Dec. 16 (Bloomberg) -- New York Governor David Paterson proposed closing next year’s record $13.7 billion budget deficit mostly with $7.2 billion of spending cuts and $4.1 billion from a bevy of new or increased taxes and fees.

The budget of $122.7 billion, which includes federal aid, is up 0.6 percent from this year’s and is $8.9 billion less than it would have been without the proposed spending cuts and increased taxes and fees. Losses and layoffs on Wall Street, which ordinarily provides 20 percent of state tax revenue, prompted Paterson to slash growth in aid to local school districts by $2 billion and health-care spending by $3.5 billion.

“One of the pillars of our revenue base, Wall Street, has been transformed. We must fundamentally re-evaluate how we manage state government and what we can afford to spend,” Paterson said in a statement.

Paterson’s plan unveiled today doesn’t call for higher income tax rates for the top income brackets. “I haven’t ruled out taxes for the wealthy,” he said at a news conference. Higher rates aren’t part of the plan because they would likely drive jobs and taxpayers out of the state during the recession.

There are some increases, including raising $140 million by further limiting deductions for those earning more than $1 million and gaining another $60 million from expanding nonresident taxes to include hedge fund management fees.

Pension Reduction

The state’s pension obligations would be reduced in coming years by reducing benefits to new employees. The plan increases the minimum retirement age to 62 from 55, requires annual employee pension contributions and raises the minimum service to collect a pension to 10 years from five. Pensions would also be reduced by basing them on employee base salaries, excluding overtime.

Existing state workers are asked to give up a 3 percent wage increase scheduled this year and defer a week’s pay.

Assembly Speaker Sheldon Silver, whose chamber has previously approved higher taxes on millionaires, said at a press conference in Albany that the budget pain should “not fall disproportionately on the backs of New York’s working families.” Silver didn’t specifically support a higher tax rate on the wealthy, saying “everything is on the table” when lawmakers convene in January.

Former Allies

Silver is a Democrat from Manhattan, like Paterson, and the two were once allied in increasing education and health-care outlays.

“Some of the spending cuts are overdue, but I’m troubled by the regressivity of many of the taxes and fees,” said Assemblyman William Parment, a Democrat from North Harmony in extreme western New York. Items such as restoring the state’s 4 percent sales tax on clothing purchases under $110 will raise $462 million for the state, “but it will hurt poor people,” he said.

Higher income taxes on the wealthy “will eventually be part of the agreement” between Paterson and lawmakers, said Elizabeth Lynam, deputy research director at the Citizens Budget Commission. When it does, “it is important that Paterson keep pounding on the pulpit to keep the pressure on for spending cuts.”

Senate Majority Leader Dean Skelos, a Republican from Rockville Centre, Long Island, who may lose that position in January when a newly elected Democratic majority takes office, said he agreed that spending cuts are needed. He was “concerned about” Paterson’s use of increased taxes and fees. “We hope to eliminate a number of” the higher charges, he said.

Empire Zones

Paterson’s plan to reform Empire Zones, disadvantaged areas where business can locate and receive a tax break, doesn’t help the economy or promote job creation, Skelos said. The budget could save $272 million by requiring 9,800 businesses in the zones to show they have made sufficient investments and hired enough workers to justify tax breaks. Skelos wants to phase out the program slowly and apply savings to tax reductions for businesses, especially small businesses.

The governor also proposed merging some small state agencies, closing underused minimum-security prisons and facilities for disturbed youth and eliminating 450 beds in the psychiatric care system.

Education Expenditures

If spending cuts are adopted by lawmakers when they return to Albany in January, “New York will still spend far more than most other states in the nation in many areas, particularly education and health care,” Paterson said.

New York allocates $14,884 per student in kindergarten through grade 12, more than any other state and 63 percent above the national average. Expenditures for the Medicaid health-care program for the poor are $2,283 per person in New York, the highest of any state and 123 percent of the national average.

In higher education, the plan calls for tuition increases of $600 per semester at public universities and creation of a state student-loan program funded initially by $350 million of bonds. The debt would be backed by the loans, which are expected to carry an 8 percent interest rate.

Tax collections, including proposed new levies, are estimated at $61.4 billion. Without the new sums, tax revenue would fall $2.9 billion from the current year.

Property-Tax Rebates

Other proposals include eliminating $1.4 billion of property-tax rebates paid by the state to offset local governments’ levies. Paterson and Senate Republicans, who have championed the rebates, favor changes in law to cap increases in local government property taxes. The Assembly hasn’t passed such a measure.

The spending plan also relies on $1.1 billion of one-time revenue, such as delaying Medicaid payments, transferring funds from state authorities and selling rights to operate electronic slot machines at the Belmont Park racetrack on Long Island.

Paterson presented his budget five weeks earlier than required by law. The state still doesn’t know how much in tax collections it will receive in the last months of the year ending March 30. An undetermined increase in federal aid is expected from the administration of President-elect Barack Obama, who takes office Jan. 20.

To contact the reporter on this story: Michael Quint in Albany, New York, at mquint@bloomberg.net.

Last Updated: December 16, 2008 16:51 EST