What should be done about New York’s $6.1 billion budget gap?

As the state Legislature prepares for the upcoming session, a $6.1 billion budget gap hangs over the lawmakers like a dark cloud. It is the state’s largest budget deficit since the Great Recession. Despite Democrats’ legislative successes during their first year after gaining complete control of state government, “they must now show whether they can overcome this more mundane – but potentially more implacable – obstacle: an old-fashioned budget deficit,” according to The New York Times.

Revealed late last year, the projected $6.1 billion budget gap for the coming fiscal year has prompted discussion about how best to move forward, and debate over the two traditional approaches – spending cuts and tax hikes – are unsurprisingly central. Some on the left, like Assembly Speaker Carl Heastie, have been advocating for raising taxes on the wealthy, and others on the right want to start with spending cuts.

Much of the budget gap has been attributed to Medicaid spending – which has contributed about $3 billion to $4 billion to the deficit – as enrollment and costs of the program grow. Spending on schools is another major budget item, with the state spending $27.9 billion on school aid in 2019. The state has started to implement changes to close budget gap, including cutting a projected Medicaid spending increase in half, delaying a $2.2 billion Medicaid payment to the following fiscal year and limiting overall spending increases to 2%. But as some have pointed out, those fixes alone are unlikely to address the entirety of the behemoth budget gap. More details will likely come later this month, when Cuomo introduces his budget proposal.

In this week’s “Ask the Experts” feature, we asked experts from across the political spectrum to offer their insight on what should be done about New York’s multibillion-dollar problem. Three experts weighed in: Ron Deutsch, executive director of the Fiscal Policy Institute; David Friedfel, director of state studies at the Citizens Budget Commission; and E.J. McMahon, research director at the Empire Center for Public Policy.

What should be done to solve the budget gap?

David Friedfel: First, we should remember that this gap is the result of (a) delayed response to unbudgeted spending and papering over the gap last year. Second, this is a spending problem – revenues are coming in at or above expectations – so the gap should be closed by restraining spending. Therefore, the state should start by making targeted reductions to Medicaid and unproductive economic development programs, and then look for savings in every other part of the state budget. By waiting until the year was almost over, the state has made solving this problem radically more challenging. The state must resist the temptation to paper over the problem again, which is what the state would be doing if it follows through on the proposal to permanently lag $2.2 billion in annual Medicaid payments. To fully close the gap, the state may consider using some one-time resources, but this would only be reasonable as a component of a multiyear strategy that fully brings spending in line with revenues. Using one-time resources in (the) absence of such a plan would perpetuate the type of fiscal maneuvers that have damaged the state’s finances and fiscal integrity in the past.

E.J. McMahon: A $4 billion overrun due to a failure to control spending in the Medicaid program should be addressed primarily with reductions in spending on Medicaid.

Ron Deutsch: The budget gap highlights the growing needs that exist in New York, and this year offers us the opportunity to commit to creating a state that works for everyone, not just the rich.

Our state has a robust economy but consistently leads the nation in income inequality, meaning that our wealthiest residents are doing exceptionally well, and the poorest are struggling to make ends meet. We can take the necessary steps forward by realizing how austerity spending (the 2% spending cap) has hamstrung services statewide, embracing an equitable tax structure where everyone shoulders the burden fairly, reforming and reimagining economic development programs that are currently based on corporate whim or high-stakes competition, and rejecting creative accounting. The worst thing we could do is to start believing that we can’t make a difference, because we can, and New York depends on us.

New York should ask our billionaires and millionaires to pay a little more so we can eliminate our budget gap, create a fairer tax system and fund the starved services so many New Yorkers depend on.

What should be done for the structural deficit going forward?

Deutsch: Any structural deficit is going to require either spending cuts or revenue raisers. Now is not the time for spending cuts but rather the time to carefully consider where and how our state can raise revenues. New York state can increase revenue from high-income earners to fund high-quality government services without overburdening middle-income New Yorkers in several ways. We should institute a billionaires wealth tax and an ultramillionaires tax that adds new income tax brackets at $5 million, $10 million and $100 million of earnings. We should also institute a stock buyback transfer tax, carried interest fairness fee, pied-a-terre tax, and reform the estate tax to ensure our state has the resources to address growing and unmet needs.

McMahon: Medicaid aside, closing the structural deficit requires curbing the growth in school aid, still the largest single category of state-funded spending in the budget. While advocates seek (a) $2 billion (increase), even the $1 billion hike assumed in the financial plan looks high, given ongoing drops in enrollment in the majority of districts statewide. More than ever, the emphasis should be not on spending more but on spending more effectively. School administrators and school boards should be equipped with more flexibility to manage their costs, including Taylor Law reforms starting with (the) repeal of the “Triborough Amendment,” which now locks in teacher “step” pay increases and gives unions a strong upper hand in negotiations. In addition, the state should mandate a minimum level of school district and local government employee contributions to health insurance, replicating what’s in effect for state workers.

Otherwise, everything should be on the table. The low-hanging fruit on the expenditure side of the budget includes all current operating spending in support of economic development programs, a redirection of economic development-related capital borrowing to core transportation and other infrastructure needs, (and) (New York) State Police barracks in New York City – a Cuomo creation that needlessly replicates the effective NYPD.

Friedfel: First and foremost, the state needs to produce a transparent budget that includes all current program spending and aligns spending with revenues. Then the state should hold spending to budgeted amounts.

To identify savings, the state should reconstitute the Medicaid Redesign Team, whose focus should include containing long-term care costs, and directing Medicaid supplemental payments to the neediest safety net hospitals. Should Medicaid spending exceed (its) budget, the executive should exercise its Medicaid global cap powers.

Outside of Medicaid, the state should focus education aid on the neediest districts – the state could have saved over $800 million last year and still provided funding for a sound basic education statewide. The state also should curtail the $4.4 billion annually devoted to questionable economic development incentives and enact retiree post-employment benefits reforms that the governor has repeatedly proposed.

Finally, part of the problem is that the state’s cash budgeting and reporting system can mask fiscal realities – as happened when the state “balanced” its budget by paying a bill three days late. The state should show the budget is balanced in accordance with generally accepted accounting principles, so New Yorkers know if what they are seeing really is what they are getting.

If the state raises taxes, will that drive a further decline in population?

Friedfel: High-income taxpayer mobility is a real risk. Wealthy taxpayers, like all people, are sensitive to financial incentives and could decide to leave New York. Combined, New York state and local taxes are among the highest in the country and the state and local tax deduction cap has made many taxpayers even more sensitive to state and local taxes. Also, it’s important to remember that we are in the midst of the longest economic expansion since economists have been keeping track, and the state is still imposing the “temporary” (personal income tax) surcharge that was adopted to help us get through the last recession. Increasing taxes now to plug a self-imposed budget gap on top of the current surcharge, and then potentially increasing them again when we hit a recession, will certainly cause high-income taxpayers to take notice.

From a strict budget perspective, the top 1% of the state’s taxpayers pay 37% of the state’s personal income taxes, or $18.5 billion per year. If 1% of the top 1% leave, which would only be 1,050 taxpayers, it will cost New York state about $185 million.

Deutsch: This is the most common refrain whenever we discuss raising revenues. Our taxes fund essential services, including our schools, infrastructure and the programs relied on by our seniors, children and people with disabilities – principally, all the things that make a vibrant, healthy community where people wish to live.

Touting lower taxes as an incentive is just a shell game. Without taxes, services either don’t exist or must be paid for through other means. A just tax system means that the burden is shared equitably, with the wealthiest residents and largest corporations shouldering their fair share and preventing struggling working families and individuals from being capsized by short-sighted policies. 

Population decline is more of a regional issue. It’s not the wealthy millionaires that are fleeing, it’s the struggling working families across this state trying to make ends meet. We should be looking at providing tax relief to those at the bottom through refundable tax credits and property tax relief while investing in infrastructure and job training to make upstate New York more attractive to businesses.

McMahon: Any increase in New York’s already high tax burden would give affected taxpayers an even greater incentive to consider relocating. New York’s highest earners, especially those living in New York City, have already seen their net, all-in federal state (and) local income tax burden grow thanks to the SALT cap. Targeting income millionaires for an added tax hike, as proposed by the Assembly speaker, will further erode a state tax base that is more dependent than ever on the top 1%.

If the Legislature would prefer to find revenue rather than reduce Medicaid spending, which would require the governor to bust his 2% spending cap, they should eliminate the annual giveaway of $420 million to TV and movie producers – easily the largest ongoing corporate (cash) giveaway on the books in any state, assuming, that is, legislators actually do assign a higher priority to health care than to tax subsidies for Netflix, Amazon and assorted other highly profitable Hollywood studios and TV networks.