New York's Budget Battle: A Case Study for Obama?

What happens when a black, liberal Democrat is chief executive during a time of financial crisis? Does he respond by slashing budgets and following a Republican-like game plan? Or does he raise revenues by taxing the rich to stimulate the economy and protect those most at risk during economic hard times? These questions don't apply only to President-elect Barack Obama. New York state is already providing a dramatic case study, with its governor, David Paterson, desperately trying to cut his way out of the worst economic crisis his state—and New York City in particular—has faced since 9/11.

While the effects of the economic meltdown are felt nationwide, New York stands at its epicenter, and is taking the heat on two fronts: It is suffering, along with the rest of the country, from the far-reaching fallout of the Wall Street debacle, but it is also directly dependent upon the financial industry itself. Jobs, retail, services, the real estate market, and an astonishing 20 percent of the state's tax base all rest upon the now crumbling foundation of the financial sector. The trip from Wall Street to Main Street is shorter in New York than anywhere else.
With the banking, securities, and insurance industry in free fall, the state suddenly faces a $1.5 billion budget deficit for the current fiscal year (which ends on March 31) and a projected $12.5 billion shortfall for the next one. Paterson, who presents his emergency budget package to the state legislature in a special session that begins on Tuesday, wants to narrow the budget gap by cutting $2 billion now and $3.2 billion more next year. These reductions come on top of $1.5 billion already cut from the state budget over the last year as the financial crisis deepened. (On Monday, New York's Republican-controlled Senate and Democrat-controlled Assembly remained at an impasse over Paterson's proposal, with members of both parties expressing concerns over some of the potential cuts.)

The largest cuts will be to Medicaid and other public health services ($572 million this year and $1.2 billion next year) and public schools ($585 million and $844 million). Union workers will be asked to defer five days of salary, forgo a 3 percent pay raise, and start paying up to half their health insurance costs. Under Paterson's plan, New York City will lose $41 million in municipal aid—a 17 percent cut—though aid to other cities in the state will hold steady.

Meanwhile, Paterson is not chastising Wall Street for causing these problems in the first place. Instead, the accidental governor—who now wants to be reelected in a state where the financial sector is still all powerful—has depicted the finance industry as the state's economic savior, rather than its scourge. Wall Street "bailed us out" for years, he said at a recent press conference, and now "the well has run dry."

Paterson's response to the crisis notably excludes from any shared sacrifice the Wall Street executives and other wealthy New Yorkers who long benefited from the boom that has gone bust. They, of course, do not use public health services and seldom send their children to public school. The only proposed budget measure that stands to affect the rich is a new 5-cent deposit on bottled water.

Most controversial is Paterson's flat refusal to consider a reinstatement of the so-called millionaire's tax, the temporary hike that helped bail New York out of its post-9/11 recession by boosting its 6.85 percent top income-tax rate up to 7.7 percent on incomes over $500,000. This year's proposal for a millionaire's tax—which was passed by New York's State Assembly in August but killed in the Senate—targeted even higher earners: It called for a 1 percentage point increase on millionaires, and another 0.75 points on those earning more than $5 million per year. Had it become law, it could have had a significant impact on revenue, since millionaires, who account for only one-half of 1 percent of New York's taxpayers, earn about a quarter of its taxable income. And an August poll showed that four out of five voters supported the tax.

But Paterson has said that he does not want to "drive up taxes for a constituency that has been, I would say, just battered over the past number of years." In addition to feeling the pain of the suffering rich, Paterson may believe that a millionaire's tax will, as Donald Trump put it, "force rich people to move to states like Florida."

Never mind that the streets of New York still teemed with millionaires after the 9/11 millionaire's tax. And never mind the response from billionaire Mayor Michael Bloomberg, who declared, "I can only tell you, among my friends, I've never heard one person say 'I'm going to move out of the city because of taxes.' Not one. Not in all the years I've lived here...My friends all want to live here and understand the value." Even if a few millionaires were to leave, so what? When two Princeton sociology students looked at a much stiffer wealth tax increase (2.6 percent on half-millionaires) that went into effect in New Jersey, they did find a tiny increase in the "out migration" rate among these wealthy residents—but overall, the state's tax revenue increased by $26 for every $1 lost.