be squandered.

A third wrong turn baked into the budget will perpetuate the state’s practice of deferring some required pension contributions.

Albany is already paying back $2.5 billion in pension deferrals dating back to 2011.

Because actuarial assumptions were recently changed to recognize that retirees are living longer, pension costs will be higher than Cuomo originally projected — and so now he plans to defer another $1 billion over the next four years.

The next bear market — a matter of when, not if — will not only drive up pension costs, but could also wreck the state’s revenue bottom line.

That’s because, thanks in part to tax policies perpetuated under Cuomo, the budget depends more than ever on the volatile incomes of the highest-earning 1 percent of taxpayers.

At one point, Cuomo threatened to hold up a budget deal this year if he didn’t win his non-financial priorities. As of Monday, however, it appeared a deal would come together sooner rather than later.

Either way, what the governor calls his “opportunity agenda” will also include some big blown opportunities.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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