New York: One Small Step Closer to Fiscal Solvency

August 12, 2008

Governor David Paterson proposed roughly $1 billion in budget cuts to resolve New York State's current budget crisis. The state legislature will consider the proposal during an emergency session focused on the $6.4 billion deficit.

The New York Times reports the Governor's proposals:

The plan Mr. Paterson presented on Monday included a 6 percent reduction in the financial assistance the state provides to local governments, a move that the governor said would save $250 million this year. It also included a 50 percent reduction in the discretionary funding available to the governor and the legislature for pet projects, which could save $100 million.

But the biggest chunk of money the governor proposed saving would come from a $506 million cut in the proposed increase for Medicaid spending. Under the governor's proposal, Medicaid spending growth this year would fall to 1.7 percent from the currently budgeted increase of 4 percent. The governor would achieve that by reducing spending increases for pharmacy reimbursements, and aid to hospitals, nursing homes and home care.

The governor would also save $51 million by decreasing aid to the City University of New York system.

As stated in an earlier blog, the current deficit represents 8% of the state's operating budget. If the proposal makes it through the legislature, New York's deficit would fall to 7% of the budget or $5.4 billion. While some may view the governor's plan as aggressive and perhaps even dangerous, cutting $1 billion from such a large budget shouldn't cripple state operations in the least. Additionally, the proposal contains a 6% reduction in state-aid to local governments. This $250 million reduction in state spending simply passes the budget problem of the state onto local governments, deflecting budget politics towards city council members.

While the Governor's plan addresses expenditures, the Democratic Assembly is calling for a tax increase on New Yorkers making over one million dollars. The governor hopes to close the budget gap without higher taxes, but finding billions of dollars in budget cuts seems rather difficult for a newly minted governor. Placing an additional tax on the highest income earners tends to provide a less stable source of revenue than alternatives. Removing exemptions, deductions and other preferences from sales and income taxes provides an increase to the tax base, allowing for greater revenues at the same tax rate.

Perhaps this unfortunate event will lead to better planning and response to revenue estimates, or at least place pressure on politicians to avoid future fiscal crises.

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