The BOOKPRESS April, 1996

Deja-Voodoo Economics

John P. Wolff

After years of protracted budget battles, New York State Governor George Pataki announced that he had a solution. Instead of submitting an executive budget for the State in the first week of April, he would provide one several weeks earlier in an effort to facilitate the negotiation process with the legislature. In recent times, Pataki argued, the disagreements over budget policy between legislators and the governor have resulted in a politicized process that serves no one. Members of both the Democratic-controlled Assembly and Republican-controlled Senate fully agreed. On December 15, 1995, amid much media fanfare, Governor Pataki released a preliminary budget to the Legislature for consideration.

With this early budget submission, Pataki promised a new direction for New York and a new, more efficient, budget-making process. Unfortunately for New Yorkers, there is nothing new about his proposals. His early budget is a gimmick designed to produce good public relations. The content of the budget, essentially a restatement of the proposals contained in his 1995 budget, suggests that Pataki is gearing up for another long budget battle. Most of the provisions of the 1995 budget were modified or eliminated by the Assembly when public outcry against Pataki’s proposals provided the Democrats with new-found political muscle. Since last spring, however, Pataki has become more politically astute. He has learned to mask his intentions behind ambiguous and seemingly contradictory actions. A closer examination of this proposed budget reveals what we might have expected all along: more trickle down economics. While the proposal lacks details and is intended to be preliminary, its policy implications say much about Pataki’s plans for the State.

Pataki justifies cuts in the state income tax with the argument that such cuts will stimulate economic growth. Similarly, his rationale for numerous reductions in government programs is that the money would be better spent if left in taxpayers hands.

But, contrary to Pataki’s claims, the historical record indicates no direct relation between tax cuts and economic growth. Furthermore, the cuts in program spending result in cost and burden shifts from the state government to local governments. In the face of increasing demand for services but limited revenues, localities are forced to reduce services and raise property and sales taxes to pay for existing services. This increased taxation at the local level stands in blatant contradiction to the stated purpose of the governor’s policies.

Highlights of Pataki’s Budget

The budget process in New York this spring is being driven by the anticipated budget gap of $3.9 billion in State fiscal year 1996-1997. New York is constitutionally required to balance the budget. To close this gap, Governor Pataki’s executive budget submission proposes a number of one-shot revenue actions and massive spending cuts in various State programs.

The programs hardest hit are mental health programs, education, welfare, and Medicaid. In fact, a $2.3 billion reduction in the Medicaid program accounts for 58 percent of the proposed savings. The budget also includes proposed reductions in welfare of $240 million, in mental health programs of $470 million, and in agency cuts of $359 million. Finally, the proposal would reduce higher education by $265 million and school aid by $190 million.

Pataki proposes to reserve $100 million from State Lottery revenues for reducing school-based property taxes. This is nothing but a public relations ploy, however, since lottery revenues are already constitutionally required to be spent on public education. Thus, funds set aside for the purpose of tax relief that would otherwise have been used to pay for educational services will still leave a budget gap. Ironically, the $100 million set aside for property tax relief will necessitate a property tax increase of $100 million in the following year, a net gain of zero for taxpayers.

Despite a nominal dollar increase in School Aid of $27 million, Pataki’s proposal would result in a cost increase to local property taxpayers of roughly $491 million due to projected increases in enrollment, inflation, and other effects of his proposal. Under the provisions of his executive budget, the costs of several school programs are shifted from the State to local school districts and changes in school-aid formulas would result in a substantial increase in costs to local districts. The impact will be devastating to school districts trying to make up budget cuts of $35 million for BOCES, $72 million for pre-school education, $37 million for special education, and $51 million for summer education.

The governor’s proposals regarding higher education reflects a similar cost-shifting pattern. Funding for public university systems and tuition assistance programs have been declining since 1989. Shortfalls have resulted in large tuition increases. In 1990-1991, State support for public colleges was $1.9 billion and covered 79 percent of operating costs. This year, Governor Pataki proposes $265 million in cuts — $317 million compared with projected need. Under these provisions, State support for higher education will decline to $1.4 billion, covering only 54 percent of operating expenses. The SUNY/CUNY system will face a cut of $298 million, and the Tuition Assistance Program (TAP) will be reduced by $119 million. To replace the full value of the cuts to SUNY and CUNY, tuition will have to be raised an additional $700 per student per year on top of last year’s $750 increase. The governor also proposes to remove the cap on tuition increases, making it difficult to determine how each campus would manage the funding cuts and tuition increases. As a result of these increases, families in New York may be required to pay an additional $2,000 for higher education. The result of last year’s cost increase was clear: many students at the financial margin could no longer afford the cost of higher education and dropped out. Many SUNY/CUNY campuses experienced sharp decreases in student enrollment. This had an adverse economic impact on the schools and their surrounding communities.

The most damaging provisions of Pataki’s budget are the $2.3 billion in cuts to the Medicaid program, a state-federal program that provides health care services to poor families with children, disabled individuals, and the elderly. Cuts this dramatic will hurt not only those who rely on Medicaid for their health care, but the medical profession as well. Including federal and local interactions, the total loss of revenue to health care providers would be $2.9 billion. A loss of this magnitude will cause a reduction in services, job losses in the health care industry, and damage to local economies. Among Pataki’s cost containment proposals for Medicaid are two block grants to counties. Under the guise of reform, funding for home health care services and for the home relief population would be provided to counties as block grants. But the reductions in overall State spending would force counties to either raise local taxes or reduce services. For example, home health services would be underfunded by $421 million, a shortfall that would lead to the collapse of nearly all home health care services in poorer counties and a substantial reduction of those services in more affluent areas.

Among the hardest hit by these provisions would be hospitals and nursing homes. Including losses attributable to indigent care as well as federal interactions, the funding loss to hospitals could reach $1.4 billion. Of the 2.1 million elderly New York residents, 15 percent rely on Medicaid to help cover health care expenses. Since aged beneficiaries account for 34 percent of Medicaid expenditures, the elderly are likely to absorb the brunt of the cuts. To make matters worse, Governor Pataki does not propose to pass down to local jurisdictions the $1.3 billion in anticipated increases in Federal funding for the Medicaid program. Thus, the counties will face the tough decisions of which beneficiaries to serve when budget constraints preclude the provision of health care.

These cuts in funding for public education, higher education, and health care demonstrate a pattern. Funding for programs is reduced at the state level, creating a burden at the local level to either increase local funding or reduce services. It is important to keep in mind what these services represent. At stake are the quality of public schools, the ability of young people to pursue college, and the assurance that all citizens have access to quality health care. Because of State constitutional requirements, as well as moral obligations, localities will likely be required to raise property and sales taxes to make up for budget cuts. The alternative is not a viable option but may become a reality if local school districts are unable to school their children, low enrollment forces SUNY schools to close their doors, and people in need of health care are denied services.

The Result is Higher

Property and Sales Taxes

Governor Pataki’s proposal, however extreme, is a reflection of the fiscal reality facing the State. The $3.9 billion shortfall in the State budget constitutes a budget crisis that must be dealt with. Pataki’s assumption is that the budget shortfall is due to excessive taxation. Another assumption is that a reduction in the size of the government will lead to an improvement in the State’s economy. Accordingly, Pataki proposes an additional reduction of 7,400 positions in the State workforce, not including layoffs in the SUNY/CUNY system.

The facts, however, contradict the governor’s assumptions regarding the size of the State government. It is true that the number of nominal dollars spent by the State government has grown over the past few decades. However, nominal dollar spending does not provide an accurate picture of growth; the economy and population of the State have also increased tremendously. A more accurate way to measure the size of government is to determine the level of spending for current services as a percentage of all personal income in the State. Using this measure, the size of the State government peaked at a level of about 8.3 percent of the New York economy in 1989. Since 1989, however, the relative size of the government has been shrinking. In 1994, the size had declined to just above 7.6 percent. Under Pataki’s plan, the size of the State government would decrease to just under 7.3 percent.

The other half of Pataki’s argument is equally dubious. According to the supply-side economic principles that Pataki embraces, a reduction of taxes will result in economic growth and activity-generating tax revenues. The underlying assumption is that the income tax burden is the cause of New York’s stagnant rate of economic growth. Again, the facts contradict this assumption.

In 1988, State tax revenues as a percentage of percentage of personal income reached a peak of almost 8.0 percent. Since then, the figure has declined to 6.8 percent in 1995. Over the past two decades, the top marginal income tax rates have actually decreased. In 1976, the top marginal rate in New York State was over 15 percent for both earned income and investment income. During the terms of Hugh Carey and his successor, Mario Cuomo, the top marginal tax rates were lowered on numerous occasions over the course of several budget battles. The top marginal tax rate reached a low of 9 percent in 1989 and has not been increased since. It is important to note that despite a large tax cut in 1989, and another in 1994, there is no data or even anecdotal evidence to suggest that the economy experienced additional growth as a result of tax cuts. In fact, in 1989, following the cuts, New York began a recessionary slide.

Some economists argue that tax cuts exacerbate adverse economic tendencies. As the theory goes, government expenditures create an expansionary economic effect since the types of things the State spends money on 97Ä transfer payments, roads and infrastructure, and education — have a positive impact, not only in terms of immediate employment but by laying the groundwork for further economic development in the private sector. Therefore, reducing these government expenditures has a constrictive effect on the economy. Economic data from 1976 through 1994 support this perspective. The number of jobs in New York State increased steadily from 1976 through 1989, then declined sharply following 1989.

Tax cuts in the ‘80s and ‘90s have also had two other important effects. First, as a greater portion of income taxes were collected from middle and lower income families rather than from wealthier individuals, New York’s income tax became regressive. In 1992, wealthier individuals were paying far less in taxes as a percentage of their income compared to lower income families. A family of four with an income of under $16,000 paid 15.3 percent of their income in taxes, while a family of four making about $63,000 paid 12.1 percent of their income in taxes. A family making $1.26 million in income paid only 8.9 percent of their income in taxes. Compounding this effect, lower income tax revenues led to increases in other, more regressive taxes, particularly property and sales taxes.

A second consequence of the income tax reductions were revenue shortfalls that led to chronic gaps in the State budget. The 1994 tax cuts under Governor Cuomo resulted in a projected decrease of $1.4 billion in revenue in fiscal year 1996-1997, while the 1995 tax cuts under Governor Pataki will result in an additional decrease of almost $2.4 billion, for a total of $3.8 billion in lost revenues. About 40 percent of this figure results from tax cuts to families making over $100,000 per year. This raises serious issues of equity. While reducing state taxes on the more affluent by $3.8 billion, Governor Pataki is forcing local jurisdictionsd to either cut vital services or else to raise local property taxes by $3.9 billion. Property taxes and sales taxes are the prime source of income for local governments, and they are also the most regressive. Property taxes are no longer a fair method of taxation since land is no longer an accurate measure of wealth. Increases in property taxes have been a prime cause of the mass exodus of New York residents to other states. (New York’s population stays relatively stable due to the influx of immigrants.) This process has been ongoing since tax cuts implemented under Governor Cuomo in 1987. Since then, the rate of growth of personal income tax revenues has been stagnant while revenues from property taxes have grown faster than the economy. The likely effects of Pataki’s budget would be to exacerbate this problem.

The second round of Pataki’s tax cut will further reduce available revenues. Each year, the budget process is driven by the need to meet budget shortfalls. As the governor and legislature lock into negotiations, long-term planning takes a back seat to political expediency. The politicized nature of recent budget debates has made it difficult for leaders in Albany to see beyond the quick fix necessary to pass the budget, with little discussion of its long term effects. Each year, one-shot measures and cost shifts get the state off the hook by passing the buck to localities, especially in the areas of public education and Medicaid spending. The result is higher property and sales taxes. This year promises more of these same regressive and punitive policies, despite the governor’s early submission of an executive budget. It is clear from the provisions of his budget that it will have an adverse effect on the fiscal health of the state.

John P. Wolff is a member of the Ithaca Town Board and business manager of The Bookpress.

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