Financial 411: New Year, New Governor

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Andrew Cuomo is now New York's governor and it will now be up to him to fix the state's growing fiscal crisis.  And it won't be easy. The state faces an estimated $9 billion budget deficit and a divided legislature, and, as Cuomo himself said in his inaugural speech, "The words 'government in Albany' have become a national punch line."

Cuomo says he will act quickly. Wednesday he gives his state of the state address and this week he plans to provide details on how he will address the state's finances.  

In advance of his speech, the Financial 411 is going to spend the next two days talking about New York, the new governor and the budget.

Today, James Parrott, chief economist with the Fiscal Policy Institute joins us.

In terms of the big picture, Cuomo says New York will have to  "rightsize" government:

The state government has grown too large, we can’t afford it, the number of local governments have grown too large, and that we’re going to have to reduce and consolidate.

So, how will Cuomo try to reduce the size of Government. Where will he aim his scissors, or his axe, first?

Well, two things need to be kept in mind: While, New York state has a lot of local governments and special districts and so on, and certaintly there are some effeciencies to be had by consolidating those, he's not the first person to make that argument. A lot of people have urged it, but it's very hard practically to do. But more importantly, the budget gap that exists is largely a result of the recession and the fact that state revenues have fallen off. In that sense, New York State is far from alone. It's not an outlier. Forty-six states are in the same position needing to close pretty large budget gaps related to the recession.

Well, now the governor is reportedly looking at a mix of spending caps and not raising taxes.  Will that be enough to cut the deficit and balance the budget? Do you see therefore state revenues increasing in coming months or years?

Overall, it's going to take a balanced approach to balancing the budget. I think a lot of things are going to have to be on the table. Including things like business tax expenditures that New York state has expanded a lot over the years; $5 billion is now the annual price tag for that. I think few people would argue we're really getting our money's worth for that. Also, we need to look at the revenue side as well.  New York State has the most polarized income distribution in the country. And it's not so much the high tax burden in New York State, that's constraining our economy. It's the fact that we have a regressive tax burden and a lot of lower income and middle income people are paying a higher share of their income on state and local taxes than the people at the top.

Well, I mean the governor has already announced he wants a one-year freeze on salaries for state workers. And that includes his own salary which he said he will take a 5 percent cut, or about $9,000. That probably won't put much of a dent in the budget. In terms of that one-year freeze on state worker salaries, I mean, a) would that make a real dent in the budget and b) based on what you were just saying, is that targeting the wrong people or the wrong place?

If you've got to bring spending in line with the revenues they're anticipating given the revenue shortfalls that's out there, you're going to need a lot more than the estimated $200 million from freezing state workers salaries. It'll take a lot more than that. The number one thing that the state has to look at is keeping in place the temporary income tax surcharge that was put in place in 2009. It was put there in order to help New York state through a period when revenues were below what they needed to be. Substantially. We're still in a situation like that. I think we have to continue that. And certainly, if you look at the windfall that the high income people are getting in New York, because of the Obama-Bush tax cuts at the high end being continued, that's going to provide an $8 billion windfall to the top two percent in New York State.

What about capping property taxes, another proposal that Cuomo is reportedly considering?

There's a serious issue with excessive property tax burdens in many areas upstate, but is a property tax cap the best approach to get to that? We think that a better approach is expanding a circuit breaker that's administered through the income tax under which people who are truly paying a high share of their income, in propery taxes get relief in that way. That cost money to do that. All the more reason we need to keep the temporary income tax surcharge in place to provide meaningful property tax relief.


On a final note, 2011 is starting off on a promising note for investors.  
The Dow jumped 93 points to close at 11,671.
The S & P 500 gained 14 to close at 1,272.
The NASDAQ ended at 2,692, up 39 points.