Eye on the News

Nicole Gelinas
Words Not Deeds
Governor Paterson’s promising speech—and enormous budget
14 April 2008

A sex scandal drives the old governor out, and the new governor cuts through partisan politics to say what voters need to hear: change is imperative. “The days of spending like there’s no tomorrow end today,” the governor, who hails from the legislature, tells his former colleagues. “The good news is we’re not bankrupt. The bad news is we’re close,” he adds, continuing his refreshing straight talk. The editorialists are thrilled, seeing an upside to the previous officeholder’s embarrassing resignation. New York governor David Paterson in 2008? No: New Jersey acting governor Richard Codey in 2005.

True, Codey and Paterson aren’t in identical situations. Codey, succeeding to the governorship when Jim McGreevey resigned after bestowing a patronage job on a love interest, was a caretaker governor; he made it clear fairly quickly that he wouldn’t run in the next election. Paterson faces nearly a full term in office and might be interested in another. Codey took office when the Northeast’s economy, dependent on the financial sector, was booming; voters might have been worried about high taxes, but most weren’t worried about losing their jobs. Paterson takes office with the financial economy cratering, leaving New Yorkers from Putnam to Nassau Counties concerned about next month’s paycheck. Codey pledged only to hold spending flat, while Paterson is more ambitious: he wants to cut 5 to 10 percent “off the top” of next year’s budget.

To lay out his goals, Paterson gave a speech last week similar to the one that Codey delivered nearly three years ago. “We need to take a realistic view of New York State’s budget,” he said, which is “too big and too bloated.” He gently warned the legislature against its usual budget-balancing tricks: overestimating revenues, issuing long-term debt or hiking taxes to cover one-year shortfalls, and trying to use “gimmicks to solve real problems.” He added that the legislature’s modest cuts to Spitzer’s budget proposal would be eaten up by April as tax revenues continue to fall. “We have got to address these issues,” he said, “and not by taxing anybody.”

Paterson could have recited facts and figures from census reports on how New York ranked dead last, in both raw numbers and percentages, in net domestic population losses between 2000 and 2004, with nearly 183,000 residents leaving the state annually. While immigration from other countries more than made up for these losses, New York still lost some ground in its percentage of the nation’s population. And immigration could slow precipitously with the economy’s woes, as a protracted credit slowdown will lessen the state’s need for Parisian investment bankers as well as Salvadoran construction workers. The governor could also have cited numbers from the Tax Foundation showing that New York’s state and local tax burden is a full one-fourth higher than the national average, and significantly higher than the burden in some of the states competing most fiercely with it for jobs and residents: Pennsylvania, Florida, Texas, and most of the states in the new South.

Instead, Paterson cited a number of personal friends, all former New Yorkers, who have contacted him from out of state since his ascent to the governorship. “A friend from primary school, Randy San Antonio, told me he moved to Dallas 20 years ago,” Paterson began. “Another friend, Randy Watts, had moved to Reno. A friend from Syracuse, Marvin Lee Simons, said he’s working in Lower Manhattan. I said we should get together . . . and he said, ‘Well, I don’t live in New York. I live in western Pennsylvania.’ Jeff and Stacey Stackhouse wanted to start a business on Long Island. They moved two years ago—they’re trying to start their business in Charlotte, North Carolina. They couldn’t pay the taxes here.”

Paterson followed up with more bluntness about New York’s spending, saying candidly that one patronage-ridden economic development program—the state’s “enterprise zone” scheme—hadn’t stopped job losses, and adding that the state’s property-tax rebate program to assuage the middle-class tax burden was a joke. Paterson concluded with a clear pledge for next year: slash spending by 5 to 10 percent, instead of “balancing the budget on those who need services, on the middle class, or people who are lucky enough to make a million dollars. . . . What I want you to understand is that this is not a new governor responding to an economic crisis. This is a new governor trying to create fiscal reality.” The governor’s words give some hope that he is serious about fixing New York’s budget problems, slowly easing the tax burden, and staunching the losses from a fleeing middle class.

But New Yorkers need action, not words—and certainly not the nearly $122 billion state budget that Paterson is expected to sign barely a week after his speech. While he has pared almost $2 billion from earlier budget proposals, state spending will still rise by close to 5 percent this year. To balance the budget, Paterson and the legislature did what past governors and legislatures have done: find creative ways to levy nearly $1.5 billion in new taxes and fees on New York residents and businesses. “Legislative leaders looked increasingly desperate to find ways to raise and spend more money than the state can actually afford—and Gov. Paterson, still in his first month on the job, didn’t seem to be stopping them,” the Manhattan Institute’s E. J. McMahon noted in a recent analysis of how legislators concocted the new budget. In addition to one-shot gimmicks “reminiscent . . . of the Cuomo era,” the budget includes sharply higher “sin” taxes on cigarettes. It also includes new surcharges on traffic tickets and a new levy that will hit private health-insurance plans.

As the fiscal situation will likely continue to deteriorate, one element in the new budget is particularly ominous for next year. Despite Paterson’s words, the budget includes a Spitzer-era proposal for corporations that have their capital rather than their income taxed: these firms’ first $10 million in capital will be taxed, rather than just their first $1 million. Coupled with a permanent corporate tax-rate cut targeted at the smallest businesses, this tax-base increase will hit many other businesses just when they are also suffering through the credit crunch.

Another bad omen for future progress is that on the spending side, Paterson and the legislature carefully avoided any fights with Albany’s major industries: education, Medicaid, and state-subsidized housing. Despite looming multibillion-dollar deficits, the state will shovel nearly $2 billion in new money to schools—a nearly 9 percent hike—though higher spending hasn’t translated into better results in recent years. And the budget earmarks $200 million for “affordable housing,” though middle-class New Yorkers struggling with mortgages might like to keep that money, and make their own housing more “affordable,” rather than send it to a special-interest group to dole out to politically favored constituents. As for the health-care industry: the state will expand Medicaid so that it covers children whose families earn four times the poverty level, up from two and a half times—though the federal government won’t pay its customary share of that bill, as the Bush administration opposes straying further from Medicaid’s original purpose of providing health care for the poorest.

For legislators and their lobbyists, all this sugar probably helped Paterson’s strong speech go down easy. Struggling voters and taxpayers have only his words—as well as New Jersey’s precedent, which isn’t much comfort. Though Codey succeeded in keeping spending flat during his year in office, his successor, Jon Corzine, is now right back where Codey started: complaining about a bloated budget; proposing his own gimmicks, like a plan to squeeze money from toll roads; and facing a wall of public-sector special interests when he tries to get beyond gimmicks and deal with the problem.

Nicole Gelinas is a contributing editor to City Journal and a Chartered Financial Analyst.

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