Options for Closing New York State’s 2004‑05 and 2005‑06 Budget Gaps
According to the Division of Budget's recently released Mid‑Year Update, New York State's budget gap for SFY 2004‑05 is $5 to $6 billion and the gap for SFY 2005‑06 is $8 billion. To the extent that the SFY 2004‑05 gap is closed with recurring revenues (and/or recurring cost reductions), that also reduces the SFY 2005‑06 gap on a dollar‑for‑dollar (or slightly greater basis).
These gaps may turn out to be smaller than currently projected for several reasons.
‑‑ It now appears that securities industry profits may have come back more strongly and more quickly than had been previously predicted.
‑‑ The revenue gains (particularly over the next several years) from this year's tax increases and loophole closing actions may be greater than currently estimated by the Division of the Budget (DOB).
There are also several issues on the horizon that could require substantial revenue increases over and above what is necessary to close the projected budget gaps.
‑‑ The Governor and the Legislature are required, by July 31, 2004, to come up with a plan for complying with the NYS Court of Appeals decision in the Campaign for Fiscal Equity lawsuit. While this remedy may be phased in over a multi‑year period, it is likely to require a substantial increase in the amount of money dedicated to elementary and secondary education,
‑‑ The county governments may be successful in their effort to get the State government to take responsibility for a greater portion of the non‑federal share of the costs of the Medicaid program.
In addition to the need for additional revenue at the State level, new revenue sources may be necessary and/or desirable at the local and regional levels. For example, the MTA's next 5‑year capital plan, for the 2005‑2009 period, is likely to require some new dedicated revenue sources. The early capital plans were backed with dedicated revenue sources like the corporate tax surcharges that are applied to income earned in the MTA region. The last several capital plans have relied overwhelmingly on fare-backed bonds. The result is that debt service represents a rapidly growing share of the MTA’s budget, thus putting the squeeze on the operating budget.
At the same time that the State faces budget gaps and important unmet needs, discussions of budget-balancing options are complicated by the fact that that the Legislature and the Governor have indicated an unwillingness to enact any tax increases in 2004.
Taking all of these factors into consideration, the following is a tentative list of revenue options for helping to close the budget gaps that are currently projected for SFY 2004‑05 and SFY 2005‑06. In addition, it will be necessary to identify additional revenue sources for meeting new needs, particularly compliance with the Campaign for Fiscal Equity decision. This latter challenge is likely to require a substantial and reliable source of revenue.
OPTIONS FOR CLOSING THE SFY 2004‑05 AND SFY2005‑06 BUDGET GAPS.
1. New York’s government, labor and business leaders should actively participate in the effort to secure federal assistance for the states in general and New York specifically - $1.4 ‑ $9 billion
a) Congress should extend the temporary federal revenue sharing program and the temporary increase in Medicaid match rates that were enacted into law in May. These programs currently provide $20 billion in assistance to State and local governments including $2.1 billion for New York. Approximately $1.4 billion of this total is being used by the State government to help close its SFY 2003-04 and SFY 2004-05 budget gaps. Additional federal assistance, of a comparable amount, is necessary if the states are to avoid counter-productive budget balancing actions during their 2004-05 and 2005-06 fiscal years.
b) New York leaders should attempt to build regional and national coalitions in support of HR5523/S3055 which would repeal the limit that the Congress enacted in 2000 on the size of the loans that the federal government can make to state and local governments for tax revenue losses directly attributable to presidentially-declared major disasters. This legislation would also waive the requirement for the repayment of such loans when the losses involved are the result of terrorist attacks. This could provide New York State with between $1.6 and $5.8 billion and New York City with between $1.6 and $3 billion.
c) New York’s public and private sector leaders should urge Congress to enact a version of the American Parity Act. This measure would provide funding for the rebuilding of US schools, hospitals and other infrastructure in an amount equal to the similar infrastructure amendments that we are making in Iraq. The funding for such an investment program could be provided by repealing the portions of the recently enacted tax cuts that benefit only the wealthiest Americans. This would trigger nearly $23 billion in investment in State infrastructure and could generate at least $2 billion for NY.
d) New York should join with the other states to continue to block the passage of the currently-pending expansion of the Internet Tax Freedom Act (S150/HR49) that would decimate state taxation of telecommunications services. Earlier this fall, it looked like the U. S. Senate was going to give fast track approval to a bill very close to a measure passed by the House of Representatives in the summer. This measure is currently tied up on the Senate floor but could be freed up at any moment so continued monitoring and immediate action is required.
e) New York leaders should support efforts to revise the recently-enacted Medicare Prescription Drug Benefit law to allow the federal government to run its new program through state programs such as New York's EPIC program rather than requiring the states with substantial and successful elderly prescription drug programs (primarily New York, New Jersey and Pennsylvania) to conform their programs to the new federal approach.
2. Eliminate Corporate Tax Avoidance Schemes So All Corporations Pay Their Fair Share of Taxes and Only Receive Tax Incentives for the Jobs they Actually Create ‑ up to $1 billion annually.
a) Eliminate Specific Corporate Loopholes that Do Not Create Jobs ‑ $200 to $250 million annually and an additional $250 million in SFY2004‑05 and SFY2005‑06. Such loopholes include reform of the Empire Zone program ($50‑$100 million annually), reducing the abuse of "point‑of‑service" exceptions ($75 million), limiting Industrial Development Agencies' ability to abate State taxes ($60 million), and recovering subsidies from companies that do not live up to the conditions of their tax abatements ($15 million). In addition New York should implement a two‑year freeze on the ability of corporations to carry over Investment Tax Credits which under current law can be carried over to reduce corporate tax liability for fifteen years ($250 million per year for two years).
b) Reform New York’s Corporate Alternate Minimum Tax (AMT) ‑ $150 to $200 million annually. New York's current AMT has had several loopholes that have been added since its original adoption. It should be replaced with a variation of the recently enacted New Jersey Alternative Minimum Assessment which applies to businesses with gross profits of $1 million or more. In order to ensure that such a revision would not hurt small business, this change could be applied to businesses with gross profits of over $5 million.
c) Tax Corporate "Nowhere Income" ‑ $50 to $150 million annually. Corporations like AOL‑Time Warner do not pay taxes on profits derived from sales made in states in which they do not have a physical presence. 25 states, including Texas, Utah, Oregon and California, have enacted "throwback rules" to ensure that profits earned in a state in which a corporation may not be subjected to an income tax are taxed instead by its home state.
d) Adopt “Combined Reporting” ‑ $340 to $400 million annually. 16 states, including California, Colorado, Illinois, and New Hampshire, require multi‑state and multi‑national corporations to file a combined return for their entire “corporate family” rather than being able to use inter-subsidiary transactions to move income to countries or states where that income is not taxable. Under combined reporting, a corporate family files a single tax return covering the income of all of its subsidiaries, with that income apportioned among the states based on the locations of all its property, payroll and sales.
e) Expand the Definition of Taxable Business Income to Encompass Corporate Profits from Irregular Transactions - New York State’s current definition of business income provides that the income must arise from transactions and activity in the regular course of the taxpayer’s trade or business. Corporations have convinced numerous state courts that any profit earned on the disposition of property that is an irregular transaction is “non-business” income. It is our understanding that the securities industry has aggressively used this scheme to significantly reduce their state corporate franchise taxes and avoid paying their fair of state taxes. Six states — Florida, Iowa, Minnesota, North Carolina, Pennsylvania, and Texas— have statutes that explicitly or effectively define apportionable business income as all income that may be apportioned under U.S. Supreme Court standards, and define allocable non-business income as all other income of a corporation. New York should adopt this definition; it is unclear how much revenue this reform would raise.
f) Enact a Corporate Disclosure Law. New York State should require every publicly‑traded corporation that does business in the State to report its gross and net income, deductions and credits, and the amount of New York State taxes paid, much as publicly-traded corporations already do at the federal level. This would allow taxpayers and policy makers to identify companies in the State that may be making profits but, through the use of clever business structures and tax expenditures, are paying little or no New York taxes. Only with that information can the State truly know how well its tax policies are working. Such information would also be critical in successfully lobbying the Legislature to raise corporate taxes. Assemblyman Brennan has introduced this legislation (A3424) and the Assembly Ways and Means Committee staff has shown interest in the proposal.
3. Broaden the Sales Tax Base to Include Additional Services and More Aggressively Enforce the Collection of Sales Tax Revenue on Remote Sales – Up to $2 billion annually.
a) Many states are considering sales tax base broadening. Hawaii, New Mexico, and South Dakota already tax virtually all services the same as they tax goods. According to the Center on Budget and Policy Priorities New York does not currently tax 15 "readily taxable services" like veterinary, health club, and hair styling services in addition to not taxing legal, investment counseling, accounting, and computer and data processing services.
b) While New York State is now actively participating in the Streamlined Sales Tax Project, a multi-state effort to even the playing field between “main street” retailers and the large remote sellers like amazon.com and L. L. Bean, this project will ultimately require authorization by Congress or the courts. In the meantime, Albany attorney Rob Plattner has set forth an enforcement strategy under which states can, under current law and court decisions, more aggressively enforce the requirement for the collection of sales tax on sales to New Yorkers by remote sellers. These suggestions are currently being reviewed by the NYS Department of Taxation and Finance. In addition, the New York Department of Taxation and Finance may be able to force more internet companies to collect NY sales tax when the companies either establish affiliate or agency nexus. An affiliate nexus may be established when an internet company has an affiliate within the same corporate family that has a physical nexus in New York. An agency nexus may be established when a company with physical presence in the State is receiving commissions for referrals to an internet company's web site that result in sales.
4. Expand the Bottle Bill to Most Beverages, Raise the Deposit to 10 cents, and Reclaim All or Part of Unclaimed Deposits from Bottlers and Distributors ‑ $135 to $278 million annually. The proposed expansion would cover all beverages, with the exception of liquor, wine and milk. Additionally, the bill would provide for a mechanism by which "deposit initiators" (bottlers, certain distributors and certain retailers) would be required to submit unclaimed deposits to the Department of Tax and Finance quarterly. DEC`s estimate of the current amount of unclaimed deposits is $85 million annually. The Container Recycling Institute (CRI) estimates that unclaimed deposits in New York State actually total $135.7 million and that under an expanded bottle bill there would be $172 million in unclaimed deposits. If the deposit were raised to 10 cents the value of unclaimed deposits could increase up to $278.9 million. If the deposit is increased to 10 cents one inducement to get the support of bottlers is to let them keep half of the unclaimed deposits which would still generate $139 million a year for the State.
5. Environmental Charges on Polluters including fees for Carbon Emission Permits ‑ $331 million ‑$1.969 billion. Governor Pataki has called on the Governors of the Northeastern states to enter into an interstate compact to cap carbon emissions from power plants beginning sometime in 2005. The Governor’s initiative opens up the possibility of generating significant revenues if the carbon emission permits are sold (auctioned) rather than given away. Giving the permits away would result in windfall revenue for the stockholders of the energy companies that own the power plants. While it may take several years to get something done along these lines it is important to pursue now in order to ensure that the windfall revenue from the Governor’s proposal is used for socially and economically beneficial purposes. While some of the money would be needed for so‑called "transitional costs," a substantial amount would be available for important budgetary needs. Revenues from Carbon Emission Permits priced at 20 cents per pound of carbon (equivalent to 5 cents per gallon of gasoline) are estimated to produce $1.4 billion if applied comprehensively and between $331 and $475 million if applied only to power plants. Dealing with such a charge's regressivity problems would require 10% to 20% of the revenue raised.
Most economists agree that environmental charges make the economy more efficient, because they discourage harmful rather than beneficial activities. One environmental charges that could produce significant revenue include a one time charge on auto emissions which would vary by the amount of emissions but would average $300 per car ($179 million), extending the federal gas guzzler fee to very large new automobiles and light trucks that weigh between 6,000 and 10,000 lbs. ($11 million), and fees on stationary sources of Nitrogen Oxide Emissions ($0.75 per lb.,$142 million), Volatile Organic Compounds (VOCs) ($1.05 per lb., $52 million), Sulfur Oxide Emissions ($0.10 perlb.,$51 million), and Particulates (PM‑10) ($0.95 per lb.,$19 million). In addition, fees could be imposed on toxic releases to water ($32.34 per lb., $4 million), organics ($0.66 per lb., $91 million), fertilizers and pesticides (10% ad valoreum, $20 million). Placing tolls on the East River Bridges could produce at least $600 million in annual revenue which could be dedicated to New York City and/or the MTA. This revenue source could be operational in 18 to 24 months, with the tolls collected electronically.
6. Reduce Wasteful Contracting Out By the New York State government – The Public Employees Federation has documented that up to $250 million is wasted by NYS each year by contracting out work that could be done by State employees at a significantly lower cost. There are numerous State contracts under which NYS pays contractors up to four times the salary of a State employee (including a 35% fringe benefit factor) to do the same work done by State employees. For example, the standard contract used by the State to hire computer consultants pays them up to $260 an hour while State employees who do the same work make $43 an hour (including the cost of their benefits). Similar savings have been documented by DC-37 for contracting out by New York City and the Transport Workers Union for contracting out by the MTA.
In order to provide a more rational approach to contracting out, the Assembly in 2003 passed legislation that would protect State taxpayers by requiring a cost/benefit analysis before a contract for personal services is executed. Specifically, A.1726-A/ S.198 would require that a State agency perform a cost/benefit analysis before entering into a state operations contract for services to determine whether those services could be performed at a lower cost by using State employees rather than a contractor. The state of Maine has already adopted similar legislation, and Massachusetts has also adopted a law to restrict the practice of wasteful contracting out. In addition, the State should be required to disclose with each agency’s proposed budget the amount proposed for state operations personal service contracts and number of employees working for the State under those personal service contracts.
7. Spend Less on Prescription Drugs by Combining State and Local Purchasing to Maximize New York’s Purchasing Power in Order to Get Lower Prices. In 2001, New York's Medicaid expenditures on drugs and supplies exceeded $3.1 billion, a 20% increase over expenditures in 2000 and 82% more than expenditures for 1998. While overall Medicaid expenditures grew by an average annual rate of 6.5% between 1998 and 2001, expenditures on drugs and supplies grew by over 27% per year. In addition to Medicaid expenditures on drugs and supplies, New York has budgeted $600 million for the EPIC program in this fiscal year and spends more than $100 million per year on other drug purchases.
Virtually every state in the union has come to recognize that prescription drug costs for state employees and retirees, Medicaid beneficiaries, and the participants in other state funded programs are increasing much faster than the benefits that these individuals are receiving. In 2002, New York State enacted legislation limiting Medicaid recipients’ access to brand name drugs when a therapeutically equivalent generic drug is available. But, unlike Florida and Michigan, it is not using its purchasing power to get better prices from brand-name drug manufacturers. The Florida plan, for example, requires drug manufacturers to give additional percentage discounts to the state’s Medicaid program in order to have their drugs included on a list of drugs that are generally available for Medicaid recipients. Drugs not included on this list can still be provided through the Medicaid program, but additional review would be required. Michigan’s plan is similar.
The savings of aggressive action on this front are substantial. For example, the Health Reform Program at Boston University School of Public Health has estimated (using data for 2000) that New York could reduce its Medicaid expenditures by over $400 million per year if it were able to purchase brand name prescription drugs at federal supply schedule prices.
CSEA has launched a new statewide campaign promoting a prescription drug purchasing agreement with Canada as another way to potentially save billions of taxpayer dollars. According to September 2001 testimony before the U.S. Senate Subcommittee on Consumer Affairs by Alan Sager, Boston University School of Public Health, New Yorkers would have saved $3 billion in 2001 if international pharmaceutical makers accepted the same prices for brand name prescription drugs in the United States that they charge in Canada. The State's share of these savings would easily exceed $1 billion --- 37.5% of $3.1 billion.