Bahl, Roy W.

Schroeder, Larry

English

ScholarWorks @ Georgia State University

Georgia State University ScholarWorks @ Georgia State University ECON Publications Department of Economics 1983 Two Steps Forward, One Step Backwards, and Some Tough Decisions for the New Governor Roy W. Bahl Georgia State University, rbahl@gsu.edu Larry Schroeder Syracuse University, ldschroe@syr.edu Follow this and additional works at: https://scholarworks.gsu.edu/econ_facpub  Part of the Economics Commons Recommended Citation Bahl, Roy W., and Larry Schroeder. "Two Steps Forward, One Step Backwards, and Some Tough Decisions for the New Governor. Empire State Report, January 1983, New York Legislative Institute. This Article is brought to you for free and open access by the Department of Economics at ScholarWorks @ Georgia State University. It has been accepted for inclusion in ECON Publications by an authorized administrator of ScholarWorks @ Georgia State University. For more information, please contact scholarworks@gsu.edu. Two Steps Forward One Step Backward And Some tough decisions for the new Governor by Roy Bahl and Larry Schroeder Hugh Carey came to Albany dur- ing the deepest nationwide recession since World War II. Ironically, he is leaving office during an even deeper recession. He is also leaving the state with a large budget deficit, a Stand- ard and Poor’s “credit watch,” and a pending New York City fiscal prob- lem. Carey’s first administration sal- vaged what appeared to be a hopeless New York City and turned around a long-standing tradition of unbridled public sector growth. But Governor Cuomo is now faced with a Hobson’s choice; he can continue the policy of restraint, in which case he will have to make serious budget cuts—the pain- ful part of fiscal restraint that the Carey administration never really had to face or he can deal with the capital infrastructure problem and maintain current service levels, but only at a cost of reversing some of the tax reductions of the past eight years. In either case, the policies will be pursued in the context of a no- growth state economy, a poorly per- forming national economy, intense regional competition, a less income- and inflation-responsive state income tax, and federal aid reductions. In some ways, the setting for the new governor’s fiscal programs will be even more unfavorable than that which confronted his predecessor. In order to understand the current situation, it is important to under- Roy Bahl and Larry Schroeder work in the Metropolitan Studies Program at the Maxwell School at Syracuse University. stand what happened in the past eight years and to think specifically of three elements: (1) the economy, which the Carey administration could not control; (2) taxation, which it focused on through explicit policy changes; and (3) expenditures, which it dealt with indirectly through attri- tion, deferral and inflation. New York’s economic decline is well documented and, of course, is quite beyond the control of state pol- icy makers. During the Carey years, the state lost 400,000 residents and, while there was some small growth in real per capital income, its relative income level slipped from 13 percent above the national average to 9 per- cent above. Thus, Carey came to office when New York State accounted for 8.5 percent of the national population and 9.5 percent of national income and is leaving office with the state accounting for 7.7 percent of national population and 8.4 percent of income. New York has become a much less dominant force in the nation. It is not surprising, then, that New York’s share of federal grants has fallen, from 10.6 to 10.2 percent during this period. Even so, the total growth in federal grants was so large that real per capita federal aid to New York state and local governments rose by 17 percent. from $167 to $196 between 1974 and 1980. The meaning of all this is that the resource base with which the state government had to work grew very little in real terms and actually declined relative to the rest of the country. 18 EMPIRE STATE REPORT, January, 1983 Tax policy, on the other hand, is a controllable; and tax reduction is the most notable feature of the Carey fis- cal policies. Led by dramatic personal income tax reductions, New York’s tax burden has fallen from 15.5 per- cent of personal income in 1974 to 14.2 percent in 1981. But while the tax burden has been falling in New York, it has been falling faster else- where in the country, leaving New York’s competitive position unim- proved. In 1974, New York state and local government taxes were 38 per- cent above the national average, while in 1981, they were 39 percent higher. Still, this is a notable achievement. If the Carey adminis- tration had not stopped the increase, leaving taxes at their 1974 level, New York taxes would have been 52 per- cent above the national average by 1981. In fact, the New York state government’s tax burden reductions were more than competitive with the rest of the country, but local govern- ment reductions were not. This points up a problem Governor Carey never found a way to deal with: how does the state government control the growth in the overall state plus local tax burden? A different kind of retrenchment occurred on the expenditure side of the budget, i.e., there were no explicit policy changes to eliminate programs or dramatically reduce benefits. Instead, maintenance and capital investments were deferred and other expenditures were eroded by infla- tion. As a result, state government per capita real expenditures have fallen by about $100 during this period. Expenditures in other states have not fallen as fast, with the result that in 1981 New York State and local governments spent 36 percent more than the average state as com- pared to 56 percent more in 1974. The structure of expenditures within New York State has not changed markedly during the Carey years. The proportions spent on health, education, welfare and state aid remain about the same—the cuts have been distributed evenly. The number of state employees for each one thousand residents has actually grown, but the real average compen- sation for these employees has declined by about 20 percent. How did the administration get away without making major pro- grammatic cuts on the expenditure side? And why was so much attention focused on Carey’s tax policies when the expenditure reduction, relative to the rest off the nation, were far more dramatic? The answer is that the expenditure cuts became relatively invisible thanks to unexpected assists from the national economy, the fed- eral government, and, ironically, from the New York City crisis. First, there was a sustained national eco- nomic recovery between 1975 and 1979, which boosted state revenues. Second, the high rate of inflation dur- ing the Carey years helped maintaina high rate of state tax revenue growth, even in the face of statutory rate reductions, and enabled real expen- diture reductions to go virtually unnoticed. For example, the 25 per- cent increase in compensation re- ceived by the average state govern- ment employee between 1974 and 1980 was actually a 20 percent reduc- tion in real terms. Third, there was substantial increases in the flow of federal grants-in-aid to the state, par- ticularly in the early years of the Carey administration. Finally, the caution that characterized the after- math of the New York City financial crisis made it easier for the adminis- tration to sell a program of slower public sector growth than had histor- ically occurred in New York State. What is in store for the next admin- istration? The economic outlook is still uncontrollable, and there is little evidence that New York has now gained a competitive advantage in attracting industry. Even if the state grows as fast as the rest of the coun- try, as the performance during the last year would suggest, a slow rate of economic growth may be expected because of sluggish national growth. This implies that the state’s real taxa- ble capacity will continue to grow as slowly over the next four years as it did during the last eight. The near future holds other prob- lems. The reported one-half billion dollar deficit has the new administra- tion in trouble at the outset, without the benefits of a high rate of inflation and a progressive state income tax structure responsive to that inflation. Prospects are for continued reduc- tions in the amount of federal aid flowing to state and local govern- ments in general and to states such as New York in particular. Moreover, fading memories of the New York City crisis, past deferrals of expendi- tures to renovate the state’s infras- tructure, urban problems, and the pent-up demand for new “programs” will make it increasingly difficult to sell an austerity program. Further- more, New York City again finds itself in fiscal distress and may again plead its case to Albany, thus adding more pressure to these spending side demands. What is a realistic expectation for the next four fiscal years? If the stra- tegy is to continue reducing the tax burden, then continued deferrals and more expenditure reductions lie ahead. It is inevitable that these reductions will be concentrated in the social service area. On the other hand, even modest increases in state government expenditures, for exam- ple, to deal with accumulated capital obsolescence problems or to com- pensate for federal aid reductions, will almost surely mean a need to increase taxes. Only a reduction in social service expenditures or local assistance, or a fast-growing New York State economy that produces large fiscal dividends, can forestall this outcome. Cuomo will have to decide whether the latter is simply wishful thinking or enough of a real- istic expectation to use it as the basis of public policy. @ The Uncontrollabies State Population (1,000s) (1967 dollars) of the Nation Average State and Local Governments (1967 dollars) Taxes Bracket income) of National Average Expenditures and Debt Expenditures (1967 dollars) The Carey Record New York’s Share of National Income Real Per Capita Personal Income Per Capita Personal Income as Percent 113% Real Per Capita Federal Aid to New York Marginal Rate on Top Personal.Income Tax New York State and Local Government Tax Burden (taxes as a percent of personal New York Tax Burden as a Percent Real Per Capita State Government 1974 18,073 9.5% $4,156 $167 New York Per Capita State and Local Government Expenditures as a Percent of National Average Percent of New York State Budget Allocated to Health Education State Aid and Welfare State Government Employees per 1000 Population Real Average Compensation per State Government Employee *1980 data. EMPIRE STATE REPORT, January, 1983 19 

Two Steps Forward, One Step Backwards, and Some Tough Decisions for the New Governor

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Two Steps Forward, One Step Backwards, and Some Tough Decisions for the New Governor

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