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September 22, 2004

S&P analyst predicts 'temporary' tax hikes will stay

A budget analyst for Standard & Poor's said the credit-rating agency expects the "temporary" tax increases the Legislature enacted in 2003 will remain in place, instead of phasing out as scheduled starting in 2005.

"Taxes that are scheduled to sunset never do," Colleen Woodell, S&P's lead analyst on New York bonds, told the Albany Times Union.

To maintain annual budget increases around twice the rate of inflation, the Senate and Assembly voted in 2003 to raise New York's personal-income tax and sales tax. A small part of the 2003 increase in personal-income taxes is to phase out in 2005, under current law, with the remainder of the increase eliminated in 2006. The sales tax, which the Legislature raised to 4.25 percent in 2003, is to revert to 4 percent (in addition to local sales taxes) on May 31, 2005.

S&P announced September 21 it has changed the outlook for New York's credit rating from negative, raising the possibility of a rating downgrade, to stable. Its current rating for state general-obligation bonds is AA, the same as most states.

"The outlook revision reflects that although the enacted budget increases out-year structural imbalance, the state's economic base is showing modest improvement," S&P said. "This, combined with revenue and expense actions anticipated next year, makes it appear that the gaps are manageable."

"The budget process remains highly politicized and the results are rarely optimal in terms of financial balance," Woodell said. The agency said New York's rating will not improve because of the state's "high service/high cost nature and consistent failure to implement meaningful spending restraint or permanent revenue enhancements in the face of budget imbalance."

"The political process surrounding the budget and its adoption are totally inconsistent with a higher rating," the agency said.

Governor Pataki's Budget Division reported recently that New York State's General Fund spending could rise an estimated $4.9 billion, or 11.3 percent, in the next fiscal year. Mostly because of that higher spending, the state faces a projected budget gap of $5.7 billion in the fiscal year starting April 1, 2005, the Budget Division said.

Next year's projected increase, driven mostly by Medicaid and education spending, would come on top of an 8.2 percent increase in state-funded spending (not counting federal funds) in the current year. This year's increase is nearly four times the projected inflation rate for New York State.

The estimates for 2005 assume that the tax increases the Legislature imposed in 2003 on personal income and sales will start to phase down in the coming year, as scheduled. Unions and other pro-spending lobbyists in Albany are urging the Governor and legislators to keep those tax hikes in place and enact other increases.