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October 8, 2002

Report: To cope with budget crisis, New York must restrain spending and cut taxes-as it did in 1995

To cope with its budget problems next year, New York should return to the cut-taxes-and-restrain-spending approach that helped the state prosper after similar challenges in 1995, a new economic analysis has concluded.

The report includes an economic analysis showing that since 1995 at least 117,000 new jobs — nearly one in five new jobs created in New York in that period—can be attributed to cuts in personal-income and sales taxes alone. Conversely, the same analysis shows that a new personal-income tax surcharge already being promoted by tax-and-spend advocates could cost New York about 46,000 jobs.

The report, Deja Vu All Over Again: The Right Away to Cure New York's Looming Budget Gap, was released Oct. 8 by the Manhattan Institute. The report's author, E.J. McMahon Jr., is senior fellow for tax and budgetary studies at the Institute's Center for Civic Innovation.

Noting that Albany next year will face a budget gap likely to be at least $5 billion, the report asked: "Can the state close a gap of this magnitude without resorting to tax increases or delays in scheduled tax cuts? The answer: It not only can, but must - or risk igniting a new spiral of economic decline."

The right response to the coming economic challenges, the report added, "would be to reverse the recent growth in spending while continuing to reduce taxes. The wrong way would be to minimize the political 'pain' of spending cuts by raising taxes and fees, which would sap economic growth and competitiveness."

Lessons from New York's recent fiscal crises: The report reviewed New York's history of taxing and spending cycles in the governments of Nelson Rockefeller, Hugh Carey, Mario Cuomo, and first- and second-term George Pataki.

"A clear pattern emerges from New York State's budgetary history over the last 40 years: big state spending and tax increases lead to job losses, while fiscal restraint and tax cuts coincide with job gains," the report said.

The state's two deepest and longest recent recessions, in the 1970s and the early 1990s, "both. . . came on the heels of substantial increases in broad-based state tax increases, compounced by tax hikes on the local level. Yet these tax hikes didn't close budget gaps - they only made them worse.

"Conversely, New York State's economy has been strongest when governors virtually froze spending while pushing through deep reductions in broad-based taxes," the report said.

How Governor Pataki met his first-term fiscal challenge: For example, when Governor Pataki first took office in 1995, he encountered a state budget that had been growing at about 7 percent a year. To restrain spending, Governor Pataki concentrated on three areas: Medicaid spending, health and social-welfare programs, and the state workforce.

This strategy worked, the report said. State-funds spending grew by an annual average of just 1 percent - half the inflation rate - under the Governor's first three budgets. At the same time, the Governor persuaded lawmakers to reduce taxes on individual and businesses. These tax cuts are now saving New York taxpayers about $9.5 billion a year, the report noted.

New York's return to its high-spending tradition: State-government spending began increasing again in the Governor's second term, with a 6.1 percent average annual increase in state spending since 1998, the report noted. New York's debt service has also grown, and the state's debt is double the national average both on a per-capita basis and relative to New Yorkers' personal income, the report added.

How New York should respond to the coming challenge : Facing fiscal challenges reminiscent of his 1995 experience, the Governor must reprise some of the same successful strategies, the report said. Specifically, the report said state government should:

The report showed that Governor George Pataki, in his first term, limited annual growth in real, inflation-adjusted spending to .6 percent. "This enabled him to eliminate a $5 billion budget gap - roughly the size of the gap which the state is estimated to face year - while substantially reducing taxes," the report said.

How tax increases cost jobs and tax cuts create them: The report uses an econometric model developed by economists at Suffolk University to estimate the impact of some state tax cuts since 1995 on job creation.

Using that model, the report concluded that reductions in personal income taxes and sales taxes created at least 117,000 jobs since 1995, nearly one in five total new jobs in New York State. This analysis does not consider the benefits of cuts in corporate taxes, energy taxes, or others.

Using the same econometric model, the report also estimated that a new $2.7 billion income-tax surcharge, as proposed by public-employee unions, would cost the state about 46,000 jobs.