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March 23, 2004

Fiscal expert to lawmakers: When you're in a hole, stop digging

New York lawmakers are in a deep fiscal hole, and need to stop digging in deeper, said E.J. McMahon, a senior fellow at the Manhattan Institute, speaking at The Business Council’s annual Small Business Day.

In his presentation, titled “New York’s Busted Budget,” McMahon noted that New York State’s budget is growing at a rate the economy cannot and will not be able to sustain.

Last year, state lawmakers increased the state personal and sales tax for the first time in 30 years to cover huge spending increases, McMahon said.

Medicaid is the biggest budget driver, growing nearly 30 percent between 2001 and 2004 on a state-funds basis, he said. In addition, lawmakers have pushed through additional funding for school aid, the SUNY/CUNY system, and the STAR program.

McMahon also noted that the state has increasingly relied on debt over the past few years to support spending increases. Since 1995, state supported debt has increased more than $12 billion, not including tobacco bond debt. More than 17 percent of the Governor’s proposed spending increase is for debt service.

If the Governor’s budget is adopted without change, state spending would increase by more than 16 percent, or $10 billion by 2007. By contrast, private-sector employment is projected to grow by 3.7 percent and inflation is expected to grow at 6.3 percent, he said.

However the Governor’s budget proposal will not be adopted without change, McMahon said. In general, the Legislature adds about a billion dollars plus to the Governor’s budget, according to McMahon. Last year the figure was $3 billion.

There are a few indicators that this year’s budget may see hefty spending increases, McMahon said. In June 2003, the Court of Appeals ruled that New York has to come up with a way to assure resources to provide all public school students the opportunity for a “sound basic education.”

The group that backed the court’s decision has put a $9.5 billion price tag on that change, $8.5 billion of which would come from the state.

Spending advocates will most likely petition for personal income tax hikes on high-income earners to raise that $8.5 billion, according to McMahon. To raise $8.5 billion, the Legislature would need to raise the top marginal rate to more than 10 percent, he said.

The state could benefit from proposals from various groups to reform the budget process, McMahon said.

“What’s most broken about New York State’s budget is not the process, it’s the results that we get out of it,” McMahon said.

McMahon advised lawmakers to follow the advice of the late U.S. Senator Daniel Patrick Moynihan, who said "Political Economy 101- when you are in a hole, stop digging."

"If there is any message you may want to deliver to legislators today when you see them, it's tell them to put down those shovels," McMahon told participants. "Because the hole is getting worse and it does not augur well for the future."

A full version of McMahon's presentation is available at www.nyfiscalwatch.com.