The Citizens Budget Commission welcomes the recognition that the State must immediately address its serious fiscal imbalance. We urge you also to recognize that actions to balance the budget should focus on restraining spending. The economy is still expanding and the State should take this opportunity to put its fiscal house in order. Aligning spending with projected receipts will strengthen both New York’s competitiveness and the ability to weather a future economic recession.

This recommendation is grounded in the following facts.

First, the problem is big and demands quick action. The State’s mid-year budget update reports a $6.1 billion budget gap next fiscal year, and a four-year gap of $22.2 billion.¹ In fact, the four-year gap is $28.8 billion. The State’s reporting understates the problem because it includes $6.7 billion in savings that are not yet specified and assumes that $2.2 billion is “solved” by permanently delaying annual Medicaid bill payments—an unsound fiscal practice.

Second, the gap is due to high and growing spending, not revenue declines. Revenues continue to grow steadily. From fiscal years 2011 to 2020 State receipts will have grown 3.5 percent annually on average. Receipts are projected to continue to grow 2.1 percent annually on average from fiscal years 2020 to 2023.²

Spending growth, conversely, is accelerating, driven by Medicaid and school aid. Between fiscal years 2011 and 2017 total state operations spending grew an average of 2.7 percent annually. This growth rate accelerated to 3.6 percent annually on average from fiscal years 2017 to 2020. Spending growth is projected to accelerate further to 4.9 percent annually on average between fiscal years 2020 and 2023.³

Medicaid State spending increased 0.8 percent annually on average between fiscal years 2011 and 2017, but has increased 6.1 percent annually on average between fiscal years 2017 and 2020.⁴ New York’s Medicaid costs are not only growing, but they are comparatively high; as of federal fiscal year 2017, the latest year data are available, New York’s cost per Medicaid enrollee was the second highest in the nation and 50 percent higher than the national average.⁵ Previously unbudgeted Medicaid spending contributes $12.5 billion to the total four-year State budget gap.

From fiscal years 2011 to 2020 education aid increased 3.7 percent annually on average, twice the rate of inflation.⁶ Notably, wealthy districts with sufficient local resources to provide a sound basic education (SBE) received $1.6 billion in state school aid in school year 2017-2018.⁷

Third, New York’s tax burden is already significantly higher than most states, threatening the state’s competitiveness. New York’s State and local tax burden is the highest in the nation and 48 percent higher than the national average.⁸ New York State’s top marginal personal income tax (PIT) rate is 8.82 percent, the sixth highest in the nation.⁹ One reason is the repeated extension of the “temporary” PIT surcharge, which was levied initially to help weather the 2007 recession. The top rate for New York City residents is an even higher 12.7 percent with City PIT.¹⁰

Furthermore, New York’s average combined 8.49 percent State and local sales tax rate is the nation’s 10^th highest.¹¹ Last year New York expanded the real estate transfer tax, increasing rates on high-value New York City properties.¹²

New York’s high tax burden combined with the federal cap on the deduction for State and local taxes (SALT) increases the risk that high-income earners will move to lower tax states.¹³ These individuals support a significant portion of state spending: one of every 5 dollars spent for state operating purposes comes from taxpayers earning more than $1 million annually.¹⁴

With the economic expansion continuing, New York should take the opportunity to stabilize its budget and prepare for any economic slowdown. It should identify recurring savings to bring spending in line with revenues. These savings should come from multiple sources in the budget.

Among other areas to consider for spending reductions, New York State should:

• Reconstitute the Medicaid Redesign Team to identify savings. The approach should be holistic, not only evaluating rates but also policies to address high and rapidly rising long-term care costs and to reform the $3.6 billion in Medicaid supplemental payments so they are better directed to safety net hospitals in need.¹⁵ The Executive, with the support of the Legislature, also appropriately should exercise powers granted under the Medicaid global cap to prevent Medicaid spending from exceeding budgeted amounts in future periods.
• Focus education aid on needy districts to fund fully SBE. Last year spending increased $800 million more than the amount needed for each district to fund an SBE.¹⁶
• Reduce unproductive economic development program spending. New York spends more than $4.4 billion annually, and there is little evidence that many of these investments produce results.¹⁷
• Consider reforms to retiree health benefits that were proposed repeatedly in recent Executive Budgets.¹⁸ These reforms were projected to significantly reduce post-employment benefit costs and future liabilities. 

Increasing taxes now would be counterproductive; it would make New York even more expensive for residents and business, decrease competitiveness, and reduce options to weather the next recession. If past is prologue, the revenue shortfall from a recession could add a whopping $35 billion to the gaps the State identified.¹⁹ Temporary revenue increases may be one appropriate action to weather a recession, but retention of the PIT surcharge and other recently enacted taxes narrow options to balance the budget soundly in future recessions; enacting additional tax increases now would make it even harder.

Now is the time to make hard choices on spending and hold the line on the State’s already high tax burden. The State has deferred action on the Medicaid-driven fiscal problem for quite some time, which only has made solutions potentially more painful. Immediate action is critical.

Sincerely,

Andrew S. Rein
President