January 23, 2002 Groups Propose More Balanced and Economically Sensible Approach to Balancing State Budget; Call on Federal Government to Address Revenue Aspects of Governor Patakis $54 Billion Plan ALBANY Faith-based organizations, health and social service providers, labor unions and research organizations are calling upon Governor George Pataki and the State Legislature to balance the state budget in a more balanced and economically sensible manner. Citing a recent paper by Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics, and Peter Orszag of the Brookings Institution, the groups reminded Governor Pataki that cutting state and local services during a recession will make the situation worse rather than better. They also called for immediate action of the tax revenue portions of the $54 billion recovery plan that Governor Pataki presented to the federal government last year. In their recent paper, which was published by the Center on Budget and Policy Priorities, Stiglitz and Orszag point out that while some state officials apparently believe that reducing spending is preferable to raising taxes, economic analysis suggests that tax increases would not in general be more harmful to the economy than spending reductions. Indeed, in the short run (which is the period of concern during a downturn), the adverse impact of a tax increase on the economy may, if anything, be smaller than the adverse impact of a spending reduction, because some of the tax increase would result in reduced saving rather than reduced consumption. Stiglitz and Orszag conclude that the least damaging type of temporary gap closing action during a recession is a tax on the portions of income that are least likely to be spent. A balanced approach to balancing the state budget makes good economic sense, but is also important from a societal perspective that the pain of balancing the state budget be spread more fairly and that counter-productive cuts in essential services, from education to mental health, be avoided, said Frank Mauro, Executive Director of the Fiscal Policy Institute. Roger Benson, President of the New York State Public Employees Federation (PEF) underscored the need for greater balance: The budget needs to have shared sacrifices but it does not require any sacrifices from the wealthy and big business. David R. Jones, Chief Executive Officer and President of the Community Service Society, said, In times of economic hardship, government must give priority to the needs of the most vulnerable New Yorkers. Temporary, modest, tax increases on those with the greatest ability to pay would give the State and the City the ability to minimize budget cuts to vital programs. This is just, humane, and economically sensible fiscal policy. The groups pointed out that the conclusions that Stiglitz and Orszag reached in their paper can assist New York State in balancing its budget in the aftermath of the September 11 th attacks: 1. Tax increases on higher-income households are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run. 2. Given the existence of balanced budget rules at the state level, some form of federal fiscal relief to states is warranted since state spending reductions or tax increases would be counter-productive at this time - restraining the economy at a time when it is already slowing. Based on the Stiglitz-Orszag analysis, the groups recommended a temporary two-year personal income tax surcharge on the portions of taxpayers incomes above $100,000. Even a very low rate surcharge (of one percent or less) can provide billions of dollars that would allow us to avoid property tax increases and steep cutbacks in education and other essential services, said Mauro. It is also essential that the Governor and New York business, labor and civic leaders work with President Bush, the New York Congressional delegation, and the leaders of the U. S. House and Senate to secure direct federal assistance for the tax revenue that the state is losing as a direct result of the September 11 attacks, said Mauro. No state should have to run its economy into the ground to make up for losses that are a national responsibility. Governor Patakis original $54 billion request for federal assistance asked for $9 billion to cover lost tax revenues. The budget that Governor Pataki presented yesterday, that projects unprecedented reductions in state income tax collections, makes clear that this aspect of the Governors plan needs to be resolved in one way or another, said Mauro. Even if it means a temporary advance from the federal government pending a detailed reconciliation of how much of the revenue loss is directly related to the international attack on the World Trade Center. Based on the projections in Patakis budget, Mauro estimated that this advance should be approximately $5 billion. ### Attachments: 1. Budget cuts hurt consumers: group; Increasing taxes less harmful to economy, think tank asserts (The Daily Gazette, Schenectady, January 24, 2002) 2. Labor group offers budget alternatives (The Times Union, Albany, January 24, 2002) From The Daily Gazette, Schenectady: Budget cuts hurt consumers: group Increasing taxes less harmful to economy, think tank asserts By WILLIAM F. HAMMOND Jr. Gazette Reporter ALBANY - Spending cuts in Gov. George Pataki's budget proposal would hurt the state's economy more than raising taxes, a liberal think tank said on Wednesday. "If you lay off 500 teachers in Buffalo or reduce the [state] work force by 5,000, you're basically reducing consumer demand," said Frank Mauro of the Fiscal Policy Institute. "This is a recession that's being driven by decreased consumer demand." Mauro argued that temporarily raising taxes on corporations or wealthy individuals - or at least postponing tax cuts due to take effect in the coming year - would allow the state to avoid spending reductions that could deepen the state's recession. Mauro also said the federal government should reimburse New York for any revenue losses tied to the destruction of the World Trade Center. "We argue that the [budget] gap should be closed in a more balanced way," he said. Mauro's analysis was endorsed at a news conference by a coalition of government employee unions, social service agencies and religious organizations. "There's no sacrifice from big business, and there's no sacrifice from big money makers," said Roger Benson, president of the Public Employees Federation. "This recession isn't going to get better when corporate America gets tax cuts. It's going to get better when everyday Americans get more money to spend." Critics respond Business groups and conservatives rejected the group's argument. "The unions and the Fiscal Policy Institute have it completely upside-down," said E.J. McMahon of the Manhattan Institute, a conservative think tank. McMahon said higher taxes would discourage businesses from investing in New York, leading to fewer jobs being created and, ultimately, less tax revenue for the state. "You inhibit wealth creation when you tax it excessively," he said. Business Council spokesman Matthew Maguire pointed to New York's experience the last time it raised taxes during a recession, in the early 1990s. Tax revenues actually declined, and the state's recession went deeper and lasted longer than the rest of the nation's. "New York state lost hundreds of thousands of jobs," Maguire said. "We think, to a significant extent, it was because New York state's high taxes made it less competitive for business." Closing the gap The $88.6 billion budget that Pataki proposed Tuesday would close a projected $5.7 billion deficit largely by dipping into the state's cash reserves, maximizing federal aid and holding the line on spending by most state agencies. It does depend on new revenue from cigarette taxes - which state lawmakers raised by 39 cents per pack last week - but would not postpone some $300 million in previously enacted tax cuts scheduled to take effect in the coming year. Pataki also proposes to trim the state work force by 5,000 jobs, or about 3 percent, through an early retirement incentive and normal attrition. In his budget message, Pataki aligned himself with those who oppose tax hikes. "We know that cutting taxes is the best way to create jobs - which is why delaying tax cuts already on the books is not an option," he said. But leaders in both houses of the Legislature indicated they were likely to add spending to the governor's budget - especially to school aid, which Pataki held flat at $14.2 billion for 2002-03. Mauro bolstered his case by citing a recent paper co-authored by Nobel Prize-winning economist Joseph Stiglitz, which said that tax-cutting by states can be "counterproductive" during a recession. "In the short run [which is the period of concern during a downturn], the adverse impact of a tax increase on the economy may, if anything, be smaller than the adverse impact of a spending reduction," the paper said. From The Times Union, Albany: Labor group offers budget alternatives Albany -- Think tank urges deferring tax cuts on businesses, keeping state positions By JAMES M. ODATO, Capitol bureau First published: Thursday, January 24, 2002 Labor representatives Wednesday said deferring tax cuts on businesses, keeping state jobs, raising taxes on the wealthy and demanding $5 billion immediately from Washington would do more to balance the state budget than Gov. George Pataki's strategy. "The best tax cuts are those that put more money into the pockets of moderate income people,'' said Frank Mauro, director of the Fiscal Policy Institute, a labor-backed economic think tank. Pataki has refused to postpone almost $300 million in tax cuts, including $95 million in corporate franchise rates and tax breaks of $30 million for banks and $8 million for insurance companies. Mauro said deferring corporate tax cuts while keeping those that help working class people would keep money in the local economy, as would scrapping plans to cut 5,000 state jobs. Mauro said the federal government should immediately advance the state $5.1 billion, the revenue shortfall Pataki says is largely attributable to the Sept. 11 attacks. He also called for increasing income taxes for two years by 0.7 percent on people earning more than $100,000 annually and another 0.7 percent on those above $200,000 a year. The increases would be modest -- about $436 annually for a$100,001-per-year earner -- but would result in at least $3 billion a year, roughly what Pataki seeks to wring out of state government operations, Mauro said. Assemblyman Martin Luster, D-Trumansburg, said Mauro's ideas made sense, but doubted the Legislature would embrace them. A Pataki spokesman had no response to the proposals. "Consumers won't have any more money to spend when the rich and corporate America get tax cuts,'' said Roger Benson, president of the Public Employees Federation. At a news conference with Mauro, Benson and other labor union leaders said the governor's $88.6 billion budget could have been worse, but still seems to fall short of what should be done. Benson and Steve Madarasz, a spokesman for the Civil Service Employees Association, said they would prefer more enticing early retirement incentive plans than those proposed by the governor. They also say that the older, higher-paid workers who retire should be replaced with younger, lower-paid people to save the positions and maintain service. Benson said agencies eyed for cut-backs can ill-afford more cuts, particularly those dealing with mentally ill people.