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Spring 2000
   
Governor Pataki’s Failure
Thomas W. Carroll
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POLITICIAN WANTED: Must increase spending at twice the rate of inflation, massively increase government debt, support rent control, lead a government takeover of health care, lavish funds on the environment, throw indiscriminate billions at failing public schools, while remaining silent about school vouchers. Must not propose any new income tax cuts, since this could curb spending increases.

If you saw such an ad, you'd think: liberal Democrat—right? Yet, curiously, the description exactly fits New York governor George Pataki, once labeled a "conservative" Republican. These days, plenty of people in the state capitol and beyond are scratching their heads and asking, what's going on?

Pataki first won election in 1994 on one overarching promise: that he would reverse New York State's long, painful economic decline, the result of decades of chronic state overspending that in turn requires high levels of taxation, at a time when savvy firms can move overnight anywhere they want in search of low taxes. Pataki would be the opposite of Governor Rockefeller, who created New York's vast, prosperity-killing welfare state—the opposite of Governor Cuomo, who made it markedly more toxic to business. Cuomo had joined forces with the profligate state legislature to boost spending 116 percent in 12 years, to drive taxes way above the national average, and to inflate government debt dangerously. By 1994, when Cuomo's third term stumbled to a close, businesses were fleeing the state in droves. Fleeing too were the talented young and the affluent elderly, who pay taxes, spend money, consume few social services, and make an economy thrive. To grasp how bad things had become, consider that, had New York just kept up with the rest of the U.S. during Cuomo's 12 years, it would have boasted an additional 1.4 million jobs when he left office. During Cuomo's watch, the state also fell to dead last in small-business creation, for decades the nation's No. 1 engine of economic growth (see "Down-and-Out Upstate," Autumn 1999).

Pataki—for his first couple of years on the job—tried to keep his promises to revive the state's moribund economy by reducing government spending, slashing taxes, and cutting away needless regulations, like such innovative and successful Republican governors as John Engler in Michigan and Tommy Thompson in Wisconsin. Early on, though, critics began to worry that his reforms amounted to tepid half measures, not the desperately needed bold vision. But even half measures were better than Pataki's sudden mid-term transformation into something indistinguishable from a big-government Democrat (save in crime and welfare policy, where he remained true to his original conservative principles).

Pataki's departure from fiscal conservatism is most dramatic in government spending. In 1995 and 1996, he stopped spending in its tracks, keeping its growth below the inflation rate and shocking long-time Albany observers accustomed to Cuomo's ever-rising state budgets. It was a real achievement. But then the governor moved his foot off the brake on spending and floored the accelerator. By 1998, as state coffers overflowed with Wall Street-generated surpluses, spending shot upward at five times the rate of inflation. In inflation-adjusted terms, spending growth scaled higher that year than in ten of the 12 years of Cuomo's governorship. Pataki's most recent budget, for 2000–01, continues the wanton spending. The governor proposed—as a starting point for negotiations with the state legislature—to hike already stratospheric government expenditures by more than twice the inflation rate. Calling for a hefty $76.8 billion in spending, the new budget is 25 percent bigger than the $61.2 billion budget that he inherited from Cuomo.

Where does Pataki spend this mountain of taxpayers' money? On old-fashioned legislative pork, for starters. The state budget Pataki approved for 1997–98 authorized more than a half-billion dollars in pork—the highest fat content to date. State legislators shower the money on their constituencies to pay for everything from the Seneca Lake Whale Watch (yes, Lake) to the NYS National Abortion Rights Action League. Though the following year, when greedy legislators tried to stuff in $350 million more in pork, Pataki trimmed the fat a bit with his first-ever budget item vetoes, he still signed off on a $192 million increase for legislators' pet projects.

Pataki has okayed vast expenditures on corporate welfare, including a host of business subsidies, a $63 million renovation for the Buffalo Bills' Rich Stadium, and $14 million for a minor-league baseball park for Suffolk County. But as former UDC head and City Journal contributing editor William J. Stern has often argued, this kind of state-directed capitalism, in which government bureaucrats substitute their own choices for those of the market, leads to inferior investment decisions (see "Kamikaze Budgeting," Spring 1998). A mountain of evidence shows that the market allocates capital far more efficiently than do public officials, who tend to reward well-established firms and politically connected insiders, rather than the sharpest new idea or the best new product or service that can really make an economy zoom. But Pataki has shown little real fervor for the power of the market: large-scale privatization efforts have been virtually nonexistent during his six years as governor.

In vintage Cuomo style, Pataki has lavished nearly $2.5 billion in new funds on New York's dismal public school system without tying the aid to greater accountability for student performance. Per-pupil spending and the median teacher salary in the public schools have thus skyrocketed, but pupil test scores continue to lag behind the nation's—one more proof that greater spending doesn't on its own lead to better grades or higher SAT scores. Lots of money, few results: not much of a record for a self-proclaimed education reformer. True—much to his credit and over the howls of the teachers' unions—the governor courageously pushed a good charter school bill through the state legislature in late 1998, but so far only a handful of charter schools have opened. And he has remained silent on vouchers, seemingly hesitant to anger the teachers' unions further.

Health-care costs are a special budgetary nightmare in New York. After six years of Pataki, total state and local per-capita spending on Medicaid—now $1,177—remains 155 percent above the national average, about where it was in 1994. New York is almost unique in making localities pay part of the non-federal share of Medicaid. That quirk has allowed the state to pile on nonessential services, while foisting fully half the non-federal tab onto localities, which must then jack up property taxes. While Pataki has vetoed the occasional new benefit, he has failed to force down Medicaid expenditures or experiment with free-market reforms such as health-care vouchers or medical savings accounts for the indigent.

In fact, he has expanded Medicaid and increased other health-care benefits in the process. Late last year, he signed into law the Health Care Reform Act, which extends health-care insurance to more than 1 million uninsured New Yorkers. The new law, which Pataki negotiated with health-care union boss Dennis Rivera after a union-funded media blitz in favor of broadening health-care entitlements, guarantees more than $1 billion in annual subsidies to hospitals, protects Medicaid from any additional cuts for three years, and massively widens Medicaid eligibility. It represents New York's biggest expansion in welfare entitlements in over three decades and a devastating burden to the state's local governments. New York City's already stratospheric $3 billion-plus annual Medicaid tab will rise still higher (see "Medicaid's Fatal Attraction," Winter 1996).

Pataki threatens to drive up New York City's spending in another way that favors a powerful union. Seeking to placate the 29,000-member Patrolmen's Benevolent Association, Pataki has clashed with New York City mayor Rudolph Giuliani over the state's meddling in the city's collective bargaining processes. In late 1998, Pataki signed a bill that moved the site for arbitrating city labor conflicts with the police from the city's Office of Collective Bargaining to the state's Public Employment Relations Board—a pro-union body. A city official warned that the move could add $200 million a year to the city budget through higher salaries and more generous benefits (see "How 211 Nobodies Strangle New York," Winter 1999).

That taxpayers have to foot the bill for all this spending may not seem like such a big deal right now, when boom-fueled state personal income tax collections have increased a staggering 44.6 percent since 1994 (even after the 1995 income tax cut), giving the state 7.2 billion new dollars to play with, so that Pataki hasn't had to raise taxes. But what happens when the economy goes south, as it inevitably will? The lesson of the Cuomo years isn't encouraging. When the state was flush with money thanks to the Reagan boom, Cuomo locked into place high levels of programmatic government spending; when the U.S. economy worsened, taxpayers had to fork over more dough. Pataki seems determined to repeat this catastrophic mistake. The state's reserves, though higher than ever, remain modest and would quickly drain away if the economy turned.

But Pataki has threatened New York's future in a more insidious way than committing the state to a high level of current spending. Debt has mushroomed, too. For current taxpayers the burden of servicing it is heavy enough; future taxpayers will have to face paying back the principal too. A future economy-minded governor will be faced with interest costs that, unlike current spending, can't be reduced. Under Pataki, outstanding taxpayer-supported debt has swelled 32 percent to a record $37 billion, with debt service payments now at $3.7 billion annually and growing to $4 billion by the end of the 2000–01 fiscal year. New Yorkers' per-capita debt is now approximately $2,100, triple the national average. And that's not including the $63 billion owed by New York's 31 bond-issuing public authorities—debt Pataki has inflated a shocking 34 percent instead of finding a way to shrink it and shutting down the authorities. Total state debt now totals $100 billion.

Two decisions typify Pataki's willingness to bury New York under a mountain of debt. First was his $1.75 billion environmental bond act, which voters approved in November 1996. That the governor, uncritically supportive of green causes, wanted to spend so much on the environment in a state already swamped with environmental regulations was bad enough. Worse, though, was issuing a bond to do it, ignoring Assembly Majority Leader Michael Bragman's more responsible pay-as-you-go alternative. The bond will add nearly $1 billion in interest costs to the final bill.

Second, to return a tiny rebate to Long Island voters, Pataki used a new state authority to take over the Long Island Lighting Company. The move required a jaw-dropping $7 billion municipal debt offering—the largest in U.S. history. Moreover, as other states move toward efficient market-based provision of energy—low energy costs being a key consideration of businesses when they decide where to locate—Pataki has extended inefficient government control over energy. New York's energy costs remain more than 50 percent above the national average.

Even though Standard and Poor's has recently improved New York's credit rating, it is still worse than all the other states except Louisiana. The poor bond rating raises borrowing costs, making deficit financing even more burdensome. Despite occasional calls for debt reform ("help me stop myself from borrowing again"), Pataki continues to push New York even deeper into the red. His 2000–01 budget calls for more than $2 billion in new debt over the next five years.

Confronted with criticism about the governor's wild spending and borrowing, Pataki defenders enthusiastically point to his tax cutting, but even his record on taxes is less impressive than it first appears. In February, Pataki proudly claimed to have cut "19 different taxes 48 separate times," saving New Yorkers a total of $29 billion. The truth is that $18 billion, or 62 percent, of the $29 billion figure resulted from a single act: a 25-percent reduction of the income tax during his first year in office. Since then, Pataki has attempted nothing close to a tax cut of that size.

In fact, most of his subsequent tax reductions have been relatively insignificant and selective—driven by favors to specific industries, environmentalists, and other special interests. Pataki has issued tax credits for fixing up historic barns, investing in solar power, and leasing or selling alternative fuel vehicles to the government; he has exempted from sales tax South African coins, meteorological services, homeowner association fees, passenger bus lubricants, and a handful of other items. It's minor-league stuff.

Pataki did start out with a good idea with his STAR (School Tax Relief) program, aimed at lowering local property taxes. New York's property taxes are 60 percent above the U.S. average—$500 per capita over nearby Pennsylvania's—in part because of the hefty sums municipalities pour into their public schools, largesse that they finance on the backs of property owners. Pataki's initial plan offered state-funded rebates to school districts that wanted to cut property taxes on homeowners (though not on businesses) and maintain existing levels of school funding—the state money would simply replace the local property tax dollars. The plan crucially included a mandatory property tax cap to prevent districts from frittering away the money and hiking school taxes anyway. But typically, under pressure from the teachers' unions, the governor approved STAR without the cap, turning it into nothing but an additional subsidy to school districts. And predictably, many school districts that have received the rebates have still raised property taxes.

To top all that off, Pataki has even started to raise taxes. In June 1999, he negotiated and signed into law a delay in an already-on-the-books sales-tax reduction on clothing, costing state taxpayers $150 million—exactly the type of tax scheme Pataki had once excoriated Cuomo for supporting. Then, Pataki signed into law a gigantic $400 million cigarette tax increase as part of his Health Care Reform Act. Finally, early this year, the Pataki administration proposed annual increases in tolls, a brand new state tax on water, and a total of $30 million in new, assorted fee hikes. Under sharp criticism from Republicans and Democrats alike, Pataki withdrew both the Thruway toll increases and the water tax. But it's clear that he has lost his hostility toward taxes.

Overall, New York has made some progress on taxes. But despite Pataki's tax cuts, New York's taxes still remain sky high, seriously impeding job growth. Per capita, the burden of state and local taxes and fees in New York still exceeds that in all but one other state (Alaska). Our personal income tax rates are a principal reason why. The top rate on paycheck income—almost 7 percent statewide, and 11 percent in New York City—is far above those of neighboring states. And it's not just the wealthy paying these top rates; New York's top income bracket applies to individuals earning just $20,000 or more in taxable income.

In his 1994 campaign against Cuomo, Pataki pledged to overhaul New York's oppressive regulatory environment—"the 12 miles of red tape, enough to stretch from Albany to Schenectady and back again," as he colorfully put it in his first state of the state address. Environmental mandates, licensing fees, long bureaucratic delays before businesses can get the go ahead to open—all these dampen the entrepreneurial spirit of New York's large and small firms alike.

At first, Pataki seemed serious about junking useless regulations. He appointed a czar for regulatory reform, placed a moratorium on new regulations, began to review the voluminous regulations already on the books to see which ones the state could reform or scrap outright, and issued a sweeping executive order subjecting all proposed new regulations to a cost-benefit analysis. In his biggest regulatory success, he reformed workers' comp, once the most expensive such program in the country and now the tenth most costly, though still 20 percent above the U.S. average.

Pataki's czar uncovered bizarre regulations, from a requirement for 250 hours of training for fingernail painters to a mid-1940s New York residency requirement for barbers, to keep carpetbagging hair cutters from competing for scarce jobs. But beyond publicizing such absurdities and getting agency officials to drop their bullying approach toward regulated businesses, Pataki has done little to slash away existing regulations: the rules for fingernail painters and barbers remain on the books. And—making things worse on the regulatory front—the governor has mandated that by 2003 at least 10 percent of cars sold in the state must be zero-emission vehicles, whether the public likes it or not.

In mid-1997, the governor spectacularly squandered a historic opportunity to do away with New York's most senseless regulation: the rent control that chokes New York City's supply of new housing and drives up its rents. The state's rent regulation laws would have automatically expired that summer unless the legislature extended them and the governor signed the extension into law. In fact, since Senate Majority Leader Joseph Bruno vowed that the Senate would not renew rent control, Pataki could simply have done nothing, and rent regulations would have been on the way out. Instead, cravenly seeking to blunt criticism from the left, he cut a deal with Democratic Assembly Speaker Sheldon Silver to save the rent regulation regime, implementing only minor changes. A political failure that still amazes, it leaves the rent regulation regime in place for years to come.

The result of Pataki's bad policies is an economy that has stayed stubbornly sluggish throughout an unprecedented national boom. Since Pataki took office, New York's private-sector job growth has ranked 44th in the nation. In upstate New York, Pataki's political base, job growth would be next to last if the region were a separate state—surpassing only Hawaii, where at least the weather is nice. Perhaps sensing that better opportunities lie elsewhere, more than 1 million people have left New York on a net basis since Pataki's inauguration. In recent months, Pataki has touted new numbers that show some job growth progress over the past year, but even his administration's own job forecasts predict a rate of job growth that trails the national average for the next few years. What we're seeing is a familiar pattern: New York begins to lose jobs before national recessions begin and only starts gaining jobs long after the rest of the country is robustly creating them.

In short, Pataki's New York is spending lots more money, is much deeper in debt, and is still one of the most heavily taxed and regulated states in the nation. The governor's new spending and additional debt will make it all the harder to cut taxes in the future.

Why is Pataki, six years after defeating Mario Cuomo, embracing policies remarkably Cuomoesque, and in some cases even more liberal? I think the most plausible explanation is narrowly political. To win the 1998 election, the governor decided to "triangulate," Clinton-style: to co-opt the left's agenda, leaving the opposition with nothing to run against and cynically assuming that his own supporters had nowhere else to go. In narrow political terms, it worked—at least for the 1998 race, in which he had no real opponent. Pataki's latest bloated budget, and his tight clinch with union boss Rivera in forging the egregious Health Care Reform Act, signals that he believes the same strategy—taken to its extreme—will pay off with another victory if he runs for governor again in 2002.

Will it? Pataki probably will face a strong Democratic candidate: either Andrew Cuomo (son of the former governor) or State Comptroller Carl McCall. Both will prove a more serious challenge than did his now-forgotten opponent in the 1998 race. Pataki has also fractured much of his political base: he has angered conservatives and upstate supporters with his financial intemperance, feuded with long-time ally Senate Majority Leader Bruno over rent control and many other issues great and small, and has lost support among Republican county executives, who resent the additional Medicaid bills that they will have to pay thanks to the Health Care Reform Act. Pataki's triangulation, even on its own terms, may prove a dangerous gambit.

Perhaps we shouldn't be surprised that Pataki has proved so disappointing. After all, like so many of his colleagues, he's a creature of New York's dysfunctional political culture. The Reagan Revolution that transformed American politics during the eighties—discrediting the idea that big government is the answer to every human need—never reached New York State. Both of New York's major political parties, free from ideas or inspiration, have kept close ties to the special interests—the construction industry, the trial lawyers, the government bond industry, and the health-care providers, even the teachers' unions and the municipal labor unions—that benefit hugely from a gargantuan welfare state. Though the governor at first seemed to escape the state's political culture, in the end it has claimed him as one of its own.

 

 

 
The governor ran as a tax-and-spending cutter. Now he’s as profligate as any liberal Democrat.
City Journal Spring 2000.
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