Feb. 11 (Bloomberg) -- Governor Andrew Cuomo’s plan to cut New York’s budget for the first time in at least 17 years is meeting resistance from fellow Democrats who want to spend more and pay for it by keeping higher income-tax rates set to expire at year-end.
Cuomo, 53, seeks record spending reductions in the two largest parts of the $132.9 billion budget, Medicaid and funds for local schools. Both programs have advocates, including labor unions with millions of dollars to spend on spreading their message. The governor also proposes firing 9,800 state workers unless they agree to $450 million of savings.
“With the stock market above 12,000, there might be more tax revenue than projected, and it could be used to avoid some of the spending cuts,” said Assemblyman Jack McEneny, a Democrat from Albany. He was referring to the Dow Jones Industrial Average, which has increased 5.6 percent since Dec. 31 and is about 86 percent above its March 2009 level.
New York relied on Wall Street workers and companies for 20 percent of its tax revenue until 2009, when the stock market plunge and the recession caused a record 11 percent decline in tax collections. Like other states coping with deficits totaling $125 billion in the next fiscal year, New York faces a drop in federal aid that exceeds its projected 7 percent growth in tax collections.
Top Tax Rate
The state increased its top income-tax rates to 8.97 percent from 6.85 percent in 2009, to help close a record deficit that grew to $20 billion. The increase is due to expire Dec. 31. Keeping the higher rates, which Cuomo opposes, would provide $1 billion of revenue for the budget and $5 billion the following fiscal year, according to the Albany-based Fiscal Policy Institute, an independent research and educational organization.
“We have to see what cuts are being provided as a result of that tax relief for the wealthy and whether we could afford to provide that tax relief,” Assembly Speaker Sheldon Silver, a Democrat from Manhattan, said last month.
Expiring tax rates could be adjusted, or a new higher rate for those earning more than $1 million a year could be created, McEneny said.
“There is a lot of bargaining ahead of us, and I expect the higher tax rates will be extended in some form,” he said.
To help close a $10 billion deficit, Cuomo’s budget for fiscal 2012, which begins April 1, would reduce total Medicaid spending, including federal money, by $982 million to $52.8 billion, and trim aid to 700 local school districts by $346 million to $19.5 billon. The cuts for schools would be $1.5 billion over their fiscal year, according to budget documents.
Redesigning Medicaid could save the state billions and improve the quality of care, Cuomo said. Local school districts have reserves and could cut their own spending, perhaps including salaries of the 279 superintendents paid more $200,000 a year, he said in his Feb. 1 budget address.
“New York has no future as the tax capital of the nation,” Cuomo said in his State of the State address Jan. 5, referring to studies showing the state’s combined state and local taxes to be among the highest.
To keep taxes down, he wants to curb the Legislature’s spending power with new laws limiting growth in Medicaid to the rate of medical inflation and linking education aid to the rise in personal income.
‘Breaks for Millionaires’
Cutting jobs and the services they provide isn’t fair in a budget that seeks “to maintain tax breaks for millionaires,” Danny Donohue, president of the Civil Service Employees Association, the largest union for state workers, said after Cuomo presented his budget.
About 127,000 of New York’s 196,000 workers are under the governor’s direct control.
Since announcing his budget, Cuomo has traveled the state presenting the plan, often sharing the spotlight with Republican lawmakers who approve of his proposals, even if they mean their districts will receive less state aid.
Yields of New York’s income-tax backed bonds, its most often-issued type of debt, have increased in recent months, as have yields of most tax-exempt issues. The tax-backed bonds are rated AAA by Standard & Poor’s and AA by Fitch Ratings.
A bond due March 2020 was valued at 3.61 percent or 0.41 percentage point more than the AAA benchmark Feb. 10, compared with 3.17 percent and a 0.37 percentage point spread when they were issued Dec. 2, according to data compiled by Bloomberg.
A bond due February 2040 traded Feb. 9 at 5.38 percent on a sale of $1 million or more, or 0.49 percentage point more than the Bloomberg AAA index. On Oct. 6, the bonds initially sold at 4.07 percent, or 0.29 percentage point more than the index.
Senate Republican leader Dean Skelos of Rockville Centre said he has no major points of disagreement with Cuomo.
“We all know that the deficit is real and we have to cut,” he said at a breakfast meeting hosted by Crain’s New York Business yesterday.
Skelos, whose party has a 32-to-30 majority in the upper chamber, said “government at all levels has to learn to do more with less.”
The Senate has already approved Cuomo’s plan to impose discipline on local governments by capping their property-tax increases at the lesser of 2 percent or the rate of inflation.
A budget agreement may end up stalled in the Legislature, with the Senate backing the governor and the Democratic majority in the Assembly holding out for more spending. Lawmakers’ reluctance to reduce outlays last year delayed completion of the budget until four months after the start of the fiscal year.
If legislators don’t act on Cuomo’s budget, he could follow the example set last year by then-Governor David Paterson, who included his spending cuts in appropriations bills needed to prevent a shutdown of the state government.
New York law gives the governor authority to veto amendments or new spending measures added to his budget by lawmakers, a power that Paterson used more than 6,700 times.
“The field of battle is set, and Governor Cuomo has a considerable arsenal at his disposal,” Edward Cox, chairman of the state Republican Party, said in a statement.
To contact the editor responsible for this story: Mark Tannenbaum at email@example.com