On the chopping block

February 3, 2009

Zach Zill examines what's on the budget chopping block in New York--and the proposals that could stop the cuts.

IT'S BECOMING a familiar news headline almost everywhere: state and local governments forecasting huge deficits and carrying out huge budget cuts.

With tax revenues for states and cities drying up due to job losses, less consumer spending and lower income for businesses, government programs and services are becoming another casualty of the deepening economic crisis--and the pain is being felt especially at the local and state level.

You might think it would make more sense in a period of job losses and pay cuts for local governments to shore up the social safety net that protects workers when they are at their most vulnerable. But the opposite is happening--politicians are responding to the crisis by cutting back on social programs that workers and the poor depend on most.

New York is near the top of the list in terms of the severity of the cutbacks. Since last November, Gov. David Paterson has been threatening state workers and several of New York's most important social programs, with education and health care at the top of the list. Paterson has decried New York's "addiction to excessive spending," as one New York Times article put it, and insists that cuts are the only way out of the budget crisis.

First-grade students in PS84 in New York City
First-grade students in PS84 in New York City (Richard B. Levine | Showcase)

Yet Paterson's assertions ring hollow in a state with one of the highest concentrations of wealth in the country and a tax structure in which the burden for paying the state's bills falls heavily on the poor and working class.

WHAT IS the scale of the budget crisis in New York? The state is forecasting shortfalls of over $15 billion from now until mid-2010, and further shortfalls of $17 billion in 2011 and $18.6 billion in 2012.

The size of the New York state economy is comparable to India, the 12th largest in the world, with over $1 trillion a year produced in goods and services. The state government's budget in recent years has topped $120 billion.

Yet unlike the federal government, a state can't run a deficit, and so by law, it must balance its budget by the beginning of the next fiscal year on April 1. All told, Paterson is projecting a $51 billion deficit.

This huge shortfall obviously stems from New York being the home of Wall Street and the U.S. financial services sector. Roughly 20 percent of state tax revenues and 33 percent of New York City's tax revenues come from Wall Street. This amount ballooned in recent years because of the record profits that banks and hedge funds were pulling in, not to mention the jaw-dropping bonuses these firms paid out to their executives.

Wall Street's financial crisis reversed this flow. In the last three months alone, the state has lost over 100,000 private-sector jobs, including 40,000 in financial services. That means larger expenditures on social programs by the state, at the same time that tax revenues from Wall Street are drying up.

To solve the problem, Paterson is pushing through cuts that he himself describes as "draconian." Nearly every part of the state budget that benefits poor and working New Yorkers is on the chopping block, including:

-- $3.5 billion from Medicaid and other health services;
-- $2.5 billion from public education;
-- $338 million from higher education;
-- $177 million from public transportation; and
-- $476 million from mental hygiene services.

These cuts apply only to the 2009-2010 fiscal year. In many cases, the spending reductions will accelerate the following year--Medicaid, for example, is expected to be slashed by an additional $3 billion in the 2010-2011 fiscal year, and public education is slated to lose an additional $3.4 billion.

What's more, Paterson has already taken some actions to plug the 2008-09 deficit of $1.7 billion, including eliminating a $3 million subsidy to the New York City Housing Authority; reducing aid for City University of New York (CUNY) and State University of New York (SUNY) community colleges by $270 per student; and raising health care contributions for retired state employees.

The effects of these cuts are too numerous to list. As part of the education cuts, public libraries will lose millions of dollars. Funding for public radio and television stations will be cut nearly in half. Spending for university programming at SUNY and CUNY is slated to drop by $74 million over two years, while tuition is raised by $600 per year. And there have already there have been major cuts in financial aid programs in the CUNY system.

From health care, Medicaid coverage for prescription drugs will be severely cut in cases where doctors "cannot demonstrate a medical necessity" for the prescription. Low-income families will be forced to pay more for their kids' health insurance through the Child Health Plus program. Funding for public hospitals and nursing homes will be reduced by $25 million over two years. The state will cut the rates it pays private home care providers, nursing homes and clinics, which will, in turn, attempt to cut staff or force workers to take pay cuts.

The list goes on. Funding for homeless shelters in New York City will drop. The only addiction treatment center in Manhattan, which employs 40 people and treats over 800 patients a year, will close under the budget plan.

Public transit in New York City will take an enormous hit, as the state decreases funding to the Metropolitan Transit Authority (MTA) by $256 million next year. As a result, the MTA, which is actually a public benefit corporation and not a public agency, is projecting an overall budget shortfall of $1.5 billion. To plug the gap, the MTA has already proposed cutting entire subway and bus lines, decreasing frequency of service, and an incredible 23 percent fare hike.

Meanwhile, residents of New York City will face an additional wave of cuts, as Mayor Michael Bloomberg goes after similar programs at the local level. When cuts from the state and the city are taken together, individual public schools will face budget reductions of up to 12 percent over the next year.

Finally, there is the statewide hiring freeze and attacks on the existing state workforce. Paterson's proposal includes $368 million in cuts from the state workforce for next year alone. This includes the elimination of over 3,100 jobs, with 520 immediate layoffs.

A scheduled 2009-2010 salary increase for state workers will be eliminated. An additional, more expensive pension tier will be implemented for new hires, with the retirement age raised to 62 from 55. And all state workers are expected to take a five-day salary deferral, which means going without a week's pay until the crisis is determined to be "over"--or until an individual leaves the state workforce.

And if that list isn't bad enough, there are a number of regressive taxes and fees that Paterson is proposing to raise additional revenue.

For example, using the claim that there is an "obesity epidemic" in New York, Paterson has proposed an 18 percent tax on all non-diet soft drinks. This will disproportionately affect working-class people--and do nothing to address the causes of obesity or diabetes, or offer a real solution to treating them.

The "obesity tax" is to be coupled with a series of other regressive measures, such as increased fees for driver's licenses, license plates, auto registration, tobacco purchases and clothing sales.

In all, these cuts will have an enormous impact on working New Yorkers. It isn't hard to imagine the effect of cutting Medicaid at a time when tens of thousands of New Yorkers are losing their jobs, and their employer-provided health insurance along with them. Or the choice for thousands of CUNY students between dropping out and trying to figure out how to come up with extra tuition money.

IN A statement explaining the cuts, Paterson pledges, "We will not turn our backs on our core priorities...We must better focus our limited resources so we can deliver the essential services that we need."

Yet the cuts show that the "core priority" of the governor is balancing the budget on the backs of working New Yorkers.

Paterson is also calling for "shared sacrifice," a familiar theme to anyone who watched Barack Obama's inauguration speech. He has included in his budget a number of measures aimed at the wealthy.

For example, the budget includes partial elimination of some of the noxious Empire Zone tax breaks for businesses. Paterson proposes to raise $216 million in additional state revenue through a tax on purchases of furs, jewelry and private jets, and is calling for several tax loopholes applying to hedge funds and yacht purchasers to be closed.

But the funds generated from these measures are a drop in the bucket compared to the cuts Paterson is proposing. And business tax breaks will continue to cost the state hundreds of millions of dollars every year.

A more rational solution would be to pay for the crisis with real tax increases on the wealthiest New Yorkers.

This is something that has been called for by a range of organizations and individuals, from municipal labor unions to a group of over 100 prominent economists, including Nobel Prize winner Joseph Stiglitz. As the open letter signed by the economists notes, "Economic theory and historical experience gives a clear and unambiguous answer [to the budget crisis]: it is economically preferable to raise taxes on those with high incomes than to cut state expenditures."

The reality is that New York's tax structure has become deeply regressive. According to the liberal Fiscal Policy Institute (FPI), in 1972, New York's income tax structure included 14 brackets that ranged from 2 percent for those at the bottom to 15 percent for those at the top. Since then, there has been a major compression of tax brackets--the highest bracket now pays 6.85 percent, while the lowest pays 4 percent.

There are a number of outrageous consequences of these changes.

First, an income level of $20,000 for a single person or $40,000 for a couple qualifies for the top tax bracket. In other words, an individual making $10 an hour pays the same state income tax rate as the millionaires on Wall Street. Plus, when sales and other taxes are added in, workers and the poor end up paying a much higher percentage of their income in taxes than the rich.

All told, the bottom 95 percent of New Yorkers pay more taxes now than they did under the old system. Yet the state takes in $7.7 billion less each year. In other words, without the tax cuts for the top 5 percent, there would be no budget crisis at all this year.

THE MOST sensible solution to the crisis would be a return to the tax structure of the 1970s--an era, it should be pointed out, when New York's super-rich still managed to enjoy a luxurious lifestyle.

Barring this, however, there are proposals being floated for a "millionaires' tax"--an additional 1 percent assessed against those with incomes over $1 million and a further 0.75 percent for incomes over $5 million. The surcharge would bring in an estimated $1.5 billion in the first year.

Paterson and other critics of the plan argue that increasing taxes on the rich would cause a mass exodus of the wealthy taking their fortunes to other states with lower tax rates. Yet according to the FPI, "A recent Princeton University study concluded that no net out-migration of the rich resulted from New Jersey raising income taxes on households with incomes over $500,000. The governor's concern that the wealthy will choose to leave New York is overblown."

Another proposal is for a 0.5 percent tax on financial transactions--something that takes place in London. This would generate $100 billion in tax revenues, according to economist Dean Baker--enough to plug New York's budget deficit and help other states around the country.

There is also the eagerly awaited stimulus package from the new Obama administration. This will include $167 billion specifically earmarked to help states. Tapping this fund could save over $5 billion in proposed cuts. Yet so far Paterson has not talked about pursuing federal funds rather than cutting spending.

Many labor unions and left-wing organizations have come out in support of raising taxes on the rich to pay for the crisis, and most have forcefully condemned Paterson's proposed budget. Yet a dismaying number of unions are accepting the logic that some cuts are necessary.

"We understand there will be cuts," United Federation of Teachers President Randi Weingarten said. "The real question is: Will there be cuts, not just cuts against growth, but real cuts that will turn back the clock?" Most unions are proposing, in the words of Weingarten, a "tripartite solution" made up of "new yet fair and progressive taxes, smart spending and a federal stimulus package."

This logic--of accepting that cuts will come, and disputing the details of what specifically will get cut and by how much--is shaky.

For one thing, working-class people never saw the benefits of the last economic expansion, the first recorded instance of a period of economic growth when real wages for workers declined. So if workers didn't benefit from the boom, why should we pay for the bust?

Accepting the logic of cuts now means that in a few months, labor in New York will be arguing over what's more important: education or health care; after-school programs or pension benefits for state workers. This is a trap.

Paterson is trying to push through the first round of cuts by early February, and the cuts for the 2009-2010 fiscal year by March 1. Yet the likelihood that cuts of this size will pass on time is slim. The state assembly isn't required to vote on the budget until April 1, giving activists a window in which to pressure Paterson and other state politicians.

Students, health care activists, unionists and others have begun organizing. Getting the unions themselves on board will be key to waging a successful struggle that forces Paterson to rearrange his "core priorities." But more is needed than talk--stopping the cuts will take street protests, sit-ins, job actions and other mobilizations.

We shouldn't have to enter a new era of hope and change with more of the same old attacks on our livelihoods and our living standards. The time to organize against the cuts is now.

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