New York State's Budget Woes Multiply

New York State’s already grim budget picture could be made even worse by some changes at the federal level and the new Congress. The state has at least a $10 billion structural deficit, and the current governor’s budget director predicts that some state services will have to end altogether if trends continue.

Some actions or lack of actions by the federal government could widen the gap even further. First, it’s likely the end of the two year-old federal stimulus program which will mean a loss of over $5 billion to New York. Governor Paterson’s budget director Robert Megna says the state will have to make up for the funds. A temporary income tax surcharge on the rich is also set to end, which added an additional billion dollars.

“So, anyone who’s thinking that we’ve entered an era where the budget choices have gotten easier is really just not looking at the numbers. The budget choices are going to be very difficult this year,” says Megna.

While the budget office had not counted on new stimulus funds, many lawmakers had assumed that Democrats would remain in control of Congress and the program would be extended. With Republicans gaining control in the House of Representatives, which controls the purse strings, it’s likely that the stimulus program will not be renewed, says E.J. McMahon with the conservative-leaning think tank, the Empire Center.

“I think a lot of people in the legislature and perhaps in the administration in New York had been holding out hope at least in their minds that the stimulus would continue, and that this influenced how much they were willing to do to restrain spending in the short term because even though they weren’t absolutely literally banking on it, they have some expectations that if the situation remained bad and was bad enough in enough states that Congress would throw a little more money at them,” says McMahon. “The Republican takeover of the House pretty much ensures that that is absolutely not going to happen anymore.”

The budget department was counting on the scheduled end of the Bush tax cuts. They anticipated that wealthy New Yorkers would move to sell off assets at the end of 2010 to avoid future income taxes, and the state was counting on increased capital gains tax revenues from the transfers. Now, the tax cuts might be extended, and the rich are hanging on to what they own for the time being, says McMahon.

“They were expecting a very significant surge of taxes from capital gains. Now, what happened is we’re now uncertain. It’s not quite clear that federal taxes will go up January 1 or that they will go up by as much as might originally have been expected. This leaves taxpayers themselves kind of confused and uncertain, and also leaves the bean counters in the budget division and the legislature somewhat uncertain as to what the revenues are likely to look like,” says McMahon.

But budget director Megna says the loss of that activity is minimal, and at a time when New York will have to rely more on its own resources comes evidence that Wall Street and the financial industry, which for decades has contributed 20 percent of the state’s total taxes, now only brings in 15 percent of revenues. That’s according to a new report by State Comptroller Tom DiNapoli.

“Although Wall Street has been coming back, some of that comeback is slowing down and we can’t depend on overheated profits from Wall Street to solve our state budget problem,” says DiNapoli.

Budget experts predict that will mean lots of hard choices for the new governor Andrew Cuomo and the legislature in the new year.