After months of waiting for a federal coronavirus stimulus bailout that never materialized, Gov. Cuomo has staked the future stability of New York’s public finances on the outcome of this year’s election.
Cuomo is banking on a Joe Biden win and a blue-wave Democratic takeover of both houses of Congress — which he assumes (not without reason) will produce a big new federal stimulus package early next year, offering generous aid to states and localities along with expanded unemployment benefits, small business aid, taxpayer rebates and the like.
New York faces a state budget deficit of around $8 billion for the current fiscal year, ballooning to a budget gap of nearly $17 billion next year. The Cuomo-controlled Metropolitan Transportation Authority says it needs a $12 billion bailout through 2021 to avoid massive layoffs and service cuts. New York City’s budget gap is at least $2 billion, although Mayor de Blasio keeps fudging the numbers and shoving costs into next year.
Under a Biden-Blue Wave scenario, gobs of aid money probably will start flowing to the state, local governments and the MTA soon after the new president is sworn in on Jan. 20.
Cuomo is hoping for something close to the $3.4 trillion HEROES Act passed by House Democrats last May, which would have offered states and localities nearly $1 trillion. New York state’s guaranteed share of that total would have come to $33 billion, enough to subsidize an uninterrupted continuation of Albany’s pre-pandemic spending trends well into fiscal 2023.
But when Cuomo and other New Yorkers talk about their need for more federal aid, they rarely mention the other side of the equation: Where will the money come from? After all, the HEROES Act (or something like it) would be just one item on a checklist of spending programs Biden has proposed, with a total 10-year price-tag north of $10 trillion.
To pay for it all, Biden proposes the largest permanent tax hikes since World War II — targeted at the kind of high earners who already shoulder a disproportionate share of the Empire State’s tax burden.
To offset the impact on those New Yorkers, Cuomo also expects Biden to eliminate the cap imposed on state and local tax (SALT) deductions under the 2017 tax law passed by congressional Republicans and signed by President Trump. But to pay for a fully restored SALT deduction, which would add $500 billion to the deficit over the next five years, Biden and congressional Democrats would have to raise tax rates even higher than he has already proposed.
Ironically, at least one aspect of Biden’s plan could bolster New York’s bottom line before he takes office. The former vice president has promised to nearly double the long-term capital-tax rate on income millionaires — which, if he’s elected, could prompt many investors to lock in gains subject to lower federal rates before the end of this year, thus boosting state income tax revenues in the short term (while deflating them in the long run).
Then again, what if the election doesn’t turn out as Cuomo hopes?
E.g., what if Biden wins, but Republicans hold onto control of the Senate? The likely result would be a smaller stimulus bill, offering less state and local aid.
The result might not be much different if Democrats control the Senate but Trump holds onto the presidency. After all, just last month, Treasury Secretary Steven Mnuchin was willing to compromise with House Democrats on a stimulus bill offering states and localities about half as much as they’d get under the HEROES Act — which would still be plenty. It was Senate Republicans who shot that down that compromise.
From a fiscal standpoint, a Trump win coupled with a continuing Senate Republican majority would be Cuomo’s worst nightmare. In that case, a post-election stimulus bill is still likely, but the state-local aid components will be minimal — and the governor will have to confront his fiscal challenges much sooner.
In reality, none of the election scenarios offers a permanent solution to New York’s problems — and given the Democrats’ taxing and spending plans, a Biden-Blue Wave scenario ultimately would end up costing New York more than most states.
Sooner or later, the Empire State must adjust its tax-and-spending patterns to post-pandemic economic reality. The buck won’t stop in Washington, but in Albany — no matter who wins this year’s federal elections.
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