Albany’s revenue base is rapidly shrinking, but the financial plan left on the table by the former governor, Eliot Spitzer, would allow the state budget to keep on growing as if shares in Bear Stearns were still selling in the low hundreds. With barely two weeks to go before the start of the next state fiscal year, it remains unclear whether Mr. Spitzer’s successor will rein in spending before it’s too late.

In his inaugural address yesterday, Governor Paterson acknowledged the turmoil on Wall Street and the fire sale of what had long been one of city’s (and state’s) leading employers and taxpayers. “We are looking at an economy that is reeling,” Mr. Paterson said. But the words that followed were open to interpretation:

“I must say, to all of you in government and all of you in business, that you must meet with me in the next couple of weeks and adjust our budget accordingly.”

This was greeted in some circles as evidence that the new governor is actually willing to take a knife to the Spitzer plan. But Mr. Paterson’s reference to “all of you in business” was odd. Why would business leaders have to meet with the governor about budget “adjustments” � unless he’d like their permission to raise taxes? Or does he want to get their ideas on how to reduce spending? Like so much of the new governor’s agenda, the answer is anyone’s guess.

At the very least, adjustments are urgently needed. The state budget reflects the vastly inflated expectations built up during one of the greatest revenue booms in New York’s history � a boom fueled by real estate and investment banking.

During Governor Pataki’s last term, inflation-adjusted state tax receipts grew faster than they had at any comparable period since Mario Cuomo’s first term as governor, two decades earlier. Personal income tax payments increased by an incredible 57% between 2003 and 2007. Fully half that rise was generated by highest-earning 1% of tax filers � households with adjusted gross income levels beginning just below $1 million. Indeed, the money poured in so fast and furious during Mr. Pataki’s last term that, although state spending increased by better than 30% during the same period, the outgoing governor left his successor an accumulated surplus of $2 billion last year.

Mr. Spitzer, the first governor of New York since Franklin Roosevelt to take office at the peak of an expansion, proceeded to assume that the good times would roll on. His first budget boosted spending by 7%, including the unprecedented promise of a record four-year hike in state school aid.

A year later, in the wake of the subprime meltdown and the bursting of the real estate bubble, Mr. Spitzer nonetheless called for a further spending hike of 6%, including a continued expansion of the state payroll and another record school aid increase.

A few weeks later, in a “consensus” with the Legislature, he nudged his forecast downwards � slightly. But as credit market jitters worsened last week, even before Bear Stearns’s collapse, it became increasingly obvious that a state budget gap projected to be $4.4 billion may have grown to well over $5 billion. That leaves Mr. Paterson to confront a Legislature that is divided along traditional lines. Last week, Assembly Democrats approved a one-house budget that appears (in the absence of supporting documentation) to boost spending by hundreds of millions of dollars over the Spitzer plan.

The key to the Assembly plan is a 12%, $1.5 billion increase in income taxes on households earning over $1 million � in effect, squeezing harder on the now-swooning flock of geese that had been laying golden eggs for the state Treasury over the past five years.

Senate Republicans have flatly rejected the Assembly’s proposed income tax increase, along with many of Governor Spitzer’s other proposed increases in taxes and fees. The net state spending total in the Senate plan reportedly is below the one last proposed by Mr. Spitzer. However, if past experience is any guide, many of the Senate’s underlying fiscal assumptions will be hotly contested by the governor’s Budget Division.

That leaves Mr. Paterson to grapple on short notice with a state fiscal and economic situation that is increasingly reminiscent of 1990 � when the Cuomo administration, reluctant to reduce spending growth, coped with a worsening recession by hatching a series of gimmicks including a recalculation of pension obligations and the “sale” of Attica prison.

As economic projections continued to deteriorate that spring, Mr. Cuomo and the legislative leaders rushed to agree on an unsustainable level of spending before their revenue numbers sunk any lower. A few months later, following the election, they returned to Albany to approve a series of mid-year budget cuts � which proved to be far too little, too late.

The city and state economies needed most of the decade to recover from the impact of the tax hikes and other bad decisions made during the 1990-1991 downturn. Will New York relive that experience over the next few years?

Near the close of his brief speech, alluding to the need for the state to find a way out of the fiscal jam caused by economic conditions, Mr. Paterson said: “We don’t know the path yet. But that’s because we haven’t blazed the trail. And I think you all know that I know a little bit about finding one’s way through the dark.”

Coming from the legally blind governor, the remark was both humorous and inspiring. Now he needs to start blazing.

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

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