The blame belongs mainly to Governor Andrew Cuomo.
E. J. McMahon
Summer 2021 @ City Journal, with permission!
In early April, Governor Andrew
Cuomo and his fellow Democrats in New York’s legislature agreed to a
record $209 billion budget that will raise taxes by billions of dollars a
year on the state’s top earners and most profitable corporations—even
though higher taxes were no longer needed to make up for pandemic-driven
revenue losses.
Buoyed by nearly $13 billion in unrestricted federal stimulus
aid—plus billions more in funding targeted directly to school districts
and local governments—Albany’s budget for fiscal year 2022 raised the
baseline of recurring state operations spending by nearly 8 percent, to a
level that won’t be sustainable once the federal cash is exhausted in a
few years. For the first time ever, New York is projecting balanced
state budgets across two consecutive fiscal years. But the fiscal
hangover, dawning in the second half of the 2020s, could be a brutal
combination of large deficits and eroding revenues—even assuming a
continuous expansion of the national and regional economy.
Conventional wisdom holds that New York’s
budget jumped the rails this year because Cuomo, known for his
(relative) fiscal restraint since taking office in 2011, had been
weakened by self-inflicted political wounds. During the two months
following the release of his Executive Budget proposal, the governor was
the target of multiple investigations (including a formal legislative
impeachment inquiry) into his concealment of Covid-19-related
nursing-home deaths, alleged sexual harassment of subordinates, and use
of state resources to help produce a self-aggrandizing pandemic memoir
for which he received $5 million. In early August, the Assembly began
moving faster toward an impeachment vote after state Attorney General
Letitia James released a report concluding that Cuomo sexually harassed 11 women.
But blaming the outcome on these (serious) distractions lets Cuomo
off the hook too easily. The governor’s own decisions—dating back to
before the pandemic—set the stage for Albany’s budget blowout. It was
the predictable result of a framework that Cuomo had laid out in his own
budget proposal, following a year of delay and dissembling.
Even pre-pandemic, Cuomo’s self-imposed 2 percent annual lid on state
spending growth had sprung a serious leak. The governor had balanced
his fiscal 2019 financial plan by quietly sliding $1.7 billion in
Medicaid payments a few weeks into the following fiscal year—an overrun
caused in part by his 2018 election-year gift of a rate increase for the
politically supportive nursing-home industry.
Meantime, even after a decade of healthy revenue growth—padded by an
extraordinary $14 billion in civil penalty payments from state-regulated
financial institutions—New York’s budgetary reserves were perilously
small by national standards.
Among leading public officials from President Donald Trump on down,
Cuomo was hardly alone in failing to spot the public-health threat
emerging from Wuhan, China, until it was too late. But he had a clear
warning of how the novel coronavirus was likely to disrupt the state’s
finances. Reacting to the spread of Covid-19 from Asia into Europe,
stock prices dropped 10 percent in the final week of February 2020—the
market’s worst five-day stretch since the 2008 financial crisis. This
should have set off alarm bells in the governor’s office. Given Wall
Street’s importance to New York’s tax base, a stock-market crash would
undermine the state’s personal income tax, its largest revenue source,
which heavily relies on capital gains and investment income of the
highest-earning taxpayers.
Cuomo’s reaction was to downplay the issue, focusing on the emerging
Covid-19 health emergency. New York’s chief executive employs a sizable
professional budget staff as well as a public-health bureaucracy, but
the fiscal situation was barely mentioned during the daily briefings
that he began holding in March. By March 27, 2020, with passage of the
fiscal 2021 budget just days away, Cuomo said that the state had “lost
about $10 billion to $15 billion in revenue” stemming from lockdowns and
the stock-market crash. In the next breath, he
complained—preposterously—that the federal government had given New York
State “zero, nada, niente, zilch” in relief aid.
In fact, the state had just received two big funding boosts from
Congress. The federal Families First Coronavirus Relief Act, passed
early in the month, initially expanded New York’s federal Medicaid
reimbursements for the year ahead by more than $5 billion. At the end of
March, the $2.2 trillion federal Coronavirus Aid, Relief, and Economic
Security (CARES) Act handed New York $1.1 billion in temporary
elementary and secondary school funding, which provided an equal amount
of state budget savings. Even by Albany standards, $1 billion in budget
relief couldn’t be termed “nada,” much less “zilch.” (The CARES Act also
allocated $5.1 billion to New York from a Coronavirus Relief Fund for
state governments—most of which, thanks to permissive “guidance” from
the supposedly hostile Trump administration, Cuomo ultimately earmarked
to offset normal state payroll costs.)
Despite what they had every reason to believe was a looming crash in
revenues, Cuomo and the legislature agreed in early April 2020 to enact a
budget that called for spending roughly the same amount as in the
previous year. The governor hailed it as “an extraordinary
accomplishment”—and, in the next breath, demanded federal aid to make it
balance.
The fiscal 2021 budget made two important
concessions to post-pandemic economic reality: it gave the governor
added authority to reduce local aid across the board or to withhold
spending in some categories; and it gave him broad discretion to borrow
up to $11 billion, if necessary.
“I’m broke. . . . I don’t have two nickels to rub together,” Cuomo
complained in mid-April 2020, when he still had an unspent cash balance
of nearly $10 billion. He continued grossly to misrepresent the federal
relief bills passed in March, saying that they “didn’t give us anything”
except “some Medicaid money” (which, in fact, would save the state
billions).
Throughout the summer, Cuomo repeatedly claimed that New York faced a
$15 billion deficit—while his own official financial plans consistently
showed an initial shortfall closer to $8 billion, without fully
counting the offsetting impact of CARES Act funds.
As it happened, 2020 also brought Cuomo’s turn to serve as vice chair
of the bipartisan National Governors Association, which endorsed a
massive proposal by congressional Democrats that would have set aside
$500 billion for states; allocated on a per-capita basis, the deal would
have handed New York $30 billion. At the height of the pandemic, Cuomo
began the fiscal year by temporarily withholding pay hikes for state
workers, promising to make good on the raises if the feds came through
with more aid. In late summer, after Congress had defied expectations by
failing to agree on a sixth stimulus bill, the governor temporarily
“withheld” scheduled local aid payments to municipalities and nonprofit
service providers—cash-strapped groups with little lobbying clout in
Albany. But he never pulled the trigger on oft-threatened school-aid
cuts; in fact, when some districts began to plan staff reductions in
September, Cuomo’s budget director scolded them for acting prematurely.
Cuomo was playing a dangerous game of budgetary brinksmanship, which
might have forced him to fall back on deficit borrowing if his initial
dire economic and revenue forecast had proved accurate. But he was
saved, in large part, by Wall Street. After dropping more than 30
percent from late February through March 2020, stock prices had fully
recovered to previous highs by Labor Day. As the market rebounded, so
did New York’s fiscal outlook. The state’s tax receipts through
September, the halfway point in the fiscal year, were up more than $1
billion from the governor’s initial forecast. Based on those results,
Comptroller Thomas DiNapoli projected in early November that tax
receipts for the year would exceed Cuomo’s initial projections by nearly
$4 billion. Cuomo nonetheless made no change to his revenue projection
and kept harping on his “$15 billion deficit” claim.
In December, the lame-duck Congress passed yet another stimulus
bill—a $900 billion “supplemental appropriations” measure, of which New
York’s share included $5.3 billion in public school funding. This
brought the state’s total 2020 pandemic relief haul from Washington to
$183 billion, including $40 billion in aid to government entities—of
which $27 billion flowed to or through Cuomo’s financial plan. The CARES
Act and the Medicaid reimbursements alone provided more than $10
billion in offsetting subsidies for state operating expenditures.
Nonetheless, when he presented his Executive Budget on January 19,
2021, Cuomo was still crying poverty, still citing a $15 billion
deficit, and asserting that nothing less than $15 billion in
unrestricted aid would represent “fair funding” in the Biden
administration’s anticipated stimulus bill to make up for New York’s
mistreatment by “a federal administration [Trump’s] that was
hyper-political.” A New York Times headline perfectly
encapsulated the governor’s budget narrative: “Cuomo Offers Doomsday
Proposal to Attack a Possible $15 Billion Deficit.”
This was pure fiction. In fact, the state no longer had a deficit,
and there was scant “doom” to be found in any corner of the governor’s
proposed budget, even under what he called his “worst-case scenario” for
federal aid (i.e., only $6 billion). By the end of the fiscal year two
months later, tax receipts had bounced back to nearly equal the previous
year’s level, about $7 billion above Cuomo’s original forecast. And as
of May, two months into fiscal 2022, tax revenues were $4 billion higher
than his just-updated projection.
The governor’s pandemic-year budget
strategy—cry poverty and demand an enormous bailout—was as crude (and
often dishonest) as it was transparent. He could argue, though, that it
worked, since New York’s state government ended up getting a much bigger
bailout than it actually needed to balance its budget: some $12.7
billion in unrestricted aid, producing a surplus that Cuomo used, in
part, to pay off $2 billion in long-standing debt at the end of fiscal
2021.
The governor’s doom-and-gloom hype, however, also stoked demands for
higher taxes from the legislature’s vocal contingent of urban
progressive lawmakers, a group enlarged by November’s election results,
giving Democrats their first-ever supermajority in both the Assembly and
Senate. Anticipating their demands, Cuomo’s own budget included a
supposedly temporary, three-year increase in tax rates on incomes
starting at $5 million. The legislature predictably seized on that
concession and insisted on raising taxes higher, kicking in at
lower-millionaire incomes.
The final budget included significant further personal income-tax
hikes on millionaires, who already pay a disproportionately large share
of New York income taxes. For residents of New York City, where most of
the state’s highest earners live, the combined state-local marginal rate
on incomes starting at just over $1 million will now range from 13.5
percent to nearly 15 percent, surpassing California’s 13.3 percent,
previously the nation’s highest marginal state rate. Those tax hikes
aren’t scheduled to expire until the end of 2027, and the budget also
erased the previously scheduled 2024 expiration date on the state’s
underlying 8.82 percent millionaire tax rate—a step that Cuomo never
previously had endorsed. This marks the first time since the late 1960s
that New York has effectively enacted a permanent increase in any
broad-based state tax.
Cuomo also agreed to a supposedly temporary three-year increase in
the corporate franchise-tax rate, from 6.5 percent to 7.25 percent on
profits above $5 million.
The impact of the income-tax hike will be worsened by the tight cap
on state and local tax (SALT) deductions introduced under Trump’s 2017
federal tax law. Cuomo is calling on Biden and congressional Democrats
to repeal the SALT cap as part of any tax hike enacted to fund Biden’s
proposed “infrastructure” package. But a very expensive tax break
principally benefiting income millionaires in New York and a handful of
other high-tax states will be a heavy lift among Democrats as well as
Republicans.
On the spending side, the state budget tapped the temporary stimulus
aid to create a $2.1 billion fund to assist workers (mostly illegal
immigrants) “excluded” from additional unemployment benefits and other
federal assistance, plus $2.4 billion in rental assistance and a $1
billion small-business, arts, entertainment, and restaurant relief
package.
But for all the political rhetoric about meeting the needs of workers
and businesses hurt by the pandemic, the enduring beneficiaries of New
York’s budget will be unionized public-sector employees—especially
teachers, who will consume the lion’s share of a record 12 percent
school-aid boost. It was no coincidence that the projected new annual
revenue from the personal income-tax hike roughly matches the $4 billion
projected annual cost of a greatly enriched school-aid formula that has
been the teachers’ union’s top lobbying priority for years.
Summing up his budget deal with the legislature early this April,
Cuomo said: “This budget will set the trajectory for the state for the
next 10 years.”
He’s right. But the trajectory could culminate in a death spiral.
E. J. McMahon is an adjunct fellow at the Manhattan Institute and founder and senior fellow of the Empire Center for Public Policy, an independent think tank based in Albany, New York.
Photo: “I’m broke. . . . I don’t have two nickels to rub
together,” the governor complained in April 2020, though he had an
unspent cash balance of nearly $10 billion. (MARK LENNIHAN/AP
PHOTO/BLOOMBERG/GETTY IMAGES)
City Journal is a
publication of the Manhattan Institute for Policy Research (MI), a
leading free-market think tank. Are you interested in supporting the
magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).
DONATE
