Dear Legislator:

I write to convey the Citizens Budget Commission’s (CBC’s) recommendations for legislative action on the New York State Executive Budget for fiscal year 2020. The Executive Budget does not sufficiently restrain spending growth or build reserves, which are critical if the State is to weather an eventual economic downturn without harmful spending cuts and counterproductive tax increases. Already there are signs of economic uncertainty, including a $2.3 billion shortfall in State revenue in the current year. CBC recommends containing spending growth by limiting school aid increases to only the highest-need districts and by reducing spending on ineffective economic development programs. CBC also advocates for increasing planned deposits to the rainy day funds. In addition, to maintain New York’s competitive position, the Legislature should authorize a congestion pricing plan in New York City and allow the millionaire’s tax surcharge to sunset or phase it out.

Priority Proposals

Contain spending growth to the State’s self-imposed 2 percent cap: Since 2011 State leaders have adopted the worthy goal of limiting growth in State operating funds disbursements to 2 percent; however, in recent years adherence to the 2 percent cap has been achieved through accounting maneuvers.¹ The Executive Budget proposes spending growth of 3.4 percent.² The State should take actions to adhere to its spending cap and report actual spending growth.

Target school aid to underfunded districts: One way to restrain spending growth is to limit increases in school aid, which comprises 16 percent of the budget. New York spends $22,366 per pupil, nearly twice the national average on secondary education.³ CBC analysis shows that the State could support a sound basic education in every district by increasing school aid approximately $200 million if targeted only to underfunded high-need districts.⁴ The Governor proposes to increase State school aid $1 billion (3.6 percent). Reducing this increase and better targeting would ensure high-need districts have sufficient resources and would restrain overall State spending growth.

Eliminate ineffective economic development programs and codify proposed economic development reforms: A recent CBC report documented $4.4 billion in State economic development tax expenditures and spending in 2018.⁵ The Executive Budget proposes continued funding for existing programs. Little information exists on these programs and the benefits they provide taxpayers; where data do exist, the results are underwhelming.⁶ The budget proposes the creation of a “database of deals” to catalog the State’s economic development programs. Governor Cuomo has also stated that some pre-contract audit authority will be restored to the State Comptroller. CBC supports these important reforms, and they should be outlined clearly in State law to ensure that reforms continue in future administrations. New spending should be on hold until reforms are enacted and ineffective programs, such as the film tax credit, are eliminated.

Increase deposits to rainy day funds: Despite a thriving economy, New York State has not made a deposit to its rainy day funds since 2015. In contrast, other states have bolstered significantly their reserves; for example, California has set aside reserves equal to 10 percent of annual general fund tax revenues, far in excess of New York’s 2.7 percent.⁷ The Executive Budget deposits $488 million into the State’s rainy day funds over two years. This is a positive step, but it is insufficient. The revenue shortfall during the average recession would dwarf the State’s planned rainy day reserves.⁸ Greater reserves are required to mitigate the impacts of an economic downturn.

Authorize and implement congestion pricing: The creation of a congestion pricing zone in Manhattan’s central business district is projected to raise approximately $1 billion annually to support issuance of $15 billion in new debt to finance Metropolitan Transportation Authority (MTA) capital improvements. On-time performance of New York City subways has declined in recent years as the MTA has struggled to keep up with maintenance and repair.⁹ Implementation of congestion pricing would provide needed revenue and reduce vehicle traffic in New York City’s central business district. While the budget proposal leaves program details to be further defined, implementing the system in a timely fashion is important to address the MTA’s capital needs.¹⁰

Let the “millionaire’s tax” surcharge sunset or phase it out: The Executive Budget extends the “millionaire’s tax” for five years, which is problematic for two reasons. First, it decreases New York’s competitiveness for high earners. The federal cap on state and local tax deductions (SALT cap) adopted in 2017 significantly increased the net cost of state and local taxes, particularly for high earners. The combined State and New York City top personal income tax rate of almost 13 percent is one of the highest in the nation, which along with the SALT cap reduces New York’s competitiveness. The State relies heavily on these taxpayers; the top 0.6 percent of personal income tax filers pay 40 percent of the personal income tax revenues—one out of every five dollars for State operating spending.¹¹ Second, the tax has been a key method to balance the State budget during economic downturns. Extending it now at the full rate increases the challenge of raising taxes when a downturn does occur. Ideally, the tax surcharge should be allowed to expire as scheduled; if the State cannot manage this without damaging service cuts, it should be phased out as quickly as possible.

In addition, CBC makes the following recommendations on other budget proposals:

Proposals to Support

Rationalize retiree health insurance contributions: New York State’s other postemployment benefits (OPEB) liability, the cost to provide health insurance benefits to State retirees, grew from $57 billion in 2011 to $92 billion in 2017—about $4,700 per resident.12 To reduce this liability, the Executive Budget proposes prospectively implementing a tiered retiree health benefit systems based on years of service for future employees, eliminating the reimbursement of the Medicare Part B surcharge for high-income retirees, and capping Medicare Part B premium sharing. Implementing these reforms would reduce OPEB liability by $13.5 billion and reduce budget costs by $56 million annually by fiscal year 2023.¹³

Broaden the sales tax: The Executive Budget would generate $378 million annually by broadening the sales tax in two ways. The first requires Internet marketplaces–regardless of whether they have a physical presence in New York State–to collect sales taxes on all sales to New York residents. Implementation and enforcement of marketplace sales tax rules will generate a total of $250 million annually. The second proposal ends the sales tax advantage for energy service companies (ESCOs). Currently, gas or electricity transmission costs are exempt if purchased by an ESCO customer, but subject to sales tax if purchased by a utility customer. This proposal would apply sales tax evenly and generate $128 million in State revenue annually.¹⁴

Convene a commission to study options for increasing health care access: Proposals to establish a single-payer health care system in New York State have been introduced for 28 consecutive years. While implementation of a New York State single-payer system is currently infeasible, the State should act to continue the State’s recent progress in improving health care access.¹⁵ A practical and effective approach to improving access and care should focus on targeted initiatives, including a State individual mandate, a low-cost targeted public plan that individuals and groups could purchase, and policies to increase price transparency and competition.¹⁶ The Governor’s proposal to convene a deliberative body to study additional options for increasing affordable health care access is a prudent way to build on these actions.

Proposals to Modify

Eliminate the property tax relief credit. The property tax relief credit program provides a refund check equal to a percentage of School Tax Relief (STAR) savings, with a higher percentage for lower-income homeowners. The program is set to expire after fiscal year 2020 but will cost more than $1 billion in the coming fiscal year.¹⁷ Phasing out this program one year early will have a minimal impact on recipients but provide considerable savings for the State.

Eliminate the STAR program: The $3.5 billion STAR program reduces local school taxes paid directly by property owners, but it is structured to provide the greatest benefits to high-income property owners in the highest-income regions. The Governor proposes capping benefits in fiscal year 2020, saving $106 million in the coming fiscal year. This proposal should go further by eliminating STAR.

Couple plastic bag ban with fee on alternative bags: The budget proposal includes a ban on single-use plastic bags effective March 1, 2020. Statewide approximately 23 billion single-use plastic bags are dispensed each year.¹⁸ The City of New York disposes of 71,000 tons of plastic bags at a cost of more than $12 million annually.¹⁹ Prior research finds plastic bag bans are effective in reducing waste when coupled with a fee on alternative single-use bags.²⁰  Accordingly, the ban proposed in the Executive Budget should be implemented with a fee on single-use alternatives.

Expand speed camera program without redirecting revenue: The Executive Budget proposes an expansion of New York City’s school zones speed camera program from 140 locations to 290 locations. The proposal requires that revenue generated from new speed violations be directed to the MTA. Speed cameras should be expanded, but the associated revenue should be retained by New York City.

Provide New York City with broad design-build authority: Design-build authority has been proposed for the Dormitory Authority of the State of New York, the New York State Urban Development Corporation, New York State Office of General Services, the New York State Department of Health, and the New York State Olympic Regional Development Authority. Design-build contracting can be an effective tool for reducing the cost and duration of major infrastructure projects by aligning planning and implementation phases under one contract. Still, the budget proposal fails to expand design-build authority to New York City, which has a large capital program. Currently design-build authority is only granted for the Brooklyn-Queens Expressway, for some projects at the New York City Housing Authority, and jail reconfiguration related to replacement of Rikers Island. New York City should be allowed to employ this more efficient contracting method more broadly.

Set achievable clean energy goals using the most cost-effective strategies:  Governor Andrew Cuomo has outlined plans to pursue 100 percent carbon-free electricity generation by 2040. To support this goal, the Governor has recommended increasing the share of renewable electricity from 50 percent in 2030 to 70 percent.²¹ Clean energy generation is an important goal and should be pursued in conjunction with maintaining the state’s competitiveness. New York State’s electricity prices are already approximately 50 percent higher than national averages for residential and commercial customers and meeting clean energy goals may exacerbate the differential.²² The budget requires the Department of Environmental Conservation to calculate the social cost of carbon; this analysis can be a starting point to determine how to meet clean energy goals with strategies to reduce the greatest amount of carbon at the lowest cost to ratepayers.²³

Proposals to Reject

Do not expand Executive authority: The Governor proposes to expand Executive authority in the case of revenue shortfalls of more than $500 million. This would defer making difficult choices as part of the budget process, and instead grant unilateral authority to the Division of the Budget. The best way to address potential risks is to build reserves, control spending, and make changes as needed within the established budget process.

Do not shift responsibility for MTA capital funding to New York City: The budget proposal would require New York City to fund half of any MTA capital plan shortfall. This is unjustified and unaffordable; New York City residents and businesses already pay three-quarters of MTA taxes and subsidies.

Omit the carried interest loophole multistate agreement: The Governor proposes a 17 percent personal income tax surcharge on “carried interest,” profits earned by private equity partners; currently, such income is taxed as capital gains under a lower federal tax rate. The proposal would only go into effect if adopted by Connecticut, New Jersey, Massachusetts, and Pennsylvania. Private equity is a very mobile industry and firms would likely leave any state that levies such a surcharge.

Thank you for considering CBC’s recommendations. As always, my staff and I are happy to answer questions or discuss these issues.

Sincerely,

Andrew S. Rein
President
Citizens Budget Commission