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January 29, 2003

Governor's 2003-04 budget preserves enacted tax cuts, keeps spending flat; some other taxes would rise

Governor Pataki proposed a 2003-04 budget that would go forward with $177 million in already enacted tax cuts, raise taxes on life insurers, health insurers and property and casualty insurers, and leave overall spending essentially the same as this year's.

Overall spending, including federal aid to support recovery in downtown Manhattan, would drop by 0.1 percent to $90.8 billion, according to the Budget Division. The state-funds portion of the budget—including state taxes, fees, tuition and other non-federal revenue—would be reduced by a similar proportion. Including expenditures moved off-budget, overall spending would rise modestly.

Governor Pataki said the slowdown in the state's economy caused by the September 2001 terrorist attacks and the national recession created a budget shortfall of $11.5 billion for the current fiscal year and the 2003-04 year, which starts April 1. This fiscal year will end with state-funded spending having risen by an estimated 3.5 percent over the previous year.

Half of the projected shortfall for the coming fiscal year would result from a $4.6 billion increase in "baseline" spending largely caused by existing formulas for Medicaid, school aid, and other programs. The remainder stems from revenue losses due to the slow economy, and the absence of reserves used to balance the current budget.

The Governor proposed to balance the budget with a combination of spending reductions in selected programs, reduced levels of increases for others, targeted tax and fee increases, movement of some expenditures off-budget, and one-time revenues.

State aid to K-12 education would be reduced by $567 million, or 4 percent. The Budget Division said school spending in New York was the highest in the nation in fiscal 2002 at $11,400 per student, 44 percent above the national average. Spending on state agencies' operations would be reduced by $176 million, including a reduction of the state workforce by 5,000 positions.

The budget proposes to reduce projected spending increases on Medicaid and other health-care programs by $1 billion. Total expenditures on those programs would still rise, though—by $515 million, or 2 percent, for Medicaid and $225 million, or 28 percent, for Child Health Plus.

Given "a clear choice between taxes and jobs," cutting spending is essential to protecting the state's economy, Governor Pataki told members of the Legislature.

"Let's take the option of raising job-killing taxes off the table," he said.

Business Council President Daniel B. Walsh said: "The fundamental choice New York must make is between jobs, and taxes. Governor Pataki has made the right choice."

Taxes: The proposed Executive Budget implements tax cuts enacted in previous years and scheduled to take effect in 2003-04. The Budget Division estimates the value of those tax reductions at $177 million. They include continued reduction in energy taxes for commercial, residential and nonprofit utility customers; a reduction in the small-business tax rate; expansion of the earned income tax credit for working, low-income New Yorkers; an increase in the deduction/credit for college tuition; and reduction of the "marriage penalty."

The Budget Division estimated the cost of new taxes and fees at $1.3 billion.

The state Insurance Tax would be restructured to a 2 percent tax on premiums, imposed regardless of whether a company is profitable. The Budget Division said the change would raise insurance companies' New York tax by more than $160 million, or 23 percent, a year. The percentage tax increase for some companies with extensive employment in New York State would be significantly higher.

The Budget Division did not project an economic impact from the insurance tax increase. It estimated that total employment in the broader finance-insurance sector will decline statewide by 1,000 jobs in 2003.

State surcharges on hospital bills and on health-insurance premiums would be increased by a total of $115 million under the Governor's budget. An existing 8.18 percent tax on hospital bills, which pays for bad debt and charity care, would rise to 8.85 percent. The state currently collects $690 million a year primarily through health-insurance premiums to pay for graduate medical education; that would rise to $725 million.

The state and local sales tax exemption for clothing sales under $110 would be replaced by a $500 exemption during four weeks of the year. The state would collect an additional $363 million, and localities another $240 million.

Numerous state fees would be created or increased. Those include fees on limited liability companies, nuclear power plants and wastewater discharge permits.

Economic development: In addition to going forward with scheduled tax cuts, the Governor's budget seeks to promote job growth by continuing major economic-development efforts begun in recent years.

"The competition for high-tech economic development is intense," Governor Pataki said in his budget address. "We have been aggressive. . . we must stay aggressive."

His proposed budget will fully fund the state's new Centers for Excellence, and would expand the Certified Capital Company tax credit to leverage up to $250 million in new venture-capital investments.

The budget would authorize more heavy truck traffic on state highways, a change long sought by shippers, contractors and trucking companies. Fees from additional divisible-load permits and fines would generate an estimated $2.3 million.

Superfund/brownfields: The budget includes legislation the Governor proposed previously to reform and refinance the state Superfund for cleaning up hazardous waste sites and to adopt a new program to encourage the cleanup of brownfield sites. The bill would impose roughly a ten-fold increase in hazardous waste-related fees, paid mostly by manufacturers and utilities. The plans also includes $12 million in tax credits to encourage clean-ups of brownfields.

Medicaid: The Executive Budget establishes a Preferred Drug Program intended to promote use of drugs that are clinically effective and less costly. It reduces state-supported pharmacy reimbursement rates by 5 percent; reduces the eligibility level for the Family Health Plus program from 150 to 133 percent of the federal poverty level; and moves some costs for the state's "early intervention" program to private health-insurance purchasers.

Even after reductions in projected increases, New York's Medicaid spending would still be more than twice the national average on a per-capita basis, according to the Budget Division. Total spending on the program will total some $40 billion - more than most states' entire budgets - under the plan.

The state would take over localities' costs for prescription drugs covered by Medicaid, in exchange for counties and New York City paying a higher share of regular medical costs. Most localities would save under that proposal.

The economy: The Governor's Budget Division forecasts that the state's employment picture will strengthen noticeably in the coming year. It projects private-sector job growth of 0.9 percent in calendar 2003, half again more than the national average. New York's private-sector employment declined by 2.1 percent in calendar 2002, the division estimated.

Local taxes: Governor Pataki renewed his call for easing the mandate burden on local governments. For instance, the Wicks Law, which drives up public construction costs by requiring multiple contractors on most projects, would be repealed.

State debt: New York's share of the national tobacco settlement, which has been used to pay for new health programs, would be diverted into new debt that would help pay current operating expenses. But the Governor proposed new Constitutional restrictions on future borrowings. Other proposed fiscal reforms would include a requirement that enacted budgets disclose the future-year impact of legislated spending increases.

Details on Governor Pataki's proposed budget are available at www.budget.ny.gov/.