Disentangled from his rambling and often hyper-partisan State of the State Address, the fiscal basics of Gov. Andrew Cuomo’s proposed state budget largely amount to more of the same policies he has pursued in the past — for better and worse.
On the broadly positive side, Cuomo is once again holding growth in New York’s main operating budget under 2 percent — although, as usual, the real increase would look larger if not for accounting gimmicks.
Another positive: Cuomo’s budget package includes language that would make permanent his historic and transformative local property-tax cap, first enacted as a temporary measure in 2011.
At the same time, the governor is pushing policies that would make it harder for localities to hold down taxes. He wants to slice state aid to towns, cities and villages by $59 million — a petty move Cuomo may intend to use as leverage to win legislative approval for the permanent tax cap.
He is adding insult to that injury by seeking a long-term extension of the state law allowing police and fire unions to push their contract disputes into binding arbitration, which makes it harder for municipalities to control their largest expenditure.
Worse, Cuomo wants to perpetuate the state’s lopsided reliance on high-income taxpayers, compounding financial risks for the future.
In a worrisome note, the state executive budget’s financial plan reports that the personal income tax, the state’s largest single revenue source, has “abruptly” dropped a half-billion bucks below projections since the end of December.
This compounded the difficulty of closing a projected $3 billion budget gap for next year, a troubling reflection of the structural imbalance between state spending and revenues, which has persisted through a long economic expansion under a governor who loudly stresses his commitment to spending restraint.
So what’s going on? The financial plan cites growing market “volatility in the second half of 2018” that was “driven in part by rising interest rates, trade tensions and instability in government institutions at home and abroad.”
The plan suggests that there have been “behavioral changes by individual taxpayers and firms” in response to the new federal cap on state and local tax deductions.
The shakiness in personal income tax receipts comes at a time when New York is more reliant than ever on this source, nearly 40 percent of which is paid by the top 1 percent. That makes the centerpiece of the governor’s revenue agenda even more questionable.
Cuomo had signaled in December that he planned to seek an extension of the 9-year-old “temporary” millionaire tax, first enacted as a stopgap measure during the Great Recession and most recently extended for two years in 2017. The tax raises $4.5 billion annually and is scheduled to expire Dec. 31.
The governor now wants to extend the added tax for another five years, bringing the state a step closer to its highest permanent rate since the 1980s. Yet his own financial projections show that, if he holds spending growth to 2 percent, he could phase out the surtax rather than push it into the mid-2020s.
In a move with no actual budget impact, Cuomo also is proposing for a second straight year that New York triple its tax on investment gains treated as “carried interest” income by private equity and hedge fund partners. This has been a controversial issue for years — but on the federal level, where capital gains are taxed at a lower rate. New York’s personal income tax already taxes all types of personal income at the same rate.
If enacted in New York alone, the carried-interest tax would drive affected firms across the nearest border. Which is why the proposed increase would take effect only if enacted in five neighboring states.
That won’t happen anytime soon: Flat-broke Connecticut couldn’t afford to drive away what’s left of its finance sector, and Pennsylvania still has a Republican legislature.
But while the carried-interest tax hike is an empty gesture, it’s also a pointedly hostile one, aimed at a small subset of residents whose individual tax bills can mount to millions of dollars a year.
Promising to soak high earners who have lost their state and local tax deductions may fit well with what Cuomo likes to frame as an aggressively “progressive” agenda — but for high-spending New York in particular, it’s also a dumb strategy.