Windfall in State Tax Collection could Ease the Way for Spitzer

| Media Coverage

The city and state are seeing windfalls of cash from higher-than-expected tax collections that will make negotiating next year’s budgets less painful for Mayor Bloomberg and Governor-elect Spitzer and could make it easier for the new governor to implement his planned property tax cut.

Also easing the way for Mr. Spitzer, who takes office January 1, is this week’s news from the state Court of Appeals, which ended a 13-year lawsuit by ruling that Albany can contribute billions of dollars less to the city’s public school system than the plaintiffs requested.

“What looked like it was going to be a very, very difficult budget for an incoming new governor six months ago is going to be a little less difficult,” the director of research at the Citizens Budget Commission, Charles Brecher, said. “You’ve got a little less pressure on the spending side and a little bit of relief on the revenue side. This is looking to be not quite as horrific as it did six months ago.”

In the past few weeks, the city and state have quietly revised their budget forecasts because of the surging tax collections driven by record-breaking Wall Street bonuses and a robust commercial real estate market, which has boosted real estate transaction taxes, mortgage recording taxes, and capital gains collections.

While Mr. Bloomberg and others have warned that the government cannot bank on tax revenues continuing at this high level, the collections have been blowing past projections for the last few years. And although the residential real estate market has cooled, the city is getting a gush of tax revenue from at least one residential deal: the recent $5.4 billion sale of Stuyvesant Town and Peter Cooper Village.

Earlier this month, city officials said tax collections would be $2.2 billion higher than expected this fiscal year, and that next year’s budget shortfall would shrink to a manageable $510 million, compared with the $3.8 billion once anticipated.

State officials announced that Albany would end the year with a $1.1 billion surplus.

Despite the tax influx, both levels of government are facing deficits for the next few years. Budget analysts say it is anyone’s guess as to whether those gaps will be filled by a continuation of tax-generating surpluses.

A budget analyst at the Manhattan Institute, E.J. McMahon, said the tax collections highlight the state’s “dangerous overdependence on volatile revenue.”

Mr. McMahon said the short-term windfall will make it tricky to rein in spending, particularly at the state level, where the most recent $113.4 billion budget was criticized as too bloated. In the past, legislators, unions, and some special interests have used short-term cash to pressure the government to increase spending.

“Most households intuitively know that you shouldn’t raise your ongoing standard of living to match the bonus you just got because your employer had a good year,” Mr. McMahon said. “Governments tend to expand their continuing expenses to match the latest peak in revenue.”

The city’s comptroller, William Thompson Jr., a likely 2009 mayoral candidate, noted that whenever there is extra money there is a temptation to use it. But, he said, the city in recent years has successfully resisted the urge.

“The temptation is always for people to say ‘Well, geez, we have a lot more money than we thought, let’s spend it,'” Mr. Thompson said during a telephone interview. “The city has shown that it won’t fall prey to that temptation.”

Indeed, in the last budget cycle, Mr. Bloomberg was praised by most budgetary watchdogs for using $2 billion in surplus money to create a health care fund to pay for future medical costs for city retirees. He has also said he wants municipal workers to contribute to their health care costs, which are increasing at astronomical rates.

Mr. Bloomberg’s press secretary, Stuart Loeser, would not disclose details of the mayor’s preliminary budget, due out in January. He said the mayor believes it is “very important to hold the line on spending and bank revenues for a rainy day or put them toward long-term obligations.”

Meanwhile, Mr. Spitzer comes into office promising that he will cut Medicaid spending and reduce property taxes.

He said his first budget, to be presented in February, would include more education money for the city than the additional $1.9 billion a year a court ordered earlier this week. During the campaign, he said he would allocate between $4 billion and $6 billion a year, but it is unclear how much he will agree to contribute now that the court has come back with a much lower figure. A lower amount would give him more wiggle room for his $6 billion, three-year plan to cut property taxes.

When the state surplus was announced a few weeks ago, a spokeswoman for Mr. Spitzer, Christine Anderson, pointed out the projected budget gaps of $2.4 billion and $4.5 billion for the next two years. She said Mr. Spitzer “has been clear that the state must be prepared to make some tough decisions to get its fiscal house in order.”

The senior economist at the Fiscal Policy Institute, Trudi Renwick, said Mr. Spitzer would, in fact, have to find savings if “he is going to keep his promise of no new taxes and provide property tax relief, and provide the increased funding for schools.”

“The $1.1 billion makes it a little bit easier, but it is still going to be hard,” she said.

Mr. Brecher of the Citizens Budget Commission said Mr. Spitzer would have to act immediately to tackle long-term fiscal imbalances.

Early in a governor’s term is “when you can blame the other guy and when you hope that people will have forgotten in four years,” he said.

Read article here