Gov. Andrew Cuomo has spent most of the past two weeks pointing fingers: first at President Trump, whose tax law he blames for a sudden decline in New York’s revenues, and then at state Senate Democrats, whom he holds responsible for the Amazon fiasco.

But the blame game will carry Cuomo only so far. In New York state’s executive budget system, the bucks stop with the governor. And, politically, this year’s budget process will be his most challenging yet, testing both his ability to manage legislative relations and his commitment to financial restraint.

During his first two terms, Cuomo was able to settle budgets mainly on his own terms, playing off the Democrat-dominated Assembly against a generally compliant Republican majority in the Senate.

Now, with Cuomo warning that New York’s high earners are being squeezed too hard by the new federal cap on state and local tax deductions, many members of Albany’s big new Senate Democratic majority would like to squeeze harder and spend more, on everything from education to health care to the subways. Even the more (fiscally) moderate suburban senators have school-aid appetites similar to their Republican predecessors — more than the state can reasonably afford.

Complicating the outlook are two non-budget related provisions included in budget legislation: Cuomo’s ham-handed effort to fund subway improvements by imposing a state-controlled congestion-pricing plan on the Big Apple, plus his scheme for legalizing marijuana.

The degree of fiscal difficulty escalated when personal-income tax receipts in December and January dropped $2.3 billion. That struck another blow to Cuomo’s already reduced budget forecast for December and January — pointing to the biggest decline since 2003 in the tax source the Empire State relies on the most.

After a year misrepresenting the federal tax changes as a broad assault against New York’s middle class, Cuomo shifted gears and focused on the real problem: the impact of the SALT cap on the highest-earning 1 percent of New Yorkers, who generate nearly half the income tax receipts collected from state residents.

Cuomo implied that the short-term revenue loss reflected out-migration of wealthy residents. But the updated plan reflected a more complex, mundane reality: Under the new federal law, high earners making quarterly estimated tax payments have less reason to accelerate their last payment into the end of the calendar year.

The budget plan now assumes that roughly 60 percent of the money will be recouped from final tax returns in April, turning Cuomo’s “serious as a heart attack” $2.3 billion shortfall into a net drop of $900 million, more of a severe chest pain.

Cuomo’s updated financial plan also acknowledges that his mid-January budget proposal failed to estimate the full extent to which the stock market crash at the end of 2018 would reduce taxable capital gains. The needed adjustment, in turn, will reduce the base of projected income tax returns for the future.

Cuomo is seeking to close the resulting budget holes in fiscal 2019 and 2020 by shuffling around unspent surplus cash, acknowledging “resources” that weren’t previously apparent, changing the timing of some expenditures, fixing the constitutional flaw in a $100 million-a-year opioid tax thrown out by a federal court last year and — in his most significant pushback against proposed spending for fiscal 2020 — cutting $550 million from his own proposed $1 billion Medicaid hike.

Even assuming the Legislature accepts his proposal as is, the financial plan through 2023 points to future “out-year” budget shortfalls larger than any Cuomo has projected since 2011.

Another risk: Despite Cuomo’s warning that more high earners will migrate due to the SALT cap, his adjusted bottom line still assumes income-tax receipts will resume growing at a healthy pace over the next four years.

He also assumes the long national economic expansion will continue. Yet national political variables pose additional risks. For example, Sen. Liz Warren’s wealth tax would eviscerate New York’s asset-rich tax base — or what’s left of it, after the SALT-related erosion likely in the next few years.

For all of the added spending and tax pressure created by the new Senate Democratic majority — not to mention bad feelings lingering from the abortive Amazon deal — the next state budget probably won’t stray far from Cuomo’s priorities. But the structural imbalance in state finances will get worse in the future.

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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