Testimony to Senate Finance Committee and Assembly Ways and Means Committee

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Governor David Paterson's Executive Budget takes a step in the right direction for New York by showing restraint in new spending and restraint in new taxes. While not perfect, the budget proposal is being positively received by many major private sector employers within our membership.

Our basic message today is to urge the Senate and Assembly to follow the Governor's lead and adopt a no-growth budget, and avoid adding spending and taxes that are simply unaffordable for both the state's business sector and its residents.

This is important not only to bring the state's fiscal house into order, but to improve New York's economic climate and promote new private sector investment and the creation and retention of good paying private sector jobs - a goal that I believe is shared by everyone in this room today.

We understand that, with the Governor, you have the difficult task of closing a $7.4 billion gap between projected income and potential spending.

But we cannot expect to fix this problem without an honest assessment of its cause. This $7.4 billion gap is primarily the result of years of unsustainable increases in state spending. Over the six fiscal years from FY 2004 to FY 2009, inclusive, New York's state-funded spending has increased at more than double the inflation rate - a 46 percent increase in spending compared to a 17 percent increase in the CPI.

If the budget had grown at the rate of inflation over this same time period, the FY 2009 budget would have been nearly $18 billion less!  New York would have entered the current recession year facing a manageable downturn in revenues, not $7.4 billion gap in the new budget and a massive, $60 billion, four year gap.

The proposed budget would result in a 0.9% increase in state tax and fee supported spending for Fiscal 2011. That figure illustrates unusual spending constraint for New York State, below both the current rate of inflation and the expected growth in personal income.

Even so, the spending cuts proposed by Governor Paterson are frankly not as aggressive as many in the private sector had wanted, nor as aggressive as needed to solve New York State longer term needs.

I say that for several reasons.

While the Governor's proposal – if approved by the legislature – would produce a balanced budget for the new state fiscal year beginning April 1, it falls well short of solving the state's structural imbalance between spending and income, leaving the state with a projected total of $30 billion in deficits over the subsequent three budget years.

While the Executive Budget contained some reasonable reforms in Medicaid, it does not include a reduction in total Medicaid spending. At roughly $51.5 billion in total spending, Medicaid is the state's single most costly program. It also consumes $14.6 billion in state tax revenues, and spending of state-generated funds for Medicaid is slated to increase by $1.1 billion, or 8.3 percent, in the new budget. When short-term federal assistance for Medicaid expires in 2011, it will leave an immediate $4 billion hole in the state's current Medicaid budget. Clearly, more reforms and more cost controls are needed.

Finally, the state's spending excesses - and the new taxes necessary to support them - were damaging enough when the economy was growing. They are unrealistic given expectations of continued economic weakness in New York State, and the nation overall. The Division of Budget projects that unemployment in New York will stay above 8% through 2012, personal income will not recover to 2007 levels until 2013, and that capital gains in 2010 will be one-half of 2007 levels. Given this sobering economic forecast, it is unclear whether a 1 percent increase in state spending is affordable.

REVENUE MEASURES

We appreciate that the Executive Budget proposal for Fiscal 2011 contains far fewer tax and fee proposals and substantially less in new tax revenues than were adopted last year, which saw a total of $6.5 billion in new costs imposed through the budget and the subsequent MTA bailout bill. This year, the budget proposal would increase state taxes and fees by up to $1 billion in the new fiscal year, and even more in later years once these changes became fully effective.

Tax proposals in the Executive Budget have the effect of increasing the cost of doing business in New York, imposing increased costs on New York State residents — or both. These ill effects are even more damaging with an economy just now showing some signs of recovery.

Let me focus on several revenue proposals of greatest concern.

• Year after year, our members tell us that the employer-provided health care is their most significant cost-of-doing business issues in New York. Last year alone, New York increased health care related taxes and fees by some $700 million, and overall imposes more than $4 billion a year in taxes on health insurance coverage. By pushing premiums higher, these taxes will force more business owners – particularly small business owners
• to shift more of the cost to their employees, or to reduce or eliminate coverage — driving up the ranks of the state's uninsured and shifting costs to state taxpayer supported coverage. The Business Council opposes the $240 million in increased taxes on hospital inpatient services, certain non-hospital services and nursing home care proposed in the Executive Budget.
• One budget proposal will have the effect of raising taxes at the local, rather than state level. The budget would give all cities and villages the authority to increase their gross receipts taxes on energy and telecommunications utilities from 1 percent to 3 percent. Not counting three of the state's largest cities Yonkers, Rochester and Buffalo – that already impose 3 percent utility gross receipts taxes, this proposal could easily result in more than $100 million in new local level utility taxes, which would then be passed on to individual and business consumers. Let's not forget that these proposed utility taxes come on top of $700 million in increased energy taxes approved in the current year's budget through the so-called Section 18-a assessment.
• Justified by some as an anti-obesity measure, the budget proposes a whopping $1 billion per year in new taxes on sugared soft drinks (the Executive Budget projects these taxes will produce $450 million in Fiscal 2011, $1 billion per year once fully implemented.) Even if this proposal achieved its ascribed reduction in soda consumption, we see this as a huge burden on a narrow sector of the economy, and – ultimately - a regressive tax on consumers. We believe this is both bad tax policy, and ineffective public health policy.
• We also question the proposal to raise another $210 million per year from a $1 increase per pack increase in the state's cigarette tax, from $2.75 to $3.75. Intended to deter smoking, it is unclear whether it will have that effect, or simply drive smokers to internet or other purchasing options in order to avoid state-level taxes, further strengthening the vibrant black market. We urge full enforcement of existing laws as a necessary and responsible alternative.

OTHER BUDGET ISSUES/INITIATIVES

The Executive Budget typically proposes policy initiatives, in addition to appropriations and revenue measures. Often, these initiatives have significant impact on the state's business climate as well. I would like to briefly comment on several of these Article VII issues.

Spending Cap – We support the Governor's proposal for a spending cap that limits growth in the state operating funds budget to the average rate of inflation from the three prior calendar years. As we mentioned earlier, had the state imposed reasonable limits on the growth of state spending in previous years, we would be facing a significantly different, and far more manageable, budget gap today.

Mandate Relief/RPT Relief - The Business Council supports the Governor's call for mandate relief to allow local governments to reduce spending. New York also needs a property tax cap to prevent a shift in the tax burden from the state level to the local level. We do not support the circuit breaker as proposed in the Executive Budget, as it will have the same fatal flaw as does the STAR program – it treats the symptom of excessive local taxes by offsetting the financial burden on residential taxpayers, but does nothing to cure the underlying problem of excessive size and cost of local governments. Moreover, neither STAR nor a circuit breaker will provide relief from the crushing burden of real property taxes on the business community – and in fact may exacerbate the problem by masking the impact of real property tax increases on residential taxpayers with state dollars.

Prior Approval - The Business Council continues to oppose the Executive Budget's proposal to reinstate prior approval for health insurance rates. Prior approval would simply masks the underlying causes of health care cost increases, and will limit competition in the health insurance market. There are alternatives to promoting lower costs for group health coverage, including adoption of so-called Freedom Health Plans, that reduce the cost of employer-provided health care by stripping away many of the state-imposed mandates on group health coverage.

Marketing Restrictions – Given the state's focus on promoting growth in technology sectors, including life sciences, The Business Council continues to oppose the pharmaceutical marketing restrictions included in the Executive Budget, as they would adversely impact on the research-based bio-pharmaceutical sector's ability to do business in New York State. Pharmaceutical products and technological innovation play important roles in the advancement of medicine in the United States, leading to improvements in public health and extended lives for our citizens. We believe this legislation will impair effective communication between the pharmaceutical industry and doctors, and discourage industry investment in New York State.

Wine In Grocery Stores – Occasionally, new taxes and fees are welcome – if they are the result of expanded economic opportunity. As example, the Executive Budget would generate $93 million in new license fees under a proposal to allow the sale of wine in grocery stores, something already allowed in 34 other states, and is strongly supported by New York State consumers. Allowing supermarkets and grocery stores to sell wine will create new markets for upstate and Long Island wineries, help support the states agribusiness, and promote new jobs and investments in that sector. Importantly, to help provide a level playing field, the bill also gives significant new flexibility to liquor stores, allowing them to broaden their product mix and customer base.

FOCUS ON JOBS

Our job growth has lagged behind national trends for the past two decades. New York grew at about half the national rate during the 1990's, about 60 percent of the national rate in the 2000's. Too many New Yorkers, especially the young and well educated, continue to leave for better job opportunities in other states. New York's high cost-of-doing business – taxes, especially real property taxes; energy costs, health care costs and others – discourage new investments by existing business, smother entrepreneurs and limit the creation of new businesses and new jobs in emerging technology sectors.

Because of our weak competitive position, New York has lagged significantly behind national trends in recovering from the last two recessions.

We need to become more competitive, not less, in order to fully participate in the eventual national economic recovery.

We believe that the most effective economic development program would be a more competitive business climate. We need to control state-imposed cost mandates on employers, reduce the cost of energy, and lower real property taxes.

Recognizing that these types of major business climate improvements will take time, we also believe the state needs to continue to offer effective, efficient economic incentive programs that target strategic industries and that produce significant returns on the state's investment.

As the Empire Zones program expires this June, the state should consider multiple programs, each designed to address specific development objectives, including:

• Capital reinvestment in existing business, to help retain valuable employers and high paying jobs. This could include QEZE-type benefits based on significant capital investment and job retention; enhanced investment tax credits; and/or by exempting investment-based credits from the state's alternative minimum tax.
• Job creation at new and existing business; these could include new employee-based tax credits, and credits based on a percentage of state personal income tax revenues derived from new employees. These types of wage-based employment incentives would also be effective in promoting job growth and development in distressed urban areas (the original focus of the empire zone program).
• Support of emerging technology sectors, with support for business growth, R&D, and commercialization of new products. This could include: expansion and extension of the Qualified Emerging Technology Company credit; pilot implementation of the regional partnership program adopted in 2005; a new capital grants program for emerging high tech companies (as proposed in the 2010 Executive Budget).

While we believe the proposed Excelsior program includes some of the right economic development tools we need in New York State, overall we believe the proposed Excelsior Jobs program would fall short of achieving the state's critical economic development and job growth needs.

For example, the basic eligibility threshold of fifty new jobs, compared to a baseline of the prior three years, will eliminate from eligibility many - if not most - businesses in its targeted technology-based sectors. Likewise, we believe that tying the proposed enhanced research and development credit to this same job creation threshold will limit its effect in promoting new research investment in New York.

Moreover, New York needs to do more than encourage new job growth. It needs to focus on reinvestment and job retention. The Excelsior program does nothing to assist our incumbent businesses that are considering new capital investments that would increase their competitiveness, and the overall budget contains limited resources that would be available to Empire State Development to provide capital investment and job retention incentives.

OPPORTUNITIES FOR FURTHER SPENDING RESTRAINT

In order to eliminate addition taxes, and to accommodate necessary economic development efforts, the state needs to identify and implement additional spending controls.

The Business Council believes there are real opportunities for significant further cuts in state spending. The Business Council, the Empire Center, Citizen's Budget Commission and others have identified a wide range of options. The opportunities are there, the need for spending control is evident. Now we need to garner the necessarily political will.

These cuts will not be easy, and will not be painless, but we see further, permanent reductions in our base level spending as essential for the long term stability of state finances, and a prerequisite for achieving a more competitive economy.

Cost cutting opportunities include:

• Accelerate phase out of STAR - $400 million. Even with the elimination of middle class rebates ($1.7 billion), STAR still costs $3.25 billion. A six year phase-out with 12.5% reduction in FY 2011 saves over $400 million.
• Tightening eligibility for long-term care under Medicaid could save $400 million per year; controlling excessive utilization of personal care services and expanding managed care for Medicaid recipients could save another $600 million. Moreover, we need to look at the models of less expensive states and find additional long term fixes. Mandatory managed care and elimination of categories of expenditures should be evaluated for improved health management and potential savings.
• Reduce state retiree benefit costs could save $630 million. The state should require a greater share of health insurance premiums to be paid by current and retired employees, bringing healthcare contributions in line with those of other public sector employees. Retirees (many of whom are eligible for Medicare), should be required to pay a 50 percent contribution to their premium costs and eliminate reimbursement for Medicare Part B premiums.
• Reduce current employee benefit costs by $75 million. For current employees, the Legislature should increase contributions to family healthcare plans from 18 percent to 22 percent, for a savings of $75 million annually.
• Consolidate small school districts - $160 million (not all state savings).
• Close underutilized state facilities - $280 million. The Legislature should thoroughly review all the large institutions that the state continues to run to determine which facilities can be closed or consolidated. In the case of prisons, for example, if the Department of Correction's staff and facilities were reduced to a level commensurate with the 15 percent decline in inmate population, the state would save $280 million annually.

SUMMARY/CONCLUSION

This year's budget decisions will have long term ramifications for the state, as we work toward state and national economic recovery. I greatly appreciate the opportunity to share viewpoints and concerns of importance to The Business Council and our members. I look forward to any opportunity to follow up with you on any issue addressed in our testimony today.