The View From Here . . .

While the federal budget deficit is certainly of great long term concern, New York State has its own, more immediate budget problems.

You may remember the 2009-10 budget that was approved earlier this year. Despite shrinking state revenues, the budget stood at a record $132 billion level, up 8.5% from the previous year. Even with the inclusion of about $7.2 billion in federal stimulus funds, the budget still required an array of new taxes and fees. This is in the context of a state whose property taxes are among the highest in the nation. According to the New York State Commission on Property Tax Relief, New York has several of the highest taxed counties in the nation, including Nassau and Westchester Counties. And numerous upstate counties have huge property levies as a percentage of real estate value.

Tax revenues have continued to decline in 2009 and Governor David Paterson announced last week that he was proposing a $5 billion, two year deficit reduction plan, including across the board agency spending reductions, a tax amnesty program as well as a new Tier V for benefits under the state pension system (providing for higher contributions for new hires), which he negotiated with state worker unions in exchange for no layoffs.

In fairness to Governor Paterson, even this level of budget cuts may be hard to sustain. The governor tried to hang tough on the budget prior to the 2009-10 negotiations, but was roundly pilloried by state workers’ unions, who are already making an issue about these new proposals. (This week, in the wake of the governor’s proposal, I received a handbill from a union sympathizer demanding “no more health cuts”.) The New York state legislature, now (more or less) controlled by Democrats in both houses, will be a tough sell indeed.

But even if Mr. Paterson’s reductions are enacted in 2010, there remain large structural problems with the New York State fiscal picture, in addition to the high property taxes discussed earlier. New York’s annual Medicaid spending, projected at $49 billion in the 2009-10 fiscal year, remains the highest in the nation, and exceeds the combined spending by California and Texas. On the revenue side, restructurings on Wall Street will likely mean that the huge tax revenues generated by the financial sector will be reduced even if the markets recover. And 40% of the state tax revenue is generated by 1% of the taxpayers, which ratchets up effect of a decision to leave the state by a few wealthy taxpayers who feel overburdened. Plus there is the perception that the business climate is poor.

Budget analyst E.J. McMahon of the Manhattan Institute believes that a top to bottom analysis of public sector personnel costs and contracts is very important to restore fiscal health. In addition, he suggests a Taxpayer Bill of Rights, which would limit the growth of government by tying increases in overall tax revenue to the rate of growth in inflation and population. Under Mr. McMahon’s proposal “state and local tax-rate increases beyond the limit would require direct voter approval-as would major debt issuances, shutting the back door through which New York’s public authorities have borrowed tens of billions of dollars without voter approval over the past 25 years.”

Mr. McMahon’s suggestions may not all be politically viable and some might best be addressed at the possible state constitutional convention in 2017. (Every 20 years, New Yorkers vote whether to hold a convention.). But the state’s continued fiscal bleeding obviously doesn’t call for Band-Aid solutions.