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A little bit here, little bit there and a $3 billion budget hole appears

ALBANY – The first 2,700 words of Gov. Andrew M. Cuomo’s State of the State speech last week were upbeat.

The Democratic governor checked off example after example of the billions of dollars the state has spent, or will spend, on parks, bridges, drinking water systems, airports, ski mountains and on and on.

Then, he gave a slight pause.

“Now, on the finances for the state. We start with the $3 billion hole," Cuomo said.

Wait, what?

The pivot was noteworthy, and so begins another season of state budget talk in Albany, punctuated by soaring spending plans amid talk of fiscal restraint.

As the state heads to a new fiscal year start on April 1, the Legislature – which, by tradition, always wants to spend more than a governor proposes – is diving through the governor’s numbers to see if the gap is really as large as the governor says it is.

But a word of caution: $3 billion is certainly a sizeable amount of cash, but in the scheme of Albany red ink it fits in the category of a fiscal mosquito bite.

Now, beyond the thousands of pages of spending outlines, the governor’s budget also contains plenty of warning signs about the economy cooling, and documents are sprinkled with reality checks about what could happen if revenues drop.

As Cuomo said in his speech to lawmakers Tuesday, “We have priority investments we want to make. So, we have a negative $3 billion and we want to invest more in targeted priorities and this budget tries to balance them."

Gov. Andrew Cuomo delivers his budget address on Jan. 15 in Albany. Towns and villages in Erie County face the loss of $3.7 million in state aid due to a technical budget issue. (Will Waldron/Times Union)

Rolling red ink

What’s at play? How, after years of good news nationally about job creation, does a state envision having to close a $3 billion hole before the next fiscal year kicks in?

“There is nearly a permanent, structural imbalance between spending and revenue in the state budget," said E.J. McMahon, research director at the Empire Center for Public Policy, a state budget watchdog group.

What that means is there is a gap, even in good years, where past spending promises do not line up with expected revenues. Governors over the years have turned to an assortment of responses: higher taxes, spending cuts or spending growth curtailments and a grab bag of Albany fiscal maneuvers that can include moving “off-budget” money into the main, general fund or simply “re-estimating” spending or revenue levels.

The state budget, including spending funded via Washington, will total $175.2 billion if Cuomo has his way this year. That’s up from the current fiscal year’s estimated spending of $171.7 billion.

But the $3 billion hole should be considered against the planned state operating funds’ portion of the budget, which is the part paid for mostly by taxes and fees imposed on individuals and corporations. That will run $102 billion in the coming fiscal year, up from $100.1 billion currently.

The governor says the state will keep state spending slightly below a self-imposed 2 percent annual spending cap. Fiscal watchers on the outside of government, like the Citizens Budget Commission, say that “reclassifications of spending and cost shifts” make the true hike in state operating fund spending higher: 3.1 percent.

With some economists predicting a cool economy, or worse, that fiscal group’s president, Andrew Rein, also is sounding an alarm about the state’s emergency funds, called rainy day accounts. They grow a bit under the new Cuomo plan, but “fall far short of what would be necessary to contend with an economic slowdown or recession," he said.

An economic canary

One only needs to be invested in the stock market to know about economic jitters.

Potential further slowdowns are noted by the governor’s budget director, Robert Mujica. In the state’s financial plan, the document that Wall Street credit rating agencies turn to first in assessing state budgets, something of concern happened in December: projections for personal income tax receipts – heavily relied upon to pay for state spending – “abruptly” encountered a “variance” from the current budget year’s projections. It was a downward encounter to the tune of $500 million below estimates. Some other revenue streams are also not meeting projections.

“Economic uncertainties and actions by the federal government continue to pose a heightened risk to state finances," the financial plan states.

Cuomo blames the federal tax law under President Trump that lowered the ability of taxpayers to deduct state and local tax payments on their federal returns. It will especially hit hard in states like New York, especially in downstate where property values and taxes are high. The governor has warned for months that the tax code change will drive people – and their state tax payments – out of New York.

McMahon, the fiscal watcher, said the 2018 stock market decline was an important factor in lower PIT revenues coming to the state starting in December. “We are really dependent on high rollers with capital gains income," he said of New York, which is also disproportionately dependent on the financial sector for jobs and taxes.

Secondly, he said a lot of small businesses and pass-through firms are still unsure how the federal tax law will affect them.

Take those two items, and something happens: “There’s uncertainty," McMahon said.

Of the state’s funding gap for the coming fiscal year, he added, “It’s not good, but it’s not a massively unprecedented thing.”

Cuomo faced a $10 billion deficit in his first year in office in 2011, and that led to painful cuts to a number of programs, including aid to public schools. Last week, Cuomo did not cite any need to cut the state workforce – instead, he’s growing it – nor are there any big spending cuts coming while the current fiscal year still has another 2 ½ months left to it.

Also, state aid to public schools in the coming year will rise 3.6 percent under Cuomo’s plan and it will rise even more after the Legislature gets done making changes to his proposal. Medicaid and health care spending also rise at twice the level of the stated 2 percent overall budget growth rate. Together, public school and Medicaid spending account for 45 percent of the state budget.

Budget-balancing moves

So, how does the governor close a $3 billion gap?

One is to reduce state spending on some local assistance and payments to nonprofits that provide services for the state, such as care for disabled people. Other local assistance areas being trimmed include transportation, mental health and higher education. He also envisions savings by changes made to some property owners who participate in the state’s STAR property tax program.

And then, of course, there are revenue raisers that most might call tax hikes.

The most valuable comes from what has come to be known as the "Millionaire’s Tax." High-income earners, who make about $1 million annually or more, now pay an 8.82 percent top marginal state tax rate, and they’ve been doing so since 2012. This year, the top rate was to revert to its previous 6.85 percent level. Cuomo’s budget plan is to extend the higher rates for an additional five years, and he’s proposing continuing charitable donation tax deductions for state tax purposes on those taxpayers.

Lawmakers, who like that tax on wealthy residents that was originally devised during the recession in the last decade, will pass the tax extension Cuomo wants. But the Citizens Budget Commission calls it “unwise” because, in part, it will make New York less competitive for such high taxpaying people to call home.

For the coming fiscal year, keeping the surcharge will be worth $771 million for the state’s treasury. At the same time, a previously begun tax rate reduction program will continue with another annual phase-in; that affects people, in different ways, with incomes ranging from $40,000 to $323,200.

To help close the deficit while also helping him to spend money on his priorities, Cuomo is proposing another healthy revenue increase in his financial plan he calls the Internet Fairness Conformity Act.

It would require what are called third-party sellers, who sell goods via Amazon, eBay and others, to collect sales taxes on items it sells to New York residents. Currently, if those firms are based in New York, they collect the tax. If out-of-state, they don’t; that would change, or at least for out-of-state firms with sales into New York over $300,000 or more than 100 transactions annually. Cuomo has tried it before and failed, but he may succeed now, buoyed by a a U.S. Supreme Court decision on the issue in June.

For the coming fiscal year, that would be worth $119 million, rising to $239 million the following year.

There’s more. The governor’s budget would end the sales tax exemption for energy services provided to residences. Have a company come out and install, for instance, a new natural gas furnace or water heater and a 4 percent sales tax will now be slapped on top of the bill.

For the coming year, that tax will be worth $90 million to the governor’s financial plan.

There’s an array of other revenue raisers, like a new tax on vapor products, a surcharge on auto rentals and a $120 inspection fee on “for-profit vehicles.” Cuomo is also proposing that his tax department increase the number of audits it conducts on taxpayers; that’s worth $12 million this coming fiscal year and $120 million next year. And while his plan to legalize recreational marijuana won’t bring any new tax money this year, it will start to see tax receipts – $83 million worth – the following year rising eventually to $300 million.

A feel-good ending?

Finally, it’s important to note that while tax receipts are not meeting projections, they are not plummeting. In fact, overall tax receipts will grow. They just won’t grow as fast as the governor’s Division of the Budget would like to see.

Tax receipts, the financial plan states, will rise from $77.6 billion in the current fiscal year to $82 billion under the governor’s plan for the new fiscal year starting April 1. That’s a 5.7 percent increase. Also, money coming from Washington for operating and capital expenses of the state will rise 1.5% to $63.8 billion.

And while he didn’t say it in his speech Tuesday, Cuomo – or at least his 436-page Financial Plan does – envisions rosy times ahead.

Consider this financial plan forecast: Surpluses are expected for two consecutive fiscal years beginning April 1, 2021.

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