Two reports issued in recent days indicate that New York Governor Andrew Cuomo may be facing his most difficult budget in seven years. The midyear financial report by the governor’s budget office has lowered revenue estimates by $850 million for the current budget year and the next two years. And it finds that next year’s projected deficit is now at $4.4 billion , if spending growth continues unchecked.
Cuomo began sounding the alarm weeks before the report was released.
“The state is already facing a $4 billion deficit going into next year,” Cuomo first said in late September.
The governor’s budget office report says the “disappointing tax collections” are “at odds with key economic indicators, which signal an improving economy.” And it speculates that anticipation of the federal tax overhaul might be affecting taxpayer behavior. Wealthier taxpayers might be holding back on cashing in investments, while they wait to see if Congress makes changes to the tax code that could result in more advantageous tax rates.
The State Comptroller, Tom DiNapoli, in his midyear budget report, also finds revenues are down, and are around $700 dollars lower than expected. He says New York faces a “triple threat” of the projected budget gap, weaker personal income tax collections, and cuts to federal programs.
EJ McMahon, with the fiscal watchdog group The Empire Center, has worked for previous administrations and helped craft state budgets. He says 2018 is not going to be easy for Cuomo and state lawmakers.
“It’s going to be the governor’s and the legislature's most challenging budget cycle since 2011,” McMahon said.
When Cuomo first took office in 2011, he closed a $10 billion projected budget gap that he inherited from the previous governor. The state had been hit hard by the financial crisis of 2008.
Since then, Cuomo has not had to slash major programs or make deep budget cuts. The governor’s budgets have grown more slowly than those under his predecessors. He’s managed to limit spending growth to around 2 percent per year.
McMahon says Cuomo’s kept a lid on spending without making major changes to state government, because he’s benefited from several events over the past few years.
First, the Affordable Care Act, also known as Obamacare, offered federal funding for multiple health care programs through the expansion of Medicaid. Health care in New York expanded without relying heavily on state funds.
Second, New York was the beneficiary of $10 billion from bank settlements that stemmed from penalties imposed after the financial crisis. McMahon calls it “an enormous piece of luck.”
“It’s completely unprecedented,” McMahon said.
But that money is now slowing to a trickle.
The biggest challenge for state budget makers is the swirling uncertainty over federal policy. The Republican led Congress has so far failed in its attempt to repeal and replace Obamacare, but efforts could be revived at any time. Under plans considered so far, the state would lose billions of dollars in funding.
The federal tax overhaul proposals would also adversely affect the state budget, as well as many taxpayers.
Cuomo has railed against a provision to eliminate state and local tax deductions from federal income tax payments. It would impact relatively high tax states like New York, California and New Jersey.
“It’s a tax on your taxes,” Cuomo said on November 2nd. “It’s the first double taxation that we can come up with.”
McMahon, with the Empire Center, agrees that the loss of the state and local tax deductions will add to the uncertainty over the state’s finances. He says it could actually result in a temporary surge in state tax collections in the final weeks of the calendar year. Wealthier taxpayers may choose to take profits from their investments now, if they know in the future that they can no longer use the deduction to lower their tax bills.
“The worse the news is on deductibility between now and the end of 2017, the more likely it may be that the state’s revenues, taxes temporarily recover,” he said.
But he says in the long term, the loss of the deduction will only deepen the state’s deficits, as higher income taxpayers leave New York or switch their primary residences to other states with lower state and local taxes.