New York state today began its 2022 fiscal year without an adopted budget—which, in itself, is not a big deal. The state government can continue to pay bills and employee salaries next week if either final appropriations bills or “extender” legislation is passed early next week.

Assuming the announcement of a deal between Governor Cuomo and lawmakers is imminent, key details probably still won’t be available for days—and the full financial plan won’t be released by the Division of the Budget for another month.

In the meantime, based on public statements and the positions staked out by the governor in his Executive Budget, and the Legislature in its counter-proposals, this much seems safe to predict:

  • The budget will increase the state’s (already high) marginal personal income tax (PIT) rates, probably starting at incomes of $1 million to $2 million, and may also include some form of business tax surcharge. Both tax hikes will initially be described as “temporary”—much like the existing “temporary” higher rate on income millionaires, which has been repeatedly extended across the last 11 years.
  • It will feature the largest spending increase ever, boosting the all funds total closer to $200 billion and raising state operating funds spending by three to five times Cuomo’s prior self-imposed 2 percent cap.
  • And it will dig a much deeper deficit hole for the future, adding to a structural budget gap that grew larger during the pandemic (but not as much larger as originally was feared).

Much about the state’s true fiscal picture has been obscured by repeated infusions of federal aid, dating back to the CARES Act a year ago, topped off by the $12.6 billion in unrestricted aid to the state alone from President Biden’s American Rescue Plan legislation. Cuomo’s repeated, inflated claims of deficits ranging from $15 billion (over one to two years) to $60 billion (over three or four years) have further confused matters.

Based on what can be gleaned from the governor’s Executive Budget financial plan—adjusting for recent increases in projected tax receipts and temporary cash flow borrowing in just-ended FY 2021—Cuomo’s proposed budget would open a recurring shortfall of $6 billion.

The governor would have temporarily filled this hole with a combination of federal aid and $2 billion in higher revenues, including his version of a personal income tax hike on millionaire earners. He assumed $3 billion would flow from Washington in each of the next two years. The federal stimulus bill, as noted, will end up sending Albany twice as much—$12.6 billion, which will be budgeted in $6.3 billion chunks this year and next.

The Legislature wanted PIT increases of roughly $5 billion—including a punitive added percentage point on the capital gains incomes of New York’s highest earners—and total tax hikes of $7 billion to $8 billion.

Budget negotiations are likely to meet halfway and drop the most egregious soak-the-rich proposals such as the capital gains hike, and a proposed increase in the estate tax, leaving a PIT increase as the main event. That would mean a tax hike of $3.5 billion to $4 billion, probably achieved by moving Cuomo’s proposed tax rates to lower bracket thresholds—say, bolstering the existing 8.82 percent top rate by an additional percentage point on incomes starting just over $1 million, and to 10.82 percent on incomes at some higher level, say $5 million or $10 million.

The Legislature also wants to increase spending by more than 20 percent on a general fund basis, and 15 percent or more on a state operating funds basis. In all likelihood, the increase will be held to between 8 percent and 10 percent, or $8 billion to $10 billion.

Winners and losers

A budget combining a soak-the-rich tax hike with a bigger spending surge is likely to be read in the news media as a victory for the Legislature’s left wing.

The governor will publicly hail the budget as a progressive milestone, a sign that government in New York is working. Privately, he’ll point out to the business community that it could have been worse.

The real winners will be the big, powerful unions representing public-school teachers and healthcare workers—who are the biggest beneficiaries of the more than one-half of state spending which is devoted to Medicaid and school aid.

As Bill Hammond notes, the Legislature is pushing for big increases in Medicaid spending, some of which inevitably will make it into the final budget. It seems a good (if not sure) bet that the budget will include some version of the Senate proposal mandating higher wages for home care workers represented by Local 1199 of SEIU, which also represents hospital and other healthcare employees who would benefit from the Legislature’s desire to remove Cuomo’s cap on Medicaid spending.

SEIU 1199 has joined New York State United Teachers (NYSUT) and its New York City affiliate, the United Federation of Teachers (UFT), as prime supporters of a leading tax-the-rich front group, which is directly bankrolled and staffed by teacher unions. The movement’s lobbying slogans emphasize growing income inequality and the needs of impoverished workers hurt most by the pandemic—but the unions’ real aim is to prop up the two biggest categories of state spending, Medicaid and school aid, of which they are the biggest beneficiaries.

An annual feature of state budgets is the Legislature’s insistence on a bigger school aid increase than proposed by the governor. This year came with a special wrinkle: Cuomo proposed a school aid increase of $2 billion, or 7 percent, funded by federal aid and flowing primarily to schools serving large disadvantaged populations. New York City, in particular, would see its state aid rise 13 percent while many suburban and upstate school districts would see a decrease. The final budget almost certainly will be adjusted to ensure all districts of an aid increase, not even counting the more than $8 billion in additional aid provided by Biden’s stimulus bill.

Indeed, with a deal still days away, NYSUT President Andy Pallotta already was quoted in the Wall Street Journal as expressing optimism. In another sign the union already is confident of winning on overall taxes and spending, Pallotta pivoted this week to reminding the Legislature that NYSUT also wants teachers included in any early retirement incentives made available to state and local government employees under the budget.

 

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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