LEX Why let California have all the fun? New York may not suffer from quite the subprime hangover it has, but the Empire State rivals the Golden one in the dysfunctionality of its budget. Now David Paterson, its governor, is warning that cash may run short before the year is out.
Like California, New York leans heavily on its wealthy residents to pay the bills and spent accordingly during the boom years. Some 40 per cent of income taxes come from the top 1 per cent of earners, but it has a particularly unfortunate crop of millionaires, made up largely of Wall Streeters. Towards the end of the boom, the state relied on them for nearly 20 per cent of its haul. After a temporary “millionaire’s tax” to help plug the budget hole last year, another increase is probably out of the question. With local taxes included, wealthy residents of New York City pay by far the highest marginal rates in the country.
Mr Paterson has rejected any more short-term fixes, such as raiding reserve funds, insisting instead that painful cost cuts are the only honest option. He is right, and there is certainly fat to cut. Medicaid (indigent healthcare) and education spending are both two-thirds higher than the national average per capita and extremely generous employee pension payments will soon surge. Even if New York bridges its cash shortfall, its comptroller predicts cumulative deficits of nearly $30bn over the next three years as federal stimulus dollars vanish.
Unlike California’s, New York’s politicians do not face many constitutional roadblocks to budget cuts, but they also fear public trade unions. To avoid issuing IOUs, expect short-term cash flow gimmicks rather than the meaningful cuts their deeply unpopular governor is seeking. When it comes to special effects, New York may even surpass Hollywood.
Post a comment below or e-mail the Lex team confidentially
