The Impact of the Federal Budget on New York State, New York local governments and New

Yorkers

Fiscal Policy InstituteMay 25, 2006

Federal budget and tax policies pass down to affect state and local governments and

the services they provide in significant ways

• NYS relies on federal grants for one third its revenues. – $36.2 billion of $107.973 billion or 33% in 2005-2006– $35.607 billion of $111.179 billion or 32% in 2006-2007 enacted

budget

• Compared to other states this is a much greater share. Other states rely on the federal government for only 25% of revenues.

• Entitlement caps would particularly hurt New York

Federal Funds as a Percent of Total State Revenues

25%

30%

35%

40%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

New York State's Use of Federal Funds: 2004-2005

All other5%

Family Assistance15%

Emergency Management and Security Services

4%

Education10%

Health66%

States, unlike the federal government, must balance their budgets.

• If federal government support for health, education and social services are reduced, New York must find the revenues to maintain services or cut back services– Medicaid– Child care– LIHEAP– Medicare Part D

• Historically, federal funding acted as an automatic stabilizer, increasing in bad times, shrinking in good times. Block grants have reduced the importance of automatic stabilizers.– Federal government decision to increase the FMAP was an important

element in reducing state fiscal distress in the latest economic downturn.

Sound state budget policy relies on sound federal budget policy. Policy failures at the federal level can lead to state revenue shortfalls and service cuts not only due to fluctuations in direct grants-in-aid, but from policy measures that have notable downstream effects on state and local budgets.

1. Federal budget cuts directly reduce funding for state programs.

2. Federal budget policies inevitably affect state budgets in future years.

3. Federal policies that make structural changes to federal-state programs often lead to significant decreases in funding to states.

4. Base-narrowing and other changes to federal tax law can significantly reduce state revenue

5. Federal pre-emption of state taxing authority makes it more difficult states to collect revenues.

6. Current federal proposals to repeal the income tax deduction for state and local taxes would reduce states' and localities' ability to raise revenues.

7. Unfunded federal mandates can place additional pressure on statebudgets.

President’s 2007 budget • Domestic discretionary spending $16 billion

below OMB baseline - $7.5 billion in cuts to grants in aid

• For the $4.2 billion in programs for which detailed data is available, New York would lose $313 million in 2007 growing to $885 million in 2011 for a five year shortfall in excess of $3 billion.

• Entitlements reduced by $47 billion over five years

Senate budget resolution

• Restores domestic discretionary spending – above the CBO baseline

• Entitlement cuts of $14 billion but not through a reconciliation process

• Tax cuts – below the President – does not include tax cuts associated with Health Savings Accounts

House budget resolution

• Domestic discretionary funding cuts similar to the President’s

• Tax cuts similar to the Senate budget resolution

• Entitlement “net” cuts of $5.1 billion• Not consistent with targets sent to

appropriation committees – targets add about $7 billion to DDF for next year

Tax cuts – 2007-2011

$282

$228 $218

$0

$50

$100

$150

$200

$250

$300

Bill

ions

President Senate House

Domestic discretionary spending cuts: 2007

$3.3

$16.0

-$1.6

$10.3

-$4-$2$0$2$4$6$8

$10$12$14$16$18

President Senate House Targets

Billi

ons

All three underestimate impact on the deficit

• Assume a single year fix for the AMT – would expand from 4 million to 34 million in 2011

• Do not include $156 billion in emergency funding

• Assume no funds for Iraq or Afghanistan after FFY 07 and only $50 billion for Iraq in FFY07 (vs $120 billion current spending)

Process… what to expect:• House has “deemed” its resolution so it can

proceed without a conference with the Senate

• Senate budget resolution not “deemed” – but analysts do not think a joint budget resolution is possible given the differences

• House beginning to work on appropriation bills

• Budget not expected to be complete until after the November elections

The Tax Cuts Enacted since January The Tax Cuts Enacted since January 2001 account for almost half the 2001 account for almost half the

current budget deficit.current budget deficit.

CBPP calculations from Congressional Budget Office data. Reflects costs in 2005 above a CBO January 2001 current services baseline projection for 2005. May not add to 100% due to rounding.70 percent of the deterioration in the budget in 2005 has resulted from legislation enacted by Congress and the President. And 85 percent of the cost of that legislation stems from tax cuts or increases in defense, international aid, and homeland security – not domestic spending.

48%

36%

8%8%Tax Cuts

Defense, Homeland Security and International

Entitlements

Domestic Discretionary (except Homeland Security)

48%

36%

8%

8%

$23 $748

$111,549

$5,406

$39,020

$0

$25,000

$50,000

$75,000

$100,000

$125,000

Lowest 20Percent

Middle 20Percent

Top 20Percent

Top 1Percent

Millionaires

Average Value of Tax Cuts, 2006

Source: Tax Policy Center

Center on Budget and Policy Priorities; last revised Feb. 14, 2006

Tax Cuts Cost More Than MostTax Cuts Cost More Than MostAgency BudgetsAgency Budgets

Tax cuts for the top 1% Veterans

All tax cuts

Education Housing & Urban DevelopmentEnvironmental

Protection$0

$50

$100

$150

$200

$250

$300

Bill

ions

of d

olla

rs

Source: CBPP calculations from Congressional Budget Office data

2005 Agency Budgets, Tax Cuts if Fully in Effect in 2005

Center on Budget and Policy Priorities; last revised February 14, 2006.

WHAT WOULD IT TAKE TO BALANCE WHAT WOULD IT TAKE TO BALANCE THE BUDGET WHILE PRESERVING THE BUDGET WHILE PRESERVING

THE TAX CUTS?THE TAX CUTS?

Cut Social Security benefits by..................................

41%

Cut defense spending by ............................................

61%

Cut Medicare by……………………………….…....…....

53%

Cut every other program except Social Security, Medicare, defense, and homeland security by…......

29%

To balance the budget by 2016 while making the tax cuts permanent, policy

makers would have to:

To balance the budget in the next decade while extending the tax cuts enacted since 2001 would require cutting Social Security benefits by nearly half, cutting Medicare or the Pentagon by roughly two-thirds, or cutting practically everything else by nearly one-third. Center on Budget and Policy Priorities; last revised February 14, 2006.

MAKING THE TAX CUTS AND AMT RELIEF PERMANENT WOULD COST TRILLIONS

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2001 2006 2011 2016 2021 2026

billio

ns

cost of already enacted tax cuts

cost of making the tax cuts permanent

Source: CBPP calculations from Congressional Budget Office data

Cost of tax cuts with interest, adjusted for inflation

Center on Budget and Policy Priorities; last revised February 14, 2006.

THE TAX CUTS AND SOCIAL THE TAX CUTS AND SOCIAL SECURITYSECURITY

Costs through the next 75 years

Note: The figure for the tax cuts represents the costs of the 2001 (EGTRRA) and 2003 (JGTRRA) tax bills. Estimates of the tax cuts assume that the tax cuts are extended as proposed by the Administration and include the additional cost of Alternative Minimum Tax relief attributable to the 2001 and 2003 tax bills. The cost of the tax cuts is assumed to grow only with the economy after 2016. The Social Security estimate comes from the 2005 Trustees’ Report. All figures are “net present values” of costs from inception through 2079.

Center on Budget and Policy Priorities; last revised February 14, 2006..

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Perce

nt of

GDP

Tax cuts if made

permanent

75-year shortfall in Social Security

Center on Budget and Policy Priorities; last revised Nov. 2, 2004

STUDIES FIND RECENT TAX CUTS STUDIES FIND RECENT TAX CUTS AS LIKELY TO REDUCE AS LIKELY TO REDUCE

ECONOMIC GROWTH AS TO ECONOMIC GROWTH AS TO INCREASE ITINCREASE ITtax legislation will probably have a net negative

effect on saving, investment, and capital accumulation over the next 10 years. -- Congressional Budget Office

making the 2001 and 2003 tax cuts permanent would raise the cost of capital for new investments, reduce long-term investment, and reduce economic growth.

-- Brookings Institution economists

Studies by Federal Reserve economists, the Joint Committee on Taxation, and other noted experts have produced similar findings.Sources: Congressional Budget Office, The Budget and Economic Outlook: An Update, Aug. 2003, p. 45; Gale & Orszag, "Budget Deficits,

National Saving, and Interest Rates," prepared for the Brookings Panel on Economic Activity, September 2004, p. 34; Elmendorf & Reischneider (Federal Reserve economists), “Short-Run Effects of Fiscal Policy with Forward-Looking Financial Markets,” National Tax Journal, Sept. 2002, pp. 357-86; Joint Committee on Taxation, “Macroeconomic Analysis of HR 2,” Congressional Record, May 8, 2003, pp. H3829-32.

““ ””““ ””

Federal tax issues affecting New York and New Yorkers

• BAT/Nexus Bill• Legislation overriding the Cuno decision• 2001 Estate Tax legislation• Federal legislation aimed at reversing the Zelinsky

decision (the “convenience of the employer” decision)

• Internet Tax Freedom Act (up for renewal in 2007)

• AMT’s treatment of the deduction for “state and local taxes paid” an an item of tax preference

• Streamlined Sales Tax Agreement