ARTHUR O. EVE

JOSEPH R. LENTOL

ALEXANDER B. GRANNIS

IVAN C. LAFAYETTE

ROBIN L. SCHIMMINGER

CLARENCE NORMAN, JR.

WILLIAM L. PARMENT

SAMUEL COLMAN

RONALD J. CANESTRARI

THOMAS P. DINAPOLI

DAVID F. GANT

HELENE E. WEINSTEIN

RONALD C. TOCCI

DEBORAH GLICK

GLORIA DAVIS

CATHERINE T. NOLAN

BRIAN M. MCLAUGHLIN

JAMES GARY PRETLOW

ROGER L. GREEN

WILLIAM COLTON

RUBEN DIAZ, JR.

ADRIANO ESPAILLAT

N. NICK PERRY

Dear Colleagues:

I am pleased to provide you with the Ways and Means Committee New York State Revenue Report for State Fiscal Year (SFY) 2001-02 and 2002-03. This report is part of our commitment to presenting clear and accurate information to the public. It provides an overview of the national and State economies, as well as an analysis of the Committee Staff revenue forecast for SFY 2001-02 and 2002-03.

The Committee Staff projects that General Fund and Lottery receipts will total $43.774 billion in SFY 2001-02, which represents an increase of $2.499 billion, or 6.1 percent, over SFY 2000-01. The Committee Staff estimate is $222 million lower than the Executive's estimate for SFY 2001-02. This difference is largely attributable to differences in economic projections and how this translates into receipts.

The Committee Staff projects that General Fund and Lottery receipts will total $41.585 billion in SFY 2002-03, a decline of $2.189 billion, or 5.0 percent, from SFY 2001-02. The Committee Staff estimate is $821 million higher than the Executive's estimate for SFY 2002-03.

The Committee staff projections are reviewed by an independent panel of professional economists drawn from major financial corporations, prestigious universities, and private forecasters from across the State. Assembly Speaker Sheldon Silver and I would like to express our appreciation to all of the members of our Board of Economic Advisors. Their dedication and expert judgement have been invaluable in helping the Ways and Means Committee staff refine and improve this forecast. They have served to make the work of the staff the best in the State. Of course, they are not responsible for either the numbers or any of the views expressed in this document.

I wish to acknowledge the fine work done by the talented Ways and Means Committee staff. Their forecasts are integral to the budget process. The Speaker and I look forward to working with each of you to achieve a fair budget for all New Yorkers.

NEW YORK STATE

2001-2002 & 2002-2003

March 2002

Sheldon Silver
Speaker
New York State Assembly

Herman D. Farrell, Jr.
Chairman
Assembly Ways and Means Committee

Prepared by the
Assembly Ways and Means Committee Staff

Dean Fuleihan
Secretary to the Committee

Roman B. Hedges
Deputy Secretary

Kristin M. Proud
Deputy Secretary

The Executive Summary

Overview

The Economic Outlook
       New Economy Catches Old Economy Flu
       The New York State Economy Lags the Nation
       The New York City Economy and the Disruption of September 11

The Revenue Outlook
       Summary
       Overall Tax Collections
       Personal Income Tax
       User Taxes
       Business Taxes
       Other Taxes
       Miscellaneous Receipts
       Lottery

All Funds Forecast

All Funds Revenue Profile
       All Funds Revenue Structure
       General Fund Revenue Structure

Executive Revenue Proposals for State Fiscal Year 2001-2002
       Revenue Enhancement Proposals
       Revenue Preservation Proposals
       Fee Increases
       Measures Pertaining to Localities
       Revenue Reduction Proposals
       School Tax Relief Program (STAR)
       Tax Reductions Effective in State Fiscal Year 2001-2002
       Railroad Taxation Reform in New York State

Focus on the Personal Income Tax
       Overview
       Low-Income Families
       State Income Tax Thresholds
       New York's Low-Income Tax Relief Programs
       Working Families
       Personal Income Tax Revenue Profile
       High-End Taxpayers

Tax Analysis

TABLES:
       Table 1: Summary of General Fund Estimates
       Table 2: Growth Rate of Selected Economic Indicators Used in WAM Forecasting by Calendar Year 5
       Table 3: Receipts Comparison Pre and Post Attack SFY 2001-02
       Table 4: General Fund Receipts SFY 2001-02
       Table 5: General Fund Receipts SFY 2002-03
       Table 6: 2001-2002 All Funds Receipt Estimates
       Table 7: 2001-2002 All Funds Receipt Estimates
       Table 8: All Governmental Funds: State Fiscal Year 2001-02
       Table 9: All Governmental Funds: State Fiscal Year 2002-03
       Table 10: Dedicated Taxes (SFY 2002-03)
       Table 11: Composition of Adjusted Gross Income

FIGURES:
       Figure 1: Real U.S. GDP Growth
       Figure 2: Consumer Confidence Index
       Figure 3: U.S. Employment Growth vs. NYS Employment Growth Rate
       Figure 4: U.S. Wages vs. NYS Wages Growth Rate
       Figure 5: Total Personal Income Tax Receipts Growth
       Figure 6: Withholding Receipts
       Figure 7: Profits vs. Variable Compensation (Securities Industry)
       Figure 8: Capital Gains Growth 1992-1999
       Figure 9: Sales Tax Collections and Employment Growth
       Figure 10: Sales Tax Receipts
       Figure 11: Corporate Franchise Tax Receipts
       Figure 12: Share of General Fund Receipts by Major Category of Taxes
       Figure 13: Dedicated Taxes 1994-95 vs. 2002-03
       Figure 14: Tax Liability and Filers by Income Class (1999)
       Figure 15: Effective Tax Rates by Income Class (1999)
       Figure 16: Share of Capital Gains for Taxpayers with AGI Over $100,000
       Figure 17: Share of Liability for Taxpayers with AGI Over $100,000

The Economy

• The nation is in the midst of an economic recession that officially began in March 2001. The economic downturn was further exacerbated by the events of September 11, which in all likelihood pushed the nation into the recession.

• GDP declined by 1.3 percent on an annualized basis in the third quarter of 2001, the first quarterly decline since 1991, and grew at a preliminary rate of just 1.4 percent in the fourth quarter. The Committee Staff estimates that the national economy grew by 1.2 percent in 2001.

• New York's economy was impacted by the current recession, and more significantly by the economic repercussions from the attack on the World Trade Center. The New York economy lost an estimated 125,300 jobs from September to December 2001 alone.

• The Committee Staff expects employment in New York to decline by 0.1 percent in 2001 and is forecasting an additional decline in employment of 0.7 percent in 2002. This compares to an expected increase of 0.4 percent at the national level in 2001, followed by a decline of 0.4 percent in 2002.

• The Committee Staff is forecasting New York wage growth of 3.9 percent in 2001, and of 0.7 percent in 2002. This compares to expected wage growth of 5.4 percent at the national level in 2001, followed by an increase of 2.6 percent in 2002.

State Receipts Overview

SFY 2001-02

• General Fund and Lottery receipts are projected to total $43.774 billion in State Fiscal Year (SFY) 2001-02, an increase of $2.499 billion or 6.1 percent over SFY 2000-01.

• Much of this growth is the result of reserve transactions that are used to balance the budget in SFY 2001-02. Excluding these transactions, General Fund taxes are expected to be $37.073 billion, a decline of $1.896 billion, or 4.9 percent from SFY 2000-01.

• In the third quarter of calendar year 2001, General Fund taxes declined by $991 million, or 11.3 percent, over the same quarter in 2000.

• General Fund taxes are expected to decline by $1.459 billion, or 15.0 percent, in the first quarter of calendar year 2002. Much of this decline is attributable to a significant falloff in variable compensation.

SFY 2002-03

• The Committee Staff is forecasting General Fund Receipts and Lottery to total $41.585 billion, a decline of $2.189 billion, or 5.0 percent from SFY 2001-02. This decline can be attributed to a net reduction in reserve transactions from the prior fiscal year.

• Adjusting for reserve transactions, General Fund Tax receipts are forecasted to total $38.327 billion in SFY 2002-03, an increase of $1.254 billion, or 3.4 percent from SFY 2001-02.

• The rebound in collections is attributed to the Committee Staff forecast of a mild economic recovery from the current recession, although the New York economy is still expected to underperform the nation in 2002 due mainly to the economic dislocations from September 11.

National Recession Halts State's Revenue Growth

Over the past several years, growth in the nation's economy has led to considerable growth in New York State receipts. However, coincident with the close of the State Fiscal Year (SFY) 2000-01, the country's ten-year economic expansion ended as well. The national economy started to slow in 2000 and, according to the National Bureau of Economic Research, fell into a recession in March 2001. Consequently, receipts growth started to slow early in SFY 2001-02, and came to a halt in the third quarter following the events of September 11. As a result, SFY 2001-02 will produce General Fund revenues substantially below budgetary projections.

The Committee Staff projects that General Fund and Lottery Receipts will total $43.774 billion in SFY 2001-02, an increase of $2.499 billion, or 6.1 percent over SFY 2000-01. However, the use of reserves to support the General Fund masks the overall weakness in the growth of General Fund Tax receipts, which are expected to decline by 4.9 percent due to the drop in economic activity.

General Fund and Lottery receipts are projected to total $41.585 billion in SFY 2002-03, a decrease of $2.189 billion, or 5.0 percent. This decline is mainly due to the reduction of available reserves, which will be used to balance the budget in SFY 2001-02. General Fund Tax collections, however, are expected to rebound in SFY 2002-03, growing at a rate of 3.4 percent.

Collections are still anticipated to grow in SFY 2002-03 despite the projection that growth in most major economic indicators will be weaker in calendar year 2002. Accelerating growth in employment and wages later in calendar year 2002, coupled with healthy growth in the first quarter of 2003, will be responsible for the overall growth in collections.

New Economy Catches Old Economy Flu

During the ten-year expansion, the consumer and the investor formed a silent partnership to keep the "New Economy" going. Accelerating investments in information technology (IT) increased productivity and led to increases in real wages. In addition, households generated greater non-wage income in the form of variable compensation, which resulted in increased spending and investment.

Figure 1

During the expansion, the nation's economic growth was unprecedented. From 1998 until 2000, Gross Domestic Product (GDP) averaged over 4 percent a year. New York's economic and industrial structure was well positioned to take advantage of the economic growth in the latter half of the expansion. The fast-growing technology and service sectors required financial and intellectual capital found in abundance in the New York City region. Consequently, New York State's economy began to grow at rates faster than the rest of the nation.

Yet, with surprising speed, consumers reacted to growing uncertainty in the economy by curtailing their desire to spend. As illustrated in Figure 2, consumer confidence started to erode as early as November of 2000, but with expansionary monetary policy and pro-growth fiscal policy in full throttle, consumers were less wary of their future and consumer confidence started to stabilize. However, with the decrease in demand, businesses were left with excess inventories and lower earnings.

Figure 2

As a consequence, current economic conditions have dramatically changed from the Committee Staff forecast published in February 2001. Last winter, with the economy already starting to slow down, the Committee Staff forecasted growth in real GDP of 2.4 percent for 2001. As a result, it was expected that the nation would avoid a recession and once again manage a soft landing - just as the nation had done subsequent to prior economic crisis such as the Asian contagion and the Russian Flu. In an attempt to reverse the economic slide, the Federal Reserve acted quickly in January of 2001 to lower the federal funds rate by 100 basis points in one month. In addition, there was hope of a fiscal stimulus package from Washington in order to avert a recession.

Tragically, before any recovery could take hold, the September 11 attack on the World Trade Center created an economic shock that arguably transformed the slowdown into a recession. The long-term impact that the attack will have on the national and State economy is still uncertain. Part of this uncertainty is related to consumer confidence, which plummeted in September 2001 as seen in Figure 2. However, the Committee Staff projects the current economic recession will be shorter and less severe than the national recession of 1990-91, which contained three consecutive quarterly declines in real GDP.

Preliminary data released by the Bureau of Economic Analysis indicates that the national economy, as measured by real GDP, grew at a 1.4 percent annualized rate in the fourth quarter of 2001. This is a sharp rebound from the 1.3 percent decline experienced in the third quarter. The Committee Staff now estimates that real GDP for calendar year 2001 grew by 1.2 percent.

The surprising growth in the fourth quarter, along with positive signs in other economic indicators, has led some economists to speculate that the recession is now in the "rear view mirror". However, the pace of the recovery is still expected to be fairly moderate. The Committee Staff forecast for growth in real GDP is 1.5 percent in 2002, which is still below historical averages.

New York State Economy Lags the Nation

New York was in the midst of its own economic slowdown when the events of September 11 pushed the State and New York City economy into recession. In addition to the tragic loss of life that occurred, the economic fallout for New York was catastrophic. Many businesses critical to the overall health of the State suffered major business disruptions, resulting in the displacement of thousands of jobs out of Lower Manhattan.

Figure 3

The impact of the current recession on New York's employment picture is illustrated in Figure 3. By 1999, employment growth in New York surpassed the national average. However, the economic effects of the recession and the localized impact of the attack on the World Trade Center are expected to reverse this trend. Consequently, it is expected that job losses will once again be greater than the national average. The Committee Staff estimates that employment growth in New York will decline by 0.1 percent in 2001, and by an additional 0.7 percent in 2002.

Figure 4

Figure 4 illustrates that over the past several years, wage growth in New York has been close to the national average. In fact New York exhibited substantial wage growth in 2000 significantly greater than the national average. There were several factors that contributed to the large growth in wages, including strong employment growth and large increases in variable compensation. However, the current recession has resulted in job losses and a sharp decline in variable compensation in 2001. Consequently, New York wage growth is forecasted to fall below the national average, growing by 3.9 percent in 2001, and by 0.7 percent in 2002.

The New York City Economy and the Disruption of September 11 ¹

According to the New York City Partnership, the New York City economy is expected to sustain approximately $83 billion in losses as a result of the events of September 11.² In addition to the loss of several thousand jobs in Lower Manhattan, millions of square feet of prime office space and billions of dollars worth of infrastructure were destroyed or damaged. A brief discussion follows of some of the estimated economic impacts.

Employment

The Committee Staff estimates that the New York economy lost approximately 125,300 jobs between September and December 2001 as a result of the terrorist attack on the World Trade Center. According to the State Labor Department, the private sector seasonally adjusted job count in New York State declined by 59,300 in October alone.

An estimated 18,500 to 31,800 jobs have relocated out-of-state.³ The average wage for private sector workers below 14th Street in Manhattan was $93,753, far higher than any other part of the State and double the statewide average. Most of the relocated jobs are in the securities industry, which had a much higher average wage of $232,223. Therefore, job losses in this area have a dramatic effect on statewide wage growth.

Financial Services Industry

In the wake of the terrorist attack, some of the major financial services firms are reevaluating their business location strategies. In particular, firms are questioning the strategy of having large numbers of employees and business units concentrated in one location. Firms are now looking to diversify the location of their business activities and have moved to disperse employees formerly located in Lower Manhattan to various locations in the New York City metropolitan area. While this change may have implications for the concentration of the financial services firms in Lower Manhattan, the impact on the overall health of the City and State economy depends on whether firms choose to relocate their workers within the City or out-of state.

New York Real Estate Market

The terrorist attack destroyed or damaged nearly 29 million square feet of prime office space, which represents approximately 30 percent of the total amount of prime office space in Lower Manhattan. Yet, despite this contraction in available office space, vacancy rates in 2002 for New York City as a whole are expected to rise from 3.6 percent to 7.8 percent. In addition, primary market asking rents are expected to decline by 8.6 percent in 2002. The market value of commercial properties in the vicinity of the World Trade Center declined by 25 percent, while Manhattan hotels experienced a 16 percent decline. Overall, the corresponding assessment declines are expected to cost New York City approximately $230 million in the form of lower property tax levies.⁴

Travel and Tourism

In recent years, New York City has enhanced its status as a worldwide destination, not only for business travelers, but also for tourists. As a result, the decline in business and leisure travel after September 11 has had a dramatic impact on the New York City economy. For example, it is estimated that hotel revenue per room fell by over 50 percent in the week immediately following the attack. While revenues have slowly recovered, they were still down significantly in December. Airline travel also fell precipitously in the aftermath of the attack, and is still down nearly 20 percent from a year ago.⁵

Infrastructure Impacts

In addition to the lost office space, portions of New York City's key infrastructure were also severely damaged or destroyed. For example, the destruction of the PATH station and the portion of the 1 and 9 subway line that serviced the World Trade Center has disrupted the daily commute into Lower Manhattan. In addition, businesses and residents have had to cope with street closures and vehicular restrictions since September 11. While repairs have begun, it will be some time before the transportation infrastructure in Lower Manhattan will be restored to pre-attack levels.

Insurance Industry Losses

According to the Insurance Information Institute (III), industry losses arising out of the attacks on September 11 are estimated to be between $30 billion and $70 billion.⁶ As of February 26, 2002, more than 27,600 claims have been filed, representing more than $15 billion in losses. The timing of the payment of these insurance claims, coupled with the flow of federal aid payments, will be an important factor in determining how quickly New York will be able to rebuild.

September 11 represented the largest insured event in history. As a result of these record losses, insurers are in the process of reevaluating their underwriting risks, especially with regard to the issuance of terrorism coverage. For example, a New York City Partnership survey indicates that since the attack, commercial insurance rates have risen by as much as 65 percent, especially for large properties.⁷ The high cost of obtaining insurance coverage in New York City could have a significant impact on efforts to attract new businesses as the City attempts to rebuild Lower Manhattan.

Signs of Recovery

There are already indications that Lower Manhattan is on the road to recovery. Of significance are the announcements by American Express, Merrill Lynch, Bank of New York and Deutsche Bank that they intend to move employees back into Lower Manhattan. American Express has indicated that they plan on returning most of the employees that were relocated out of Lower Manhattan back to their building in the World Financial Center. Merrill Lynch has already returned nearly 6,000 employees back to the World Financial Center, while Deutsche Bank has completed its purchase of 60 Wall Street and is planning to relocate workers currently in midtown to its new downtown location. In addition, Bank of New York has returned to One Wall Street and is leasing new space at 60 Broad Street.

Summary

Slow growth in the economy and the events of September 11 have substantially altered the Committee Staff revenue outlook for SFY 2001-02. The Committee Staff estimates that General Fund and Lottery receipts will total $43.774 billion, an increase of $2.499 billion, or 6.1 percent over SFY 2000-01. This estimate is $222 million lower than that of the Executive. However, General Fund Tax collections, which exclude reserve transactions and non-tax revenues, are projected to total $37.073 billion, a decline of $1.896 billion or 4.9 percent.

Most of the growth in General Fund and Lottery receipts is attributable to the use of $2.905 billion from the Refund Reserve Fund. This year's extraordinarily large adjustment is somewhat offset by a STAR transfer payment of $1.310 billion, and a deposit of $250 million into the Debt Reduction Reserve Fund. Combining these three transactions yields a net increase of $1.345 billion in bottom line General Fund and Lottery receipts in SFY 2001-02.

The Committee Staff forecasts General Fund and Lottery receipts to total $41.585 billion in SFY 2002-03, a decline of $2.189 billion, or 5.0 percent over SFY 2001-02. This forecast is $821 million above that of the Executive. Overall receipts will be down in SFY 2002-03 because of the lack of money available in the Refund Reserve Fund, and an increase in the amount of Personal Income Tax revenues that will be transferred out of the General Fund to pay for the STAR program.

Absent these factors, General Fund Tax receipts in SFY 2002-03 are expected to total $38.327 billion, an increase of $1.254 billion, or 3.4 percent over SFY 2001-02. This forecast also takes into account $300 million in scheduled tax reductions. The forecast is based on the assumption that the downturn in the national and New York economy will be relatively short-lived, supporting modest revenue growth in most major tax categories.

Overall Tax Collections

For the ten-month period through January 2002, overall General Fund Tax collections have declined by $1.467 billion, or 4.4 percent over the same period in SFY 2000-01. The largest component of this category of receipts, the Personal Income Tax, declined by $565 million, or 2.4 percent during this period. User Tax collections and Business Tax collections declined further through January, with year-to-date growth rates falling to 4.4 percent below last year's levels for User Taxes and 18.5 percent below last year's levels for Business Taxes.

Prior to the September 11 attack on the World Trade Center, the national economy was already experiencing a significant slowdown. General Fund Tax collections through August 2001 grew by 5.1 percent, or $747 million, over the same period in SFY 2000-01. Although there was growth in total tax collections there were also signs of trouble. By the time the first five months of SFY 2001-02 came to an end, all of the major tax areas except for the Personal Income Tax were declining over the same period in the prior fiscal year. The Personal Income Tax grew by 10.2 percent during that period, an increase of $1.021 billion. However, much of this strong growth in the early part of the fiscal year was due to large increases in extension deposits and final payments made in April 2001 on calendar year 2000 tax liability.

While revenue collections through August reflected the weakness in the overall economy, collections post-September 11 dramatically illustrate the effect of the attack on revenue collections. In the month of September alone, revenue collections fell by 21.6 percent from September 2000. While some of the decline can be attributed to a 90-day deferral of tax filing and payment deadlines for affected taxpayers, collections in subsequent months for most of the major tax categories have not shown much improvement.

For example, during the five-month period from September 2001 through January 2002, Personal Income Tax collections have reversed course and have declined by 12.0 percent over the same period in SFY 2000-01. The drop in User Taxes and fees has accelerated to 5.3 percent during that time, while Business Taxes plunged 26.0 percent. Total General Fund tax revenues declined by approximately 11.8 percent during the five-month period following the terrorist attack on the World Trade Center.

Personal Income Tax

Over the past few years, as illustrated in Figure 5, the State has seen substantial growth in Personal Income Tax collections, a pattern which will end due to the current economic downturn. The current weakness in Personal Income Tax receipts will have a significant adverse impact on overall revenue collections.

Figure 5

The Committee Staff estimates that Personal Income Tax collections, excluding refund reserve transactions and transfers, will total $25.497 billion in SFY 2001-02, a decline of $945 million, or 3.6 percent. This estimate is $135 million lower than that of the Executive. Personal Income Tax collections are expected to rebound in SFY 2002-03, increasing by $919 million, or 3.6 percent, to $26.416 billion. This forecast is $429 million higher than that of the Executive.

Strong collections in April 2001 contributed to the growth in the Personal Income Tax of 13.4 percent in the first quarter of SFY 2001-02. This strength in collections early in the fiscal year was largely attributable to substantial payments made by taxpayers in settling their liability on income earned in 2000. As a result, the decline in receipts for the fiscal year overall has been somewhat mitigated.

However, through January 2002, collections are $565 million less than they were last year, a decline of 2.4 percent, for the fiscal year. To better understand the reasons for this, it is important to take a closer look at two of the major components of the Personal Income Tax, withholding and estimated payments.

Withholding

The largest component of Personal Income Tax collections is withholding, which accounts for nearly 80 percent of the total and is closely tied to growth in New York wages. The Committee Staff expects withholding receipts to total $20.125 billion in SFY 2001-02, a decline of 4.0 percent. This estimate is $142 million lower than that of the Executive.

Figure 6

Through January 2002, withholding receipts fell by $421 million over the same period in SFY 2000-01, representing a decline of 2.5 percent. As shown in Figure 6, the events of September 11 are part of the reason for this decline as withholding starts to decline in the third quarter. However, revenue growth immediately prior to the terrorist attack had already slowed through August 2001, increasing by only 2.9 percent over the same period in SFY 2000-01.

Withholding collections are expected to drop off even further for the remainder of the fiscal year. In January 2002 alone, withholding receipts declined by $485 million, or 16.0 percent over January 2001. As illustrated in Figure 6, withholding growth in the first quarter of both calendar year 2000 and calendar year 2001 was over 18 percent.

January includes a large portion of collections that are attributable to variable compensation such as bonus payments and stock options. However, the Committee Staff projects a sharp drop in the first quarter of 2002 of 12.7 percent. The taxation of variable compensation is mostly contained in the withholding component of the Personal Income Tax, so it is no surprise that January 2002 collections were so dismal. As a result, part of the large decline this year is surely attributable to the higher base that resulted from this strong growth.

The level of variable compensation is correlated with corporate profits, which are estimated to have declined by 16.1 percent in 2001. As corporate profits decline, bonus payments and stock options tend to drop off as well. As illustrated in Figure 7, when securities industry profits decline as they did in 1990, 1994, and 1998, variable compensation declines but less than the rate of profits decline. Securities industry variable compensation made up almost half of total variable compensation in New York State in 2000, and 3.4 percent of all State wages.

Figure 7

SFY 2002-03 withholding collections are expected to increase by $1.124 billion, or 5.6 percent, based on anticipated wage growth of 3.9 percent for the fiscal year. This translates to a total of $21.249 billion, which is $182 million higher than that of the Executive. It should be noted that the wage growth expected is relatively modest in comparison to that experienced during the years leading up to the current recession. Prior to an expected decline in wages of 0.7 percent in SFY 2001-02, for example, wages grew by an average of 7.6 percent for the five previous fiscal years.

Estimated Payments

Estimated payments, which include installment payments and extension deposits, are expected to total $6.360 billion in SFY 2001-02, representing a decline of $514 million, or 7.5 percent. This estimate is $35 million lower than that of the Executive. In SFY 2002-03, estimated payments are expected to total $6.581 billion, an increase of $221 million, or 3.5 percent over SFY 2001-02. This forecast is $151 million higher than that of the Executive.

Installment payments are quarterly estimated tax payments made by taxpayers if they will owe significantly more than the amount of tax being withheld from their wages. These payments arelargely tied to capital gains, which result from the sale of certain assets such as stocks or investment properties. Installment payments are expected to total $4.690 billion in SFY 2001-02, a decline of $931 million, or 16.6 percent. This estimate is $35 million lower than that of the Executive.

Capital gains tend to move similarly to variable compensation in that they rise sharply when the economy is doing well, and decline rapidly when the economy is slowing. As illustrated in Figure 8, capital gains has grown significantly in the second half of the 90's when the economy was expanding.

However, installment payments, which include taxes on capital gains, declined by 39.7 percent in January 2002 alone, and have fallen by 16.7 percent so far for the entire fiscal year. Capital gains are estimated to fall by 30.5 percent for calendar year 2001, after several years of strong growth.

Figure 8

In SFY 2002-03, installment payments are expected to total $5.139 billion, an increase of $449 million, or 9.6 percent. This forecast is $119 million higher than that of the Executive. This expected increase in installment payments of 9.6 percent for SFY 2002-03 is based on capital gains growth of 14.9 percent for calendar year 2002.

Extension deposits are payments made with automatic four-month extensions for final payment on tax liability from the previous calendar year. Although taxpayers are granted an automatic four-month extension for the final payment on tax liability, they are still required to accurately estimate liability and submit any corresponding payment with the extension. Generally, more than 90 percent of these extension deposits are made in April. In April 2001, extension deposits grew by $437 million, or 36.6 percent over April 2000.

Through January 2002, extension deposits are 33.4 percent higher for the entire fiscal year, and are expected to total $1.670 billion in SFY 2001-02, representing an increase of $417 million, or 33.3 percent. In SFY 2002-03, extension deposits are forecast to total $1.442 billion, a decline of $228 million, or 13.7 percent. This forecast is $32 million higher than that of the Executive.

Settlements

Every April, taxpayers must file either an extension or final return to settle up their tax liability for the prior calendar year. These returns are accompanied by a corresponding payment, if the taxpayer owes money, or by a refund, if the taxpayer has paid too much over the course of the year. As a result, the month of April is usually large in terms of Personal Income Tax collections.

Final payments are expected to total $1.9 billion in SFY 2001-02, representing an increase of $216 million, or 12.8 percent. This estimate is $5 million higher than that of the Executive.

As stated previously, much of the growth in Personal Income Tax collections during the first quarter of the current fiscal year was due to large increases in extension deposits and final payments made in April 2001 on calendar year 2000 tax liability. In April 2001, final payments grew by $196 million, or 14.7 percent over April 2000.

Through January 2002, final payments are 13.1 percent higher for the entire fiscal year. In addition to the current state of the economy, the strength of settlements in April 2001 will contribute to the expected decline in settlements in April 2002. In SFY 2002-03, final payments are expected to total $1.647 billion, a decline of $253 million, or 13.3 percent. This forecast is $42 million higher than that of the Executive.

Refunds are issued to taxpayers that have paid too much based on their tax liability. The dollar amount of refunds paid out between January and March of each year is administratively determined by the Executive. The amount expected to be paid during this three-month period is $960 million.

Beginning in April, the rest of these refunds, known as prior year refunds, are paid to taxpayers as they are processed. Roughly two-thirds of prior year refunds are paid out in April and May of each year. The Committee Staff estimates that prior year refunds will total $2.163 billion in SFY 2001-02, representing a decline of $150 million, or 6.5 percent. This estimate is $12 million lower than that of the Executive.

In SFY 2002-03, prior year refunds are forecast to total $2.449 billion, an increase of $289 million, or 13.2 percent. This forecast is $41 million lower than that of the Executive.

User Taxes

The taxes comprising the User tax category are the Sales and Compensating Use, Cigarette and Tobacco, Highway Use, Motor Fuel, Auto Rental and Alcohol Beverage Taxes, and Motor Vehicle and Alcohol Beverage Fees.

User taxes and fees are expected to total $7.123 billion, a decline of $281 million, or 3.8 percent in SFY 2001-2002. This estimate is $41 million higher than that of the Executive. The expected decline in Sales Tax revenues contributes a little over 40 percent of the total decline in User Taxes. A majority of the decline is attributable to the increased dedication of Motor Vehicle Fees and an additional transfer of $169 million to the Dedicated Highway and Bridge Trust Fund.

User taxes are expected to decline in SFY 2002-03 to $7.161 billion, an increase of $38 million, or 0.5 percent. The relatively flat growth is the result of the Executive proposal that would dedicate an additional $205 million in General Fund revenues to the Dedicated Highway and Bridge Trust Fund. Of this total, an additional $171.6 million would come from Motor Vehicle Fees and $34 million would come from dedicating all revenues collected under the Auto Rental Tax.

Sales Tax

The largest component of User Taxes, the Sales Tax, is expected to total $6.161 billion in SFY 2001-02, a decline of 1.8 percent, or $111 million, over the previous fiscal year. A combination of deteriorating economic conditions, much of it directly related to the events of September 11, as well as additional tax cuts of $115 million are responsible for the decline in Sales Tax collections -- the first such decline since SFY 1990-91.

Figure 9

As Figure 9 illustrates, growth in Sales Tax revenues are closely correlated with growth in New York State employment. Over the past several years, unemployment has been at record lows, providing a measure of job security and increased wages for employees. The resulting increase in consumer confidence translated into increased consumption, driving up Sales Tax revenues. However, employment declines, the falloff of business and leisure travel, and declining consumer confidence, all of which were exacerbated by the events of September 11, have contributed to a decrease in consumption, and consequently, a decrease in Sales Tax collections. Tax collections have also been impacted by prior year tax reductions, including the phase-out of the Sales Tax imposed on the transmission and distribution of commercial energy and the exemption for qualified businesses located in Empire Zones.

Fiscal year-to-date Sales Tax collections are approximately 2.7 percent below collections over the same period a year ago as can be seen in Figure 10. The effects of the September 11 events can be seen clearly by the sharp decline in receipts in the third quarter of the calendar year. The disruption of business activity in Lower Manhattan, coupled with a sharp drop in consumer confidence contributed to the 10.6 percent decline in collections in the third quarter.

Figure 10

Figure 10 also indicates that the decline in collections actually began in the fourth quarter of 2000. However, 3.1 percent growth in fourth quarter of 2001 and 2.3 percent growth in January 2002 provide some reason to be cautiously optimistic regarding collections for the remainder of SFY 2001-02 and for SFY 2002-03. The fourth quarter growth was the first increase in collections for this fiscal year, though a portion of this growth is likely the result of increased auto sales as the major U.S. auto makers provided no-cost financing packages to boost demand. In addition, the 3.6 percent increase in December collections may, in part, be due to third quarter deferred sales tax payments from businesses that were impacted by the events of September 11.

In SFY 2002-03, the Committee staff forecasts Sales Tax revenues to total $6.381 billion, an increase of $220 million, or 3.6 percent. The increase in Sales Tax collections is based on an expected rebound in consumer confidence and modest growth in Personal Income on a fiscal year basis. However, growth will be below historical averages due to a forecasted decline in New York State employment of 0.1 percent in SFY 2002-03. The continued phase-out of the Sales Tax on the transmission and distribution of gas and electricity will reduce collections by approximately an additional $35 million in SFY 2002-03.

Motor Vehicle Fees

The Committee Staff estimates that Motor Vehicle Fees will total $191 million, a decline of 43.5 percent. This decline is the result of legislation enacted in 2000 and 2001 that increased the dedication of Motor Vehicle Fees by $169 million to support the Dedicated Highway and Bridge Trust Fund. The increased dedication lowers General Fund revenues, but does not affect receipts on an All Funds basis.

General Fund collections through January 2002, total $153.7 million, which represents a decline of 44.3 percent. The Executive has proposed an additional dedication of $171.6 million in SFY 2002-03, which reduces the General Fund forecast of Motor Vehicle Fees to $56 million in SFY 2002-03.

Cigarette Tax

The Committee Staff estimates that Cigarette Tax receipts in SFY 2001-02 will total $520 million, a decline of $8 million, or 1.5 percent.

General Fund Cigarette and Tobacco Tax collections through January 2002 have declined by 2.5 percent over the same period one year ago. The decline is consistent with long-term trends in tobacco consumption.

Recently enacted legislation will increase the tax imposed on cigarettes by 39 cents to $1.50 on April 3, 2002. The revenues generated by the tax increase are being used to finance heath care reforms and other heath care related programs.

In SFY 2002-03, Cigarette and Tobacco Tax revenues are forecasted to total $500 million. This is a decline of 3.8 percent, or $20 million, from collections in SFY 2001-02. The decline is consistent with long term trends in tax collections and the change in the formula that distributes total cigarette tax collections between the General Fund and the Tobacco Control and Insurance Initiatives Pool.

Business Taxes

The Committee Staff estimates that Business Tax revenues will total $3.658 billion in SFY 2001-02, a decline of $670 million, or 15.5 percent. Most of this decline is the result of an estimated 16.1 percent fall off in corporate profits in 2001. This estimate is $171 million lower than that of the Executive. Business Tax revenues are forecast to total $3.952 billion in SFY 2002-03, an increase of $294 million, or 8.0 percent. This forecast is $177 million higher than that of the Executive, and is largely based on an expected rebound in corporate profits of 8.2 percent in 2002.

Corporate Franchise Tax

The Committee Staff estimates that Corporate Franchise Tax receipts will total $1.598 billion in SFY 2001-02, representing a decline of $738 million, or 31.6 percent. This estimate is $157 million lower than that of the Executive. Through January 2002, Corporate Franchise Tax receipts have dropped by $652 million, representing a decline of 37.0 percent. This decline in receipts is the result of an estimated decline in corporate profits of 16.1 percent in 2001, coupled with an additional $290 million in tax cuts.

In SFY 2002-03, Corporation Franchise Tax receipts are forecast to total $1.849 billion, representing growth of 15.7 percent. This forecast is based on an expected rebound in corporate profits of 8.2 percent in calendar year 2002. Additional tax cuts, including the final phase of the corporate tax rate reductions, will reduce receipts by an additional $118 million in SFY 2002-03.

Corporate profits, which represent the net difference between revenues and expenses, have declined in each quarter of calendar year 2001. This decline is attributable to a contraction in the overall economy. During the economic expansion that came to an end in March 2001, productivity and wages increased steadily and, in turn, so did corporate profits.

As consumers began to cut back on spending, businesses were left with excess inventories and production capacity. As a result, they were no longer able to maintain previous levels of earnings growth, which caused a decline in the equities market and created worries of a recession. The events of September 11 slowed consumer and business spending even further, causing a greater decline in corporate profits. In the coming year, business activity is expected to turn around, which will lead to a rise in the equity markets and growth in corporate profits.

Figure 11

Utility Tax

The Committee Staff estimates that Utility Tax receipts will total $1.008 billion, an increase of $191 million in SFY 2001-02, or 23.4 percent over the prior fiscal year. This estimate reflects 2001 legislation that provided a credit under the Gas Import Tax for taxes paid to other states where natural gas was purchased, preserving approximately $114 million in refunds and ongoing receipts.

Utility Tax collections grew by $152 million, or 25.3 percent, through January 2002 over the same period in SFY 2000-01. Much of this growth is due to the timing of the first installment collection that increased collections in the current fiscal year, and strong growth in collections from the telecommunications sector.

The Committee Staff forecasts Utility Tax receipts to total $1.022 billion, an increase of 1.4 percent, or $14 million in SFY 2002-03.

Utility tax reform enacted in 2000 eliminated the Gross Receipts Tax (GRT) on industrial and commercial consumers, eliminated the commodity portion of the GRT, and reduced the GRT on the delivery of gas and electricity, changed the method of taxation for utility companies from a gross receipts base to a net income base, and eliminated the Gas Import Tax. These actions are expected to reduce receipts in SFY 2002-03 by an additional $85 million.

Insurance Tax

The Committee Staff estimates that Insurance Tax receipts in SFY 2001-02 will total $601 million, representing an increase of $17 million, or 2.9 percent. Growth in Insurance Tax collections reflects modest growth in premiums in 2001. This estimate is $29 million lower than that of the Executive.

The Committee Staff forecasts Insurance Tax receipts to total $561 million for SFY 2002-03, representing a decline of 6.7 percent. This decline is somewhat attributable to the September 11 events in addition to the continued phase-in of the tax rate reduction and the reduction of the premiums cap on Property and Casualty companies, which is expected to lower receipts by $30 million. However, premiums are expected to continue to grow as the demand for increased coverage rises in the current higher risk climate. This forecast is $45 million higher than that of the Executive.

Another consideration in the Insurance Tax forecast is the timing of actual payments on insurance claims resulting from losses incurred on September 11. According to the Insurance Information Institute (I.I.I.)⁸, the consensus estimate for losses resulting from the events of September 11 will total more than $40 billion, with more than $15 billion in claims already filed as of February 26, 2002. How quickly these claims are paid will play a part in how much Insurance Tax collections are dampened over the next year.

Bank Tax

The Committee Staff estimates that SFY 2001-02 receipts will total $451 million, representing a decline of $54 million, or 10.7 percent. This decline in receipts is attributable to an estimated decline in corporate profits of 16.1 percent in 2001, and the disruption of September 11, which limited the ability of some banks in Lower Manhattan to conduct business for a period of time. This estimate is $6 million lower than that of the Executive.

The Committee Staff forecast for SFY 2002-03 is $520 million, an increase of $69 million or, 15.3 percent. This forecast is based on an expected increase in corporate profits of 8.2 percent in calendar year 2002. In addition, industry analysts have predicted healthy profits for some of New York's biggest banks. Recently enacted tax cuts, including the reduction in bank tax rates, is expected to reduce receipts by $38 million in SFY 2002-03.

Other Taxes

Estate and Gift Tax collections comprise the largest component of Other Taxes, representing approximately 95 percent of the total. As a result, any major swings in Estate and Gift Tax collections dominate the increase or decline in Other Taxes. The Committee Staff estimates that Other Taxes will total $795 million in SFY 2001-02, which is the same as last year. Of this amount, Estate and Gift Tax collections are expected to total $759 million.

Other taxes are expected to total $798 million is SFY 2002-03, an increase of $3 million, or 0.4 percent over SFY 2001-02. Estate Tax collections are expected to total $766 million, an increase of 0.9 percent. Estate and Gift Tax collections have declined significantly over the past few years as a result of the adoption of the "SOP" tax based on the Federal credit for State estate taxes paid. The recently enacted Economic Growth and Tax Relief Reconciliation Act of 2001 increased the Unified Exemption and thus New York's threshold level for taxable estates to $1 million. The increase is effective as of January 1, 2002 and is expected to lower estate tax revenues by $31.5 million in SFY 2002-03. In addition, the Legislature repealed the Gift tax as of January 1, 2000. Therefore, no addition revenue from the Gift Tax is expected in SFY 2002-03.

Estate and Gift Tax Collections totaled $627 million through January 2002, representing a decline of 4 percent from the same period in SFY 2000-01.

Miscellaneous Receipts

The Committee Staff estimates that Miscellaneous Receipts will total $1.622 billion in SFY 2001-02, which represents an increase of $69 million, or 4.4 percent, over SFY 2000-01. This increase can mainly be attributed to both the early payment of bonds from the Thruway Authority and investment earnings for SFY 2001-02 that, despite reduced interest rates, reflect large average cash balances that were due to a large transfer at the end of the prior fiscal year. The Committee Staff estimate is $13 million higher than that of the Executive.

The Committee Staff forecast for SFY 2002-03 is $1.619 billion, which represents a decrease in overall Miscellaneous Receipts of 0.2 percent, or $3 million, over SFY 2001-02. This reduction is mainly attributable to the net effect of an expected decline in investment income, resulting from lower balances in the Short Term Investment Pool (STIP), that is mostly offset by various transactions reflecting excess funds totaling $216 million.

Lottery

The Committee Staff expects SFY 2001-02 revenues to total $1.597 billion, which exceeds the current Lottery Aid Guarantee of $1.525 billion by $72 million. However, the Executive Budget proposes to increase the Lottery Aid Guarantee to $1.562 billion so that all of the anticipated revenues estimated by the Executive are used in this fiscal year rather than being carried into SFY 2002-03.

The increase in anticipated revenues over and above the Lottery Aid Guarantee is largely attributable to stronger than anticipated growth in Instant Games as a result of the legislatively authorized 65 percent prize payout that was implemented in October 1999. Higher than expected collections are also due to administrative changes in Daily Numbers and Win-4, and because of a large roll-up in the Lotto jackpot over the past few weeks. The Committee Staff estimate is the same as that of the Executive since any excess in revenues above the Lottery Aid Guarantee is rolled into the next fiscal year.

In SFY 2002-03 the Committee Staff estimates that revenues will total $1.973 billion, representing growth of 26.3 percent. This forecast reflects Executive initiatives to increase revenues by $244 million. The Executive's initiatives would permanently extend authorization to operate Quick Draw, worth an estimated $147.7 million annually; to eliminate the restrictions placed on Quick Draw generating $43.0 million in SFY 2002-03; and to authorize a higher prize payout of 75 percent for up to three Instant Games in any given fiscal year $17.5 million worth an additional $17.5 million in SFY 2002-03. In addition, the Lottery Division plans administrative provisions to Quick Draw which will generate an additional $36.4 million.

This forecast also reflects recent legislation authorizing the Lottery Division to enter into agreements with certain racetracks to operate video lottery terminals, which is expected to generate $60 million. Legislation allowing entrance into the Big Game, which is a multi-state lottery game, is anticipated to generate approximately $125 million in revenues in SFY 2002-03. Administrative provisions to introduce two promotional Lotto type games during the fiscal year are expected to bring in an additional $65.9 million. The Committee Staff forecast is $63 million higher than that of the Executive. Of this amount, $35 million is the result of higher collections from SFY 2001-02 that will be carried forward into SFY 2002-03.

In 1996, the Legislature established an annual revenue consensus forecasting process. The Executive and the Legislature agreed that the process would include an analysis based on All Funds taxes. This broader definition of tax collections enables the reader to analyze receipts without separately analyzing each decision to earmark tax receipts separately. It excludes from the analysis all non-tax receipts outside of the General Fund (e.g., Federal Grant, State University tuition, fishing licenses, etc.).

For the purposes of this document, All Funds only includes tax revenues and Lottery receipts deposited into four funds: the General Fund, Special Revenue Funds, Capital Projects Funds and Debt Service Funds. This concept can also be referred to as State Funds taxes. This section of the report fulfills the statutory requirement enacted in 1996.

The Committee Staff estimates that All Funds receipts will total $48.632 billion in SFY 2001-02, and increase of $1.078 billion, or 2.3 percent. The Committee Staff estimate is $242 million lower than that of the Executive.

For SFY 2002-03, the Executive has submitted Article VII proposals that would dedicate an additional $205.6 million in current General Fund receipts to the Dedicated Highway and Bridge Trust Fund. This will increase the total amount of tax revenue that is dedicated for other than General Fund purposes to over $8.365 billion.

The Committee Staff All Funds forecast for SFY 2002-03 is $47.588 billion, a decline of $1.044 billion, or 2.1 percent. The Committee Staff estimate is $826 million higher than that of the Executive.

All Funds Revenue Structure

In 1981 the State restructured its system of accounts in order to better disclose the workings of the budget and more effectively account for governmental funds and operations. This financial reporting reform established the All Governmental Funds system used by the State.

The State's Fund Structure

The State's fund structure, for governmental accounting purposes, is categorized into four major fund types, the General Fund and three dedicated revenue funds - the Special Revenue Fund, the Capital Projects Fund and the Debt Service Fund:

1. The General Fund is the State's main fund. It includes a majority of the State's tax receipts. The General Fund is also used to pay for most of the State's operations and local assistance. The General Fund does not include dedicated revenues, which are deposited into a separate fund;

2. The Special Revenue Fund contains revenue derived from Federal grants and dedicated taxes and fees. Lottery receipts, even though they are deposited into a Special Revenue account, are also included in the Committee Staff's analysis since they are used to support education spending. The revenue in this Fund is used for specific purposes as designated by the State Legislature;

3. The Capital Projects Fund covers the cost of construction and maintenance for various capital items such as bridges, prisons, roads and other infrastructure projects. The revenue in the Fund is derived from bonds, dedicated taxes, Federal grants, and other transfers from the General Fund; and,

4. The Debt Service Fund, which contains some dedicated tax revenue, is used to pay principal and interest payments on State issued bonds. Transfers from the General Fund supports debt service payments for general obligation payments paid via the General Debt Service Fund.

General Fund Revenue Structure

The General Fund currently comprises nearly 80 percent of all state tax revenues and other non-tax revenues not otherwise dedicated. The Committee Staff analysis of the General Fund include receipts generated through the Lottery that are dedicated to education spending, a crucial element of the State's budget. In addition, the General Fund includes certain reserve transactions that can mask the overall size and growth of General Fund Tax collections. Apart from being allocated to pay Personal Income Tax refunds in the first quarter of the State fiscal year, reserve transactions are generally used to transfer General Fund surpluses from one fiscal year into another, thus lowering General Fund receipts in the prior fiscal year while increasing receipts in the latter.

There are four major categories of General Fund tax receipts:

• Personal Income Tax
• User Taxes
• Business Taxes
• Other Taxes

As the following chart illustrates, the General Fund has become increasingly reliant on revenue from the Personal Income Tax. Since SFY 1998, all of the major tax categories except the Personal Income Tax have declined in their relative contribution to Total General Fund Receipts. Personal Income Taxes, as percent of total receipts, are expected to increase from 57.4 percent of Total General Fund in SFY 1997-98 to approximately 70 percent in SFY 2001-02. User Taxes⁹, the second most important tax category, is expected to make up roughly 18.5 percent of total General Fund Taxes in SFY 2001-02, down from approximately 22.7 percent in SFY 1997-98. Similarly, Business Tax collections have declined from approximately 16.3 percent of total collections in SFY 1997-98 to an expected 9.5 percent in SFY 2001-02.

Figure 12

There are several reasons for this trend. First is the increasing importance of variable compensation and capital gains. Income from these sources has driven exceptional growth rates in Personal Income Tax collections over the last few years.

In addition, a series of tax reductions, the repeal of some minor taxes and the dedication of others are also a contributing factor. For example, the Petroleum Business Tax, Highway Use Tax, Motor Fuel Tax and Motor Vehicle Fees, and the Real Estate Transfer Tax, which generate over $2 billion annually, are now almost entirely dedicated to specific, non-General Fund spending.

In prior years, the inclusion of additional revenue sources helped to stabilize major swings in General Fund collections. The absence of such stabilizing revenue sources may be a factor in the way General Fund Tax receipts have responded to the current recession, as SFY 2001-02 receipts are expected to be approximately $1.941 million below prior year collections and significantly below prior year expectations.

While the General Fund consists of the majority of tax receipts, over the past seven years the Executive has gradually shifted a large amount of General Fund Tax Collections to one of the three dedicated funds. Typically, funds are dedicated to ensure that there are adequate resources to fund programs deemed essential by both the Executive and the Legislature. However, as a greater percentage of funds become dedicated, the General Fund becomes a less meaningful gauge of state receipt growth, and more importantly, of state spending.

Figure 13

As Figure 13 illustrates, in SFY 1994-95, the portion of State tax collections that was dedicated to funds other than the General Fund was roughly 10 percent. If the Legislature concurs with proposals contained in the SFY 2002-03 Executive budget, the total amount of State taxes dedicated to other than General Fund purposes will have doubled since that time, to over 20 percent.¹⁰

Table 10 summarizes, by State Fund, the total amount of State taxes and fees that are dedicated for special purposes. The table includes $205.4 million in proposed dedications contained in the current Executive budget for SFY 2002-03.

REVENUE ENHANCEMENT PROPOSALS

Quick Draw - Elimination of Restrictions $43.0 million

Eliminates the current restrictions on the operation of Quick Draw. Currently, Quick Draw cannot operate for more than 13 hours daily, eight of which may be consecutive. Additionally, Quick Draw tickets may only be sold at premises licensed for the sale of alcoholic beverages if the sale of food constitutes at least 25 percent of gross sales. Premises not licensed to sell alcoholic beverages may only sell Quick Draw tickets if they are greater than 2,500 square feet in area. This proposal will provide an estimated $43.0 million in Lottery Aid in SFY 2002-03, and $68 million annually thereafter.

Instant Games - Increase Prize Payout $17.5 million

Authorizes a prize payout of 75 percent for up to three Instant Games in each fiscal year. Currently, the prize payout for Instant Games is capped at 65 percent. Raising the payout for some games to 75 percent will result in increased revenue due to expected higher sales. This proposal will provide an estimated $17.5 million in SFY 2002-03.

EFT Program - Lower Withholding Threshold $25.0 million

Lowers the aggregate annual withholding tax liability that requires participation in the Electronic Funds Transfer (EFT) program to $100,000 from $400,000. This proposal will provide a one-time spin-up of revenues of $25 million in SFY 2002-03 resulting from the April 2003 payment being remitted in March 2003.

New Price Index for Pre-Paid Sales Tax on Cigarettes $5.8 million

Establishes a new price index to adjust the base retail price for inflation. The new index requires that the pre-paid sales tax on cigarettes be rounded to the nearest whole cent per package.

Alcohol Beverage License Fee Adjustments $8 million

Increases alcoholic beverage control license and permit fees for sellers based upon an inflation index. Grocery stores will see an increase of approximately 15 percent in control license and permit fees based upon the alcoholic beverage producer price index for 1992 (the date of the last fee rate change). All other alcoholic beverage control license and permit fees will increase by about 108 percent based upon the alcoholic beverage producer price index for 1976 (the date of the last fee rate change). These increases will be phased-in over a three-year period, beginning with SFY 2002-03. License and permit fees vary, depending upon the type and location of the establishment or premises operated. This proposal is expected to generate $8 million in SFY 2002-03, $13 million in SFY 2003-04 and $23 million in SFY 2004-05.

Lower Electronic Funds Transfer threshold to $500,000 $32.5 million

Decreases the threshold for requiring persons to register with the Department of Taxation and Finance to pay their sales and use tax liability by electronic funds transfer or certified check monthly to $500,000 from the current threshold of $1,000,000. Results in non-recurring revenue increase in SFY 2002-03 of $32.5 million.

REVENUE PRESERVATION PROPOSALS

Quick Draw - Permanent Extension $147.7 million

Grants the Division of Lottery permanent authorization to operate the Quick Draw game. Current authorization to operate Quick Draw expires on March 31, 2002. The Division of Lottery plans administrative changes to the game that are expected to generate an additional $36.4 million.

Alcoholic Beverage Tax Enforcement $3 million

Extends various alcoholic beverage tax enforcement provisions. This proposal will authorize any peace officer, when acting in accordance with his/her duties, to inspect selected premises. In addition, it removes the October 31, 2002 expiration date of various enforcement tools that are currently employed by the Department of Taxation and Finance and the State Liquor Authority. The enactment of these enforcement provisions will prevent the loss of $3 million annually.

FEE INCREASES

Department of Agriculture and Markets

Food Processing Fees $1.4 million

Increase current biennial fee from $35 to $100. It will make the fee comparable to the fees charged by other states and local entities. The fee was last raised in 1990. (Statutorily)

Pet Food Registration Fees $0.49 million

Increases pet food brand registration fee from $25 to $100 annually. The fee was last raised in 1974. (Statutorily)

Weightmaster Fees $0.02 million

Increases the fee by 50 percent (from $10 to $15) to help cover the costs of testing the accuracy of calibration equipment. (Statutorily)

Weights and Measures Inspection Fees $0.03 million

Increases the weight and measures inspection fee by 15 percent on average. (Administratively),

Council on the Arts

Surcharge $22.5 million

Increases from $5 to $20 the surcharge on the recording, indexing, entering, and endorsing of documents with county clerks. The increase will provide support for a proposed new public benefit corporation, the New York Institute for Cultural Education, which will comprise the State Museum, the State Library, and the State Archives. (Statutorily)

Consumer Protection Board

Registry Fee $1.4 million

Increase the DO NOT CALL registry fee paid by telemarketers from $500 to $800 annually. The increase will offset costs of the registry. (Administratively)

Department of Environmental Conservation

Pesticide Fees $2.4million

Increase pesticide applicator and other pesticide related fees. (Statutorily)

Fees for Bulk Petroleum Storage $1.0 million

Double current registration fees on petroleum bulk storage. (Statutorily)

Surcharge on Hazardous Waste Generators $18.4 million

Imposes a surcharge on generators of hazardous waste. The increase will range from $4,000 to $360,000, depending on the amount of waste generated. (Statutorily)

Hunting and Fishing Licenses $5.9 million

Increases fees for resident and non-resident hunting and fishing licenses in order to maintain programs and keep the Conservation Fund solvent. The increase for different types of licenses will depend on the structure of the fees; not all fees will be increased. (Statutorily)

Department of Health

Hospital Mortgage Servicing Fee $4.0 million

Increases the operational fee for servicing mortgage loans that are charged to Health Care Facilities' financing with the Dormitory Authority from 0.2 percent to 0.3 percent of the principal. (Administratively)

Office of Parks, Recreation and Historic Preservation

Boat Registration Fees $1.3 million

Doubles boat registration fees. Current triennial fees range from $9 to $30. The proposal will increase fees from $18 to $60. (Statutorily)

Surcharge on Boat Registration Fees $0.6 million

Imposes a surcharge on boat registration fees. The surcharge will range from $3 to $15, depending on the size of the boat. The surcharge will support boating access and maintenance projects across the State. (Statutorily)

Snowmobile Maintenance and Development Fees $1.3 million

Increases the snowmobile maintenance and development fee from $10 to $20 for residents and $20 to $30 for non-residents. (Statutorily)

Department of State

Various Regulatory Fees $2.6 million

Increases license fees for a number of occupations regulated by the Department of State. The occupations include barbers, non?barbershop stylists, notaries public, security guards, appraisers, real estate brokers or salespersons, private investigator, watch, guard and patrol agency. (Statutorily)

Lake George Park Commission Fees $0.3 million

Increases boat and dock fees at Lake George. The current fee structure, set in 1987 to support the costs of the Park Commission, is now considered insufficient. (Statutorily)

Department of Transportation

Penalty Schedule $3.0 million

Unifies four existing fine schedules into a single statewide fine schedule. New schedule eliminates disparities in weights and consequent penalties between different regions of the State. (Statutorily)

Overweight Truck Permits $1.5 million

Increases the number of annual permits that may be issued each year for overweight trucks. The number of authorized permits will increase from 17,000 to 21,000 beginning January 1, 2003 with graduated increases up to 25,000 by January 1, 2007. In addition, establishes a new overweight truck permit for vehicles with seven or more axles. (Statutorily)

Statewide Wireless Network

Cellular Surcharge $28.1 million

Increases the monthly cellular surcharge on all wireless devices from 70 cents to $1. The revenue from the increase will be directed to localities and to wireless providers to implement enhanced 911 service as required by the FCC. (Statutorily)

The Executive has proposed various tax reductions that will reduce receipts by approximately $80.8 million when fully implemented. These proposals include:

• Enhancing the New York State Low-Income Housing Tax Credit Program enacted in State Fiscal Year (SFY) 2000-01. Under this proposal, an additional allocation of $2 million will be used to enhance provisions of the current 10-year program.

• Extends current law for three years, until September 1, 2005, the tax reductions under the New York State Real Estate Transfer Tax and the New York City Real Property Tax for conveyances of real property to existing Real Estate Investment Trusts (REITs). This proposal is expected to reduce State revenue by $0.4 million in the SFY 2002-03 and $0.8 million per year thereafter. In addition, New York City revenue will decrease by $0.8 million in SFY 2002-03 and $1.5 million per year thereafter.

• Offering a tax incentive package to encourage the remediation and redevelopment of brownfields to productive use. First, tax incentives will be provided for the cost associated with both site remediation of brownfields and the purchase of property used on a brownfield site. Second, the redevelopment of brownfields between 10 acres and 100 acres will be given a credit for real property taxes paid. This credit applies to brownfields located outside of the MCTD and partially located within an upstate city. Finally, an enhanced real property tax benefit will be provided for upstate brownfields located outside of the MCTD, consisting of more than 100 acres. These incentives will have no impact on revenues in SFY 2002-03 and are expected to reduce revenues by $70 million when fully implemented.

The Executive proposal includes the following Article VII provisions:

• Index the income eligibility ceiling for the enhanced STAR exemption to allow for a cost of living adjustment. Beginning with the 2003-04 school year, the income threshold will be adjusted by the Consumer Price Index used by the United States Social Security Administration to annually adjust Social Security benefits; and,

• Modify the administration of the School Tax Relief (STAR) Program by addressing senior exemption eligibility requirements. The amendments will:

  • simplify the process of renewing the enhanced STAR exemption by changing the time period for renewal to once every three years. Currently, to maintain their "enhanced" STAR exemption, seniors must file a renewal application annually;

  • conform the current process allowing seniors to designate a third party to be notified when "enhanced" STAR renewal applications are due to the proposed three-year renewal cycle and shift responsibility for third party notification from school districts to the local assessors;

  • clarify which income tax year is to be used for income qualifications;

  • clarify that to receive the enhanced exemption for property co-owned by siblings, the senior owner must be a resident of the premises;

  • start the streamlining of the reapplication process for the senior enhanced exemption by allowing the State Tax Department to verify income eligibility for the enhanced STAR exemption;

  • authorize an extension of the STAR application filing date where hardship exist that prevented the applicant from filing a timely application;

  • address general eligibility, procedural and technical STAR issues;

  • provide that a husband and wife may receive a STAR exemption only on one home unless they are legally separated;

  • permit an exemption for each primary residence on a parcel containing multiple homes;

  • clarify treatment of properties that lie in more than one municipality and mixed use properties in homestead assessing units; and,

  • extend from two to three years following the initial estimate, the time period for revising the estimate of the annual amount to be paid to New York City for income tax receipts foregone.

Over the past several years, the New York State Legislature has enacted various tax reductions that have aimed at creating jobs and helping working families. These provisions are expected to save New Yorkers an additional $300 million in SFY 2002-03. Some of these tax relief measures include:

Earned Income Tax Credit (EITC)

The New York State Earned Income Tax Credit was increased to 25 percent of the federal credit for tax years beginning on or after January 1, 2001. The credit is further increased in 2002 to 27.5 percent and to 30 percent in 2003. This increase is expected to save working families an additional $14 million in SFY 2002-03 and $125 million when fully implemented.

Marriage Penalty

Effective for tax years beginning on or after January 1, 2001, the standard deduction for married couples filing jointly was increased from $13,000 to $13,400. The standard deduction was further increased for tax years beginning on or after January 1, 2002 to $14,200. Savings from the change in the standard deduction will total $21 million in SFY 2002-03 and $200 million when fully implemented.

College Tuition Deduction/Credit

Effective for tax years beginning on or after January 1, 2001, taxpayers will be able to claim an itemized deduction or a 4 percent tax credit for up to $2,500 of undergraduate tuition costs. The amount of deduction is scheduled to increase to $5,000 on January 1, 2002, $7,500 on January 1, 2003 and $10,000 on January 1, 2004. Savings from this deduction/credit will total $14 million in SFY 2002-03 and $200 million when fully implemented.

Long Term Care Insurance Credit

Effective for tax years beginning on or after January 1, 2002, taxpayers will be able to claim a credit equal to the cost of 10 percent of a taxpayer's long-term care insurance premiums. This credit will save taxpayers $2 million in SFY 2002-03, and $5 million when fully implemented

Energy Tax Reform

Legislation enacted in 2000 changed the method of taxation for utility companies from a gross receipts base to a net income base. In addition, changes were made to eliminate the Gross Receipts Tax (GRT) on industrial and commercial consumers, and the GRT on gas and electricity purchased by residential consumers. These tax reform measures will save utilities an additional $85 million in SFY 2002-03, and $330 million annually when fully effective.

Sales Tax on Energy

On September 1, 2000, the sales tax on the transportation, transmission or distribution of gas or electricity was reduced by 25 percent. Annual reductions will occur in 25 percent increments until the tax is fully phased-out on September 1, 2003. Savings from the additional reduction which took place on September 1, 2001, will total $22.9 million in SFY 2002-03, and $148 million annually when fully implemented.

Corporate Franchise Tax Rate Reduction

Effective for tax years beginning on or after July 1, 2001, the corporate franchise tax rate for large corporations was reduced from 8 percent to 7.5 percent. In addition, the corporate franchise tax rate for small businesses was reduced from 8 percent to 7.5 percent effective for tax years beginning on or after June 30, 1999. This new rate applies to small businesses with Entire Net Income of not more than $200,000. A further rate reduction to 6.85 percent for such businesses will take effect for tax years beginning on or after June 30, 2003. Combined tax savings for these tax rate reductions will total an additional $95 million for SFY 2002-03, and $280 million when fully implemented.

Bank Tax Rate Reduction

Effective for tax years beginning on or after July 1, 2001, the bank tax rate was reduced from 8.5 percent to 8 percent. A further rate reduction to 7.5 percent, will take effect for tax years beginning on or after July 1, 2002. Savings from this tax rate reduction will total an additional $30 million for SFY 2002-03 and $100 million annually when fully implemented.

Insurance Tax Rate Reduction/Cap Reduction for P/C Insurers

Effective for tax years beginning on or after July 30, 2001, the insurance tax rate was reduced from 8.5 percent to 8 percent. A further rate reduction to 7.5 percent, will take effect for tax years beginning on or after July 1, 2002. In addition, the cap on Property and Casualty Insurance company taxes will be reduced from 2.6 percent to 2.0 percent over the same three-year period. Savings from this tax rate reduction will total an additional $15 million for SFY 2001-02 and $50 million annually when fully implemented.

Investment Tax Credit for Insurers

Extends the Investment Tax Credit that is available to corporations, banks and personal income taxpayers that are registered broker/dealers in securities and insurance companies. The credit is available for equipment or buildings used for broker/dealer activities, and is equal to five percent of the cost of qualified expenditures up to $350 million. The credit will provide savings of approximately $5 million in SFY 2002-03 and $10 million when fully implemented.

Green Buildings

This program provides tax credits for construction of environmentally friendly buildings in New York State. These credits can be applied to construction costs incurred on or after June 1, 1999 for property that has met various requirements in tax years beginning on or after January 1, 2001. Savings from this tax credit will total $2 million for SFY 2002-03 and $5 million when fully implemented.

In an effort to promote a competitive business climate within New York State, one must develop an environment that attracts and retains businesses. Policy issues, such as those that relate to a state's transportation infrastructure, will undoubtedly affect the business climate within New York State. Thus, New York's effort to reform its method for the taxation of railroad property has become an issue of importance in recent years.

One method for the taxation of railroad real property in New York State is the use of "railroad ceilings." Such ceilings are used in order to determine a maximum value on the assessed value for railroad property and are defined in State statute through schedules that take into consideration a railroad company's earnings, in conjunction with the cost reproduction approach, to establish ceiling values.¹³ The State Board of Equalization and Assessment establishes railroad ceilings for the assessment of such property.

The original intent for the implementation of railroad ceilings was to limit a local municipality's ability to unjustly tax railroad companies. It was believed that by establishing a maximum assessment value, such ceilings would shield railroad companies from becoming targets of over taxation by local governments.

The use of these ceilings has been the source of much controversy over the years. Railroad companies contend that the use of ceilings is unfair and violates the Federal Railroad Revitalization and Regulatory Reform Act of 1976 (or "The 4-R Act") that requires "transportation property" to be treated equally under the law.¹⁴ Specifically, The 4-R Act prohibits any state or subdivision thereof from assessing various types of "transportation property" at "a value that has a higher ratio to the market value" than the ratio with respect to "other commercial and industrial property in the same assessment jurisdiction."¹⁵

With the passage of the 4-R Act, the State Legislature passed service enhancement legislation in 1987 that attempted to correct the perceived inequities of the railroad ceiling program in New York State. This legislation expired in February 1993. As a result, the Legislature needed to pass additional legislation in a continued effort to comply with the 4-R Act.

In the early 1990s, the Legislature attempted to reach a negotiated legislative solution. The parties involved reached a settlement that resulted in the reduction of railroad assessments by 25 percent and held these assessment levels constant through 2000.¹⁶

Since the expiration of this settlement in 2000, CSX, the company that purchased Conrail, has filed suit against the State on the grounds that New York's railroad ceiling program does not provide for the equal treatment of their transportation property as guaranteed under the Federal 4-R Act.

2002 Legislative Session Developments

In 2000, the Executive put forth a program bill to reform the way railroad property is taxed in New York. This proposal was never enacted. The Executive's 2001 Article VII proposal included a negotiated version of the 2000 railroad reform proposal. This year, the Executive has put forth a similar proposal within his 2002-03 Executive Budget 30-day amendment package.

This proposal would establish a ten year exemption for all newly constructed and rehabilitated capital assets, modifies the method by which a railroad system's reproduction costs are calculated, alters the schedules of exemption ratios, and phases-in the proposed tax benefits over a seven-year period. This proposal also establishes transition aid for local governments for a ten-year period.

The following highlights some of the major provisions within the Executive's 2002 Railroad Reform Proposal. The plan:

• Establishes a ten-year exemption for all newly constructed and rehabilitated capital assets;

• Modifies the determination of a system's reproduction cost for the purposes of calculating the railroad ceiling;

• Changes the schedule of exemption ratios for intrastate and interstate railroads;

• Authorizes DOT to review, approve, and monitor capital improvement proposals; and

• Establishes a time line for the phase-in of tax benefits to railroad companies and payment schedule of state assistance to localities.

In addition, this proposal changes the relationship between company earnings and the eligible exemption by increasing the exemption factors for all companies and reviving the relationship between earnings and exemptions that had sunset in 1992. It also limits the year-to-year decrease in the exemption factor to ten percent in an effort to help phase in the tax increases as rail companies improve their financial conditions. This bill would also authorize the Department of Transportation to review capital improvement proposals of railroad companies to establish the eligibility of their capital assets for the exemptions established under current law.

This proposal also includes some new provisions and minor technical amendments that were not included within the Executive's 2001 Article VII Budget Bills. The 2002 changes:

• Allows for railroad companies to reapply for additional ten-year exemption periods for all newly constructed and rehabilitated capital assets;

• Does not exclude "soft costs" when determining a system's reproduction cost for the purposes of calculating the railroad ceiling; and

• Adds a penalty of a 50% reduction in benefits that is granted for increased depreciation for railroad companies that has either failed to file an application needed for determining reproduction costs or has failed to meet the standards for improved services.

In an effort to minimize any potential negative impact that the localities would face, State assistance is provided to localities for a ten-year period. Years one and two provide 100 percent assistance, and the remaining eight years provide 50 percent assistance to localities.

Overview

The Personal Income Tax is imposed on resident individuals, and on non-resident individuals for income connected with New York sources. Taxpayers file returns each year based on a certain filing status such as single, married filing joint, or head of household, and may choose between a standard deduction or New York itemized deductions. There are also certain credits allowed which serve to reduce tax liability on a dollar for dollar basis.

New York's Personal Income Tax is primarily based on the federal income tax, and uses federal Adjusted Gross Income (AGI) as its base. From that point, there are certain additions or subtractions made that result in New York AGI. For example, interest on bonds issued by other states must be added, while social security benefits and certain pension annuity income is subtracted. Once New York AGI is determined, either the standard deduction or the New York itemized deductions are applied, followed by any applicable tax credits, resulting in final tax liability.

The Personal Income Tax is meant to be progressive in nature, and the current rate structure provides a base for making it that way. Depending upon a taxpayer's filing status, there are 5 different levels of tax rates imposed at different levels of income. The rates range from 4 percent of taxable income at the low-end, and gradually increase to the top rate of 6.85 percent. Additionally, the benefit of having some income taxed at lower than the top rate is recaptured as income rises above $100,000 per year so that all income is taxed at the top rate for taxpayers with income equal to or exceeding $150,000 annually.

Although the rate schedule of the Personal Income Tax makes it relatively progressive in comparison to other taxes, it does not in itself lessen the income disparity between low-income and high-income taxpayers. A recent publication by the Fiscal Policy Institute provided some insight into the widening of the income gap between low-income families and the wealthy that has taken place over the last decade in New York.¹⁷

According to this publication, between the late 1980s and late 1990s, the lower 40 percent of New York families with children experienced a decline in income of two percent. The middle 20 percent of New York families with children experienced some income growth during this period, but only at a rate of two percent. The top 20 percent of these families, on the other hand, experienced average income growth of 21 percent during this same period.

The publication goes on to discuss the "Top-to-Bottom" ratio, which is a comparison of the average income of the top 20 percent of income earners with children to the lowest 20 percent of New York families with children. Between the late 1980s and the late 1990s, this ratio increased from 10.4 to 12.8. This same ratio nationwide increased from 9.3 to only 10.0 during the same period.

Over the past several years, New York State has moved to reduce the income tax burden for workers with incomes below or substantially above the poverty line. The income tax system plays an important role in addressing the problems of poverty. Primarily, it allows policy makers to exclude initial earnings from the income tax to ensure that workers get their feet on the ground before being subject to income taxes.

At the federal level, tax changes in 1986 removed virtually all families with income below the poverty line from the federal income tax rolls.¹⁸ At the state level, providing low-income workers with refundable income tax credits, such as the Earned Income Tax Credit (EITC), can be an effective tool in reducing the burden of sales and property taxes faced by the poor and near poor.

A useful measure of the income tax burden on low-income workers is the income tax threshold, which is the level at which workers first begin to incur income tax liability. The threshold is typically derived by combining the value of credits, deductions and exemptions for which all workers in a particular family structure are eligible. Only the credits, deductions and exemptions applicable to all taxpayers in a certain income range are included in the calculation. For example, since the mortgage interest deduction is not available to workers who rent, its value is not calculated in determining the income tax threshold. On the other hand, since every low-income worker is eligible for the Earned Income Tax Credit, its value is factored in when calculating the income tax threshold.

A recent study published by the Center on Budget and Policy Priorities provides a comparison between New York State's income tax threshold and thresholds of other states for typical family structures.¹⁹

• In 2001, New York State's income tax threshold for a two-parent family of four was reported at $24,900, 37.5 percent above the poverty line of $18,104 for such families.

• The State income tax threshold for a single-parent family of three in 2001 was $23,700, 67.7 percent above the $14,129 poverty line income for these families.

Legislation enacted in 2000 increased the standard deduction to $14,600 for married couples filing jointly, increasing the Earned Income Tax Credit to 30 percent of the federal credit over a three-year period. This will serve to increase New York State's income tax threshold every year until 2003, when these law changes become fully effective.

In 2001, many states imposed income tax thresholds at levels that were below the poverty line.

Two-parent families of four:

The average income tax threshold among the 41 states and the District of Columbia with broad-based income taxes excluding New York was $18,822. New York's threshold was 32.3 percent higher than this average.

Single-parent families of three:

• Excluding New York State from the list of 41 states and the District of Columbia, the average income tax threshold was $16,371. New York's threshold for these families was 44.8 percent higher than this average.

There are several major components of the New York State income tax system that reduce the tax burden faced by low-income families. They include:

• The Standard Deduction;
• The Dependent Exemption;
• The Earned Income Tax Credit;
• The Child and Dependent Care Credit;
• The Real Property Circuit Breaker Tax Credit; and
• The Household Credit.

Taken together, these tax breaks remove a significant amount of income from taxation, and ensure that workers do not face a State income tax burden until their incomes are well above the poverty line.

Standard Deduction

Every taxpayer in New York State can deduct a specific amount from their gross income when calculating their income subject to taxation. For 2001, the standard deduction amounts are:

• $13,400 for married couples filing jointly;
• $10,500 for heads of households; and
• $7,500 for single individuals.

Legislation enacted in 2000 will raise the standard deduction for married couples filing jointly to $14,600 over a three-year period, which will be fully phased-in by Tax Year 2003. The standard deduction is intended to exempt income used to provide basic necessities from the state income tax. New York's standard deduction is one of the most generous among the 33 states and the District of Columbia that offer an optional standard deduction.²⁰

Dependent Exemption

The dependent exemption is a more modest means of reducing income tax liability. All taxpayers deduct $1,000 from their gross income for each dependent claimed. Thus, a couple with two dependent children would be allowed to lower their taxable income by $2,000. Since the dependent exemption is a deduction rather than a credit, it lowers taxable income rather than tax owed. Therefore, it is more valuable to taxpayers with higher incomes than to those with lower incomes. For example, a taxpayer in the highest tax bracket (6.85 percent) saves $68.50 in taxes for each dependent, while a taxpayer in the lowest bracket (4.0 percent) saves just $40.

Earned Income Tax Credit

The State Earned Income Tax Credit (EITC) was originally enacted in 1994, and is an increasingly important tool that provides support to working families. The credit is taken at 25 percent of the Federal EITC for Tax Year 2001, and is scheduled to increase in 2.5 percent increments until it reaches 30 percent of the federal EITC for tax years beginning in 2003. Taxpayers are eligible for the credit only if they work, with additional benefits if they are raising children. There is a limited credit available to workers between the ages of 24 and 65 who do not have dependent children. The value of the credit depends on a taxpayer's income and the number of children.

An important characteristic of the EITC that makes it particularly valuable for low-income workers is that it is "refundable."²¹ That means that any portion of the credit that exceeds a worker's tax liability is still given. Therefore, low-income workers benefit from the EITC even if their incomes are so low they have no income tax liability.

Child and Dependent Care Credit

The Child and Dependent Care Credit subsidizes New York families who must purchase such care in order to find or hold a job. The refundable State credit, like the EITC, is calculated as a share of the federal Child and Dependent Care Credit. Legislation enacted in 2000 provides a State credit of 110 percent of the federal credit to workers with incomes below $25,000. The credit is phased down to 100 percent of the federal credit for taxpayers with incomes between $25,000 and $40,000. The credit equals 100 percent of the federal credit for those with incomes ranging between $40,000 and $50,000, and is then phased down to 20 percent of the federal credit for incomes of up to $65,000. The State credit remains at 20 percent for those with incomes above $65,000.

The federal credit, which forms the basis for the New York State credit, works as follows. Irrespective of income or actual child care spending, the maximum amount of child care expenses that are allowed in calculating the federal credit is $2,400 per year for families with one child, or $4,800 per year for those with two or more children. Workers with income of $10,000 or less are eligible for a credit of 30 percent of eligible child care costs, with the rate scaled down by one percentage point for every $2,000 of income until it reaches a rate of 20 percent for workers with income over $28,000.

Real Property Circuit Breaker Tax Credit

Taxpayers may be eligible for a State income tax credit intended to compensate them for property tax paid. The program gets its name because it works like an electrical circuit breaker. Property taxes are reduced when the tax burden becomes too heavy relative to income. Renters, who pay the property tax indirectly through their rent payments, can claim 25 percent of their rent payment as their property tax equivalent. If property taxes consume more than a certain percentage of a taxpayer's income,²² the circuit breaker rebates half the excess, up to $75; for taxpayers aged 65 years or older, the maximum increases to $375.

There are several provisions that limit the value of the credit.

• Only taxpayers with incomes of less than $18,000 are eligible for the credit.
• Homeowners are eligible only if their property is valued at less than $85,000.
• Renters are eligible only if their monthly rent (net of any utilities included in the rent payment) is less than $450.

Household Credit

New York also provides a non-refundable household credit for taxpayers with incomes below $32,000. For married couples and heads of households, the household credit is worth a maximum of $90 plus $15 for each personal exemption claimed on the federal income tax form. This maximum is available to families with incomes less than $5,000; the credit is phased-down to $20 plus $5 for each personal exemption for families with incomes between $28,000 and $32,000. For single filers with income below $5,000, the credit equals $75; it is scaled down to $20 for individuals with incomes between $25,000 and $28,000.

Personal Income Tax collections are based on Adjusted Gross Income (AGI), which consists of four main components. The first component, wages, includes salaries, which are fixed, and bonus payments, stock options and other forms of compensation that vary based on individual performance and economic conditions. The other three components are capital gains, interest or dividends, and other income, which includes business and partnership income and taxable pensions.

Table 11 details the components of AGI through 1999, the most recent year for which data is available. Wages, for example, consist of more than two-thirds of AGI, and fluctuate the least in terms of growth from year to year. The other components, most notably capital gains, are more volatile from on year to the next, and their contribution to AGI as a whole can vary quite dramatically based on economic conditions. For example, in the mid 1990s, capital gains represented roughly 4.0 percent of AGI. When the economy grew faster in the late 1990s, capital gains represented a larger share, comprising 8.9 percent of AGI in 1998 and 10.2 percent in 1999.

An illustration of the progressive nature of the Personal Income Tax in New York State can be seen in Figure 14. In 1999, for example, taxpayers with AGI of over $500,000 represented only three-quarters of one percent of all New York taxpayers, while they were responsible for paying roughly one-third of all tax liability. Conversely, the greatest number of taxpayers are concentrated in the lowest income ranges. In fact, roughly two-thirds of all taxpayers in New York State paid less than 10 percent of the tax liability in 1999.

Figure 14

Figure 14 shows the effective tax rates in New York State by income class for 1999. A taxpayer's effective tax rate is the actual amount of tax owed as a percentage of that taxpayer's AGI. It can clearly be seen that the effective tax rate in New York State increases as income rises. At the lower end of the spectrum, the effective tax rate is negative because New York State provides assistance to low-income taxpayers through tax credits that are refundable. The most significant refundable tax credits are the Earned Income Tax Credit (EITC) and the Child and Dependent Care Credit.

Figure 15

During times of economic expansion, it is no surprise that tax receipts are inclined to increase faster than in a stagnant economy or during a recession. Much of the growth in New York State tax collections during the most recent economic expansion that came to an end in March 2001 was attributable to the Personal Income Tax. One reason for this is that bonus payments and capital gains tend to increase rapidly when the economy is doing well, and shrink when the economy is doing poorly.

According to the National Bureau of Economic Research (NBER), the current recession began in March 2001. In looking at the components of the Personal Income Tax since that time, it is apparent that bonus payments and capital gains have fallen off significantly. December and January, for example, are the two months of the year in which a large portion of collections are attributable to bonus payments and capital gains. Withholding collections, which would include bonus payments, declined by almost $500 million during this two-month period, a drop of approximately 10 percent. Installment payments, which would include capital gains, fell by more than $600 million, or almost 23 percent, during this same period.

Looking at the overall numbers does not complete the picture, however. It is also important to take a look at different groups of taxpayers to obtain a better understanding of what is happening. The average AGI for New Yorkers in 1999 was slightly over $53,000, yielding an effective tax rate of 4.6 percent for the year. Taxpayers at the high-end, those with AGI of over $100,000, for example, represented about 9 percent of all taxpayers and 50 percent of overall AGI, yielding an effective tax rate of approximately 6.0 percent. As a result, a greater change in AGI for these high-end taxpayers can be expected to have a proportionally larger effect on Personal Income Tax receipts than if the change in AGI is spread evenly among all taxpayers.

As a result of the recession that began in March 2001, it is already estimated that capital gains have declined significantly in 2001. Because taxpayers with AGI over $100,000 account for 86 percent of capital gains realizations, this estimated decline will have more of an effect on their tax liability for 2001 and for times of economic downturn in general. Since these taxpayers have a larger effective tax rate (6.0 percent in 1999) than those with AGI below at or below $100,000 (3.3 percent in 1999), it can be expected that there will be a relatively greater impact on Personal Income Tax collections. As stated previously, some of this is already apparent in looking at the collections for December and January.

Figure 16

As the economy gained strength throughout the 1990s, the tax liability shifted more and more to taxpayers with income of more than $100,000 per year. As seen in the graph below, from 1992 through 1995 these taxpayers accounted for less than 50 percent of total tax liability in New York. By 1999, that share had risen to 65 percent.

Figure 17

So what can be expected to happen during times of economic downturn? For one thing, it is likely that this share will drop off, not only because there will be fewer taxpayers making this kind of money, but also because of the expected falloff in the most volatile components of AGI, bonus payments and capital gains. This essentially means that when the economy does well, high-end taxpayers tend to pick up a larger share of tax liability than they do when the economy does not do well. At the other end of the spectrum, it means that taxpayers whose income is at the low-end pick up a larger share of the tab when the economy is in recession.

Alcoholic Beverage Fees

Distillers, brewers, retailers, wholesalers, and others who sell alcoholic beverages in New York State are required by Articles 4, 4-A, 5, and 6 of the Alcoholic Beverage Control Law to be licensed by the State Liquor Authority. Currently, 2,500 retail outlets and 25,000 bars and restaurants are licensed.

General Fund

The Committee Staff estimates receipts will total $36 million in SFY 2001-02, a 16.1 percent increase over SFY 2000-01. This estimate is $3 million higher than that of the Executive. Receipts have rebounded from a decline caused by a law change effective December 1, 1998 which allowed bars and restaurants (licensees) to purchase licenses on an annual or biennial basis, rather than a three-year basis as previously required. This change had the effect of "spinning down" revenues by $9.0 million in SFY 1999-00.

The Committee Staff forecasts receipts to total $35 million in SFY 2002-03, representing a 2.8 percent decrease, over SFY 2001-02.

Legislation submitted with the Executive Budget will increase various Alcoholic Beverage Control license and permit fees by approximately 15 percent for grocery stores and 108 percent for all other fees. The increases for grocery stores are based upon the alcoholic beverage producer index for 1992 and the 1976 index for all other establishments and will be phased-in over a three-year period beginning April 1, 2002. This legislation is expected to increase State revenues by $8 million in 2002-03, $13 million in 2003-04, and $23 million in 2004-05. The Committee Staff 2002-03 proposed law forecast, therefore, increases to $43 million.

Recent Legislative History

In 1997, the credit period offered to beer and wine retailers was decreased from 30 days to 15 days. Also, the payment period for license renewal relating to liquor licenses for on-premise consumption, special on-premise consumption, and bottle club liquor licenses was changed from a mandatory 3-year license to an optimal annual, biennial, or triennial license, effective December 1, 1998. These actions lowered revenues by $14 million in SFY 1999-00, and $4 million in SFY 2000-01.

New York State, through Article 18 of the Tax Law, currently imposes a tax on various Alcoholic Beverages, including beer, wine, and other spirits. The tax rate varies depending on the alcohol content. All of the receipts are deposited in the General Fund.

General Fund

The Committee Staff estimate for SFY 2001-02 is $179 million, which represents no growth over SFY 2000-01. The Committee Staff estimate is $2 million higher than that of the Executive.

The Committee Staff current law forecast for SFY 2002-03 is $180 million, an increase of 0.6 percent over SFY 2001-02. This increase can be attributed to an expected slight increase in liquor consumption, offset by a small decline in the consumption of beer and wine.

Legislation submitted with the Executive Budget extends current alcoholic beverage tax enforcement provisions. Specifically, it removes the expiration date of the enforcement tools that are set to expire on October 31, 2002, thus making these provisions permanent. In addition, it authorizes any peace officer acting pursuant to his/her duties, or police officer or any duly authorized representatives of the State Liquor Authority to inspect premises licensed under various sections of the Alcoholic Beverage Control Law. This legislation is expected to protect $1 million in alcoholic beverage receipts for SFY 2002-03, and approximately $3 million each year thereafter. Therefore, the Committee Staff SFY 2002-03 proposed law forecast increases to $181 million.

Recent Legislative History

In the 2000 legislative session, the Executive accelerated the effective date of the expansion of the Small Brewers exemption under the beer tax retroactively to January 1, 2000 from the original effective date of April 1, 2001. In addition, the Alcoholic Beverage Tax (ABT) on beer was reduced from 12.5 cents to 11 cents per gallon. This change will be effective September 1, 2003 and builds upon the one cent reduction that was passed with the SFY 1999-00 budget.

In 1999, the Small Brewers exemption was increased to the first 200,000 barrels of beer (31 gallons/barrel) from 100,000 barrels effective March 1, 2001. This reduction was estimated to reduce revenues by $3 million when fully implemented. In addition, the ABT was reduced one cent from 13.5 cents to 12.5 cents effective April 1, 2001.

In 1998, legislation was enacted which reduced the tax rate on beer from 16 cents-per-gallon to 13.5 cents-per-gallon. This became effective on January 1, 1999.

In 1997, legislation was enacted that repealed 1996 legislation, which required payment by Electronic Funds Transfer (EFT). The Alcoholic Beverage Enforcement provisions, which were due to expire on October 31, 1997, were extended until October 1, 2002.

In 1996, legislation was enacted to require alcohol distributors with an annual tax liability of more than $5 million to remit payment by means of EFT.

On January 1, 1996, the State excise tax on beer was reduced from 21 cents to 16 cents-per-gallon.

The Auto Rental Tax, imposed by Article 28-A of the Tax Law, applies to the rental of any passenger car with a gross vehicle weight of 9,000 pounds or less that can seat up to a maximum of nine passengers. The tax is imposed at a rate of five percent on the charges incurred for any rental for use in New York State. The tax does not apply to leases of one year or more. All of the receipts are deposited in the General Fund.

General Fund

Based on historical collection patterns, the Committee Staff estimates that SFY 2001-02 receipts will total $36 million, representing a decline of 7.7 percent. This estimate is the same as that of the Executive.

The Committee Staff forecast for SFY 2002-03 is $34 million on an All Funds basis. This represents a decline of $2 million or 5.6 percent.

All Funds

The Executive is proposing an Article VII bill that will dedicate receipts currently reserved for the General Fund to the Dedicated Highway and Bridge Trust fund as of April 1, 2002. This will reduce General Fund revenue by $34 million in SFY 2002-03.

Article 32 of the Tax Law, imposes a tax on banking corporations for the privilege of operating a banking business in a corporate manner, employing capital, owning or leasing property, or maintaining an office in New York State. The tax has been assessed at a rate of nine percent of Entire Net Income, but is currently being phased down to 7.5 percent. One of the three alternative bases, allocated capital, alternative minimum income, or fixed dollar minimum, must be used if it results in a greater amount of tax owed.

General Fund

The Committee Staff estimates that SFY 2001-02 receipts will total $451 million, or a decrease of 10.7 percent over SFY 2000-01. Year-to-date collections through January 2001 are down by 12.1 percent compared to last fiscal year. This is attributed to the fact that financial profits declined as a result of the economy-wide slowdown. Additionally, audit collections were disrupted by losses incurred due to the WTC attacks. This estimate is $6 million lower than that of the Executive.

The Committee Staff forecast for SFY 2002-03 is $520 million, which is an increase of 15.3 percent. Corporate profits are expected to make a strong rebound this year. Additionally, according to industry analysts several of the largest New York banks are expected to perform well in 2002. The Committee Staff expects these factors to contribute to healthy growth in bank tax collections in 2002-03. Finally, the forecast has been adjusted to account for recent tax cuts. The Committee Staff forecast is $17 million higher than the Executive forecast.

All Funds

Article 32 taxpayers also pay a Regional Business Tax Surcharge, which is levied at the rate of 17 percent on business activity carried on within the Metropolitan Commuter Transportation District (MCTD). The district includes the City of New York and seven surrounding counties (Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester).

Collections from the surcharge are deposited into the Mass Transportation Operating Assistance Fund, associated with the Metropolitan Transportation Authority.

All Funds receipts for SFY 2001-02 are expected to be $536 million, which is the sum of the General Fund estimate and the estimate of the Article 32 portion of the Regional Business Tax Surcharge. This estimate represents a decline of 9.4 percent over SFY 2000-01. The Committee Staff estimate is $7 million lower than the Executive estimate.

The Committee Staff All Funds forecast for SFY 2002-03 is $620 million, representing growth of 15.7 percent. The All Funds forecast is the aggregate of the Article 32 General Funds forecast and the forecast of the Article 32 portion of the Regional Business Tax Surcharge. The Committee Staff forecast is $20 million higher than the forecast of the Executive.

Recent Legislative History

Legislation enacted in 2001 extended until December 31, 2002 the provision of the 1985 Bank Tax Reforms and of the 1987 and 1988 Bad Debt Decoupling Legislation.

Legislation enacted in 2000 changed the allocation rules for Bank Mutual funds to match the corresponding rules for Mutual Funds operated by non-banking corporations. This method sources receipts to the location of the customer. In addition, financial services companies may elect to be held under their current article of taxation while the State studies the implications of the 1999 Federal Financial Services Modernization Act.

Legislation enacted in 1999 reduced the Entire Net Income (ENI) tax rate on banks from nine percent to 7.5 percent over three years. This had no significant effect on SFY 2000-01 collections, and reduced bank tax revenues by $45 million in SFY 2001-02.

In 1998, the Investment Tax Credit, currently available to manufacturing corporations, was extended to banks that are brokers or dealers in securities. The credit can be taken for equipment used in broker/dealer activity. To be eligible for the credit, employees using the eligible equipment must be located within New York.

In 1997, two measures were enacted affecting the Bank Tax. First, the tax was extended for four years, with an expiration date of December 31, 2000. In addition, banks, beginning in the year 2001, will be allowed a Net Operating Loss deduction, similar to that afforded to other corporations.

The Cigarette Tax, Article 20 of the Tax Law, is levied at a rate of $1.11 per package of 20 cigarettes on the sale of cigarettes within the State. However, the enactment of recent legislation (Chapter 1 of 2002 - HCRA 2002) will raise the tax rate to $1.50 per package of 20 cigarettes effective April 3, 2002. Of the total Cigarette Tax levied, currently 62.5 cents of the receipts are deposited into the General Fund and the remaining 48.5 cents are dedicated to fund the HCRA program.

The State levies a tax on all other tobacco products equal to 20 percent of the wholesale price of such products. In addition, there is an annual license fee of $100 for all retail establishments and $25 for every vending machine that sells cigarette and/or tobacco products.

General Fund

The Committee Staff estimates that Cigarette Tax receipts in SFY 2001-02 will total $520 million, a decline of 1.5 percent. This decline in receipts is attributable to decreased cigarette consumption as a result of the tax increase in 2000, and increasing health concerns related to the use of tobacco products. The Committee Staff estimate is $6 million more than that of the Executive.

The Committee Staff forecasts revenue of $500 million in SFY 2002-03, which represents a 3.8 percent decrease.

Legislation submitted with the Executive Budget changes the distribution rates used to fund HCRA programs from 49.55 percent of the receipts collected to 55.4 percent effective February 1, 2002 and then to 61.22 percent on and after April 1, 2002. As a result of this proposal, General Fund distribution rates will also change from 50.45 percent to 44.6 percent effective February 1, 2002 and then to 38.78 percent on and after April 1, 2002. The receipts that are deposited into the General Fund are anticipated to be held harmless under this proposal as a result of the enacted tax rate increase from $1.11 to $1.50 that occurs on April 3, 2002.

Recent Legislative History

Chapter 1 of the Laws of 2002 increased the Cigarette Tax rate from $1.11 to $1.50 per package of 20 cigarettes effective April 3, 2002. The additional 39 cents per pack increase is intended to be used to help fund the shift of various health care programs into the HCRA pool.

Chapter 262 of the Laws of 2000 contained various enforcement provisions in an effort to reduce cigarette bootlegging and reduce youth and adult smoking by banning Internet sales. A portion of this legislation, which prohibited carriers from delivering cigarettes to persons who are not licensed or registered cigarette dealers or agents, was ruled unconstitutional by the U.S. District Court of the Southern District of New York and was enjoined from going into effect. The Executive has filed an appeal to this ruling.

Chapter 1 of the Laws of 1999 enacted broad health care legislation known as HCRA 2000. A key component was a 55 cents per pack of cigarette increase with all proceeds of the increase devoted to health care programs.

Chapter 629 of the Laws of 1996 enacted strict Cigarette and Tobacco Tax enforcement measures, which were aimed at curbing the sale of bootlegged cigarettes in New York State. The increased enforcement provisions were estimated to increase SFY 1997-98 revenues by $13 million.

The Corporation Franchise Tax is comprised of Articles 9-A and 13 of the Tax Law. Article 9-A imposes a tax on corporations for the privilege of operating a business in a corporate form in New York State. The tax has been assessed at a rate of nine percent of Entire Net Income (ENI), but has been phased-down. For tax years starting between June 1999 and July 2000, the rate was 8.5 percent. For tax years starting between June 2000 and July 2001, the rate was 8 percent. For tax years starting after July 2001, the rate is 7.5 percent. One of the three alternative bases (allocated capital, alternative minimum income, or fixed dollar minimum) must be used if any of the three results in a greater amount of tax owed. Article 13 authorizes the tax on unrelated business income (UBT). The UBT is a tax on the unrelated business income of not-for-profit corporations and other organizations whose activities are otherwise tax-exempt.

General Fund

The Committee Staff estimates that receipts for SFY 2001-02 will total $1.598 billion, which is a decline of 31.6 percent from SFY 2000-01. This decline is mainly the result of an estimated reduction in corporate profits in 2001. In particular, following the September 11 events, the temporary disruption of the ability of New York City firms to conduct business led to some businesses leaving the State. The reduction is also partially explained by previously enacted tax cuts, which had an incremental effect of lowering receipts by approximately $290 million. This estimate is $157 million lower than that of the Executive.

The Committee Staff forecast for SFY 2002-03 is $1,849 million, representing growth of 15.7 percent over the current fiscal year. The forecast takes into account a strong expected return to growth in corporate profits. Recent monetary and fiscal stimulus measures support this expectation. The Committee Staff forecast is $88 million higher than that of the Executive.

All Funds

Corporate Franchise taxpayers pay an additional Regional Business Tax Surcharge, which is levied at the rate of 17 percent on business activity conducted within the Metropolitan Commuter Transportation District (MCTD). This district includes the City of New York and seven surrounding counties (Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester).

Collections from the surcharge are deposited into the Mass Transportation Operating Assistance Fund, associated with the Metropolitan Transportation Authority.

All Funds receipts for SFY 2001-02 are expected to be $1,819 million, which is the sum of the General Fund estimate and the estimate of the Article 9-A portion of the Regional Business Tax Surcharge. This estimate represents a decline of 30.9 percent over SFY 2000-01. The Committee Staff Estimate is $179 million lower than the Executive estimate.

The Committee Staff All Funds forecast for SFY 2002-03 is $2,113 million, representing an increase of 16.2 percent. The All Funds forecast is the aggregate of the Article 9-A General Funds forecast and the forecast of the Article 9-A portion of the Regional Business Tax Surcharge. The Committee Staff forecast is $111 million higher than the forecast of the Executive.

Proposed Legislation

The Executive proposes the following two tax relief measures:

• The Brownfield Redevelopment Tax Credit provides an incentive to restore abandoned brownfields to productive use. The credit consists of two components. The first includes credits for the purchase of property used on a brownfield site and for costs associated with environmental remediation. The second is a real property tax credit on remediated property located outside the MCTD for brownfields ranging from 10 to 100 acres in size. An enhanced real property credit is also available for brownfields of more than 100 acres located outside the MCTD. The proposed credits will apply to taxpayers who file under Articles 9, 9-A, 22, 32 or 33 for tax years beginning on or after January 1, 2003 for costs incurred and property placed in service on or after January 1, 2002. There is no fiscal cost to the State for fiscal year 2002-03.

• The Low-Income Housing Credit Increase would increase to $4 million the aggregate dollar amount of low-income housing tax credits that may be allocated to eligible investors in low-income housing. The program currently allows an aggregate amount of $2 million and is available to taxpayers who file under Articles 9, 9-A, 22, 32 or 33.

Recent Legislative History

In addition to legislation that moved utility companies to Article 9-A, a number of other measures were enacted in the 2000-2001 State Budget:

• Entire Net Income (ENI) rates for small businesses were lowered from 7.5 percent to 6.85 percent, to match the rate paid by unincorporated businesses under the Personal Income Tax. The rates for subchapter S corporations were also lowered;

• Empire Zones were created out of Economic Development Zones as places where businesses creating jobs can operate virtually tax-free;

• A green buildings credit was created for the construction of environmentally sound buildings;

• Homeowners associations that are incorporated were made exempt from the Corporate Franchise Tax fixed minimum tax if they had no taxable income;

• Investment Tax Credits (ITC) were made transferable in certain cases if the property on which the credits were earned is transferred to a spin off company;

• Provisions limiting the use of Investment Tax Credits owned by businesses being acquired were retroactively eliminated to January 1, 1997;

• A Transportation Access Credit was created to provide a wage credit incentive to businesses that make significant contributions to improving access to transportation from their facilities;

• Credits for the manufacture of alternative fuel vehicles, originally set to expire in 2001, were extended through 2003. Additionally, the $2.5 million program cap was converted to an annual cap;

• A new Low Income Housing Tax Credit (LIHTC) was created. Modeled after the Federal LIHTC, it provides an incentive for the construction of housing for needy populations. The criteria for the State credit were modified from the Federal criteria in order to target more middle-income households; and,

• The allocation rules for securities brokers were modified. Instead of sourcing receipts from services performed based on the location of such performance, they will now be sourced to the customer's mailing address.

The 1999-2000 State Budget lowered the Alternative Minimum Tax (AMT) rate from 3.0 percent to 2.5 percent and created additional credits against 9-A taxes:

• A credit for the manufacture of alternative fuel vehicles made within the state. The amount of the credit is half the incremental cost of manufacturing the vehicle, up to $5,000;

• For taxable years beginning on or after January 1, 2001, the credits available to Qualified Emerging Technology Corporations will be extended to include companies engaging in the remanufacture of certain commodities; and,

• Beginning in 2000, the Subsidiary Capital Tax will not apply for subsidiaries paying taxes under Articles 32 or 33 of the Tax Law.

• In 1998, the Legislature enacted measures that will have an impact on Corporate Franchise Tax revenues. Among these measures were the following:

• Reducing the rate imposed under the Entire Net Income base of the Corporate Franchise Tax over a three-year period, beginning July 1, 1999;

• Over a two-year period, which began July 1, 1998, both the Alternative Minimum Tax rate and the Fixed Dollar Minimum Tax will be reduced;

• Lowering the Subchapter-S differential so that S-Corporations will benefit from the Corporate Franchise Tax rate reduction;

• Extending the Investment Tax Credit to the financial services and banking industry for investments in equipment used for security trading practices, including computers and telecommunications technology. The credit, which is a five-year program, will only be allowed if employment in these industries is maintained in New York State; and,

• Providing tax credits to emerging technology companies. These included an employment credit equal to $1,000 for each employee hired above the base employment level and a capital investment credit equal to ten percent of any investments made which are held for at least four years (or twenty percent for investments held for at least nine years).

In 1997, various tax reductions were enacted, which will affect Corporate Franchise Tax collections when fully implemented:

• An extension of the Investment Tax Credit carry-forward period from 10 to 15 years; and,

• A tax credit for employers that hire workers with disabilities.

Articles 26 and 26-A of the Tax Law impose taxes on the transfer of property among individuals. Transfers of property upon death are taxed under the Estate Tax Law (Article 26), and transfers of property during an individual's lifetime are taxed under the Gift Tax Law (Article 26-A). All of the receipts are deposited into the General Fund.

General Fund

The Committee Staff estimates that SFY 2001-02 receipts will total $759 million, which is the same as last year. Of this, $754 million is derived from the Estate Tax and $5 million from the Gift Tax. The decline in receipts is partially attributable to the weak performance of the equities markets, which reduce the value of taxable estates. Congressional action earlier this year to gradually phase-out the Estate Tax increased the threshold to $1 million for 2002. The Committee Staff estimate is $14 million lower than that of the Executive.

The Committee Staff forecast for SFY 2002-2003 is $766 million, which represents increase of 0.9 percent in overall Estate Tax receipts. The forecast assumes a $31.5 million impact from Congressional action that gradually repeals the Estate Tax at the Federal level. The forecast assumes no receipts from the Gift Tax since it was repealed in January 2000.

Recent Legislative History

In 1999, legislation was enacted that conforms the New York State Estate and Gift Tax Law to Federal law providing a qualified family-owned business interest deduction. This allows heirs to exempt a total of $1.3 million from the New York State Estate Tax. This change was expected to reduce revenues by $8.0 million when fully implemented.

In 1998, legislation was enacted that conforms the Estate Tax to the effective Federal exemption of $1.3 million if the value of a family-owned farm or business constitutes 50 percent of the gross value of the estate.

In 1997, legislation was enacted which phased-in a reduction of the Estate and Gift Tax making the tax liability equal to the Federal credit for state estate taxes paid. As of October 1, 1998, estates valued under $300,000 became exempt from Estate Taxes. This threshold increased to the Federal exemption of $600,000 as of February 1, 2000, and now conforms to any additional Federal increase as long as the exemption does not exceed $1 million. In addition, as of January 1, 2000, the Gift Tax was repealed.

Article 21 of the Tax Law imposes a Highway Use Tax for the privilege of operating any vehicle on the highways of New York State. Three component taxes are imposed upon the operation of trucks, tractors, trailers and semi?trailers for their use of the highways:

• Truck Mileage Tax;
• Permits; and,
• Fuel Use Tax.

General Fund

All Highway Use Tax receipts are dedicated to the Highway and Bridge Trust Fund.

All Funds

The Committee Staff estimates that receipts in SFY 2001-02 will total $151 million, a decrease of $1 million, or 2.6 percent, over SFY 2000-01. This estimate is $1 million lower than that of the Executive.

The Committee staff forecast for Highway Use Tax receipts is $156 million for SFY 2002-03. This forecast is $1 million above that of the Executive.

Recent Legislative History

In 2000, the supplemental tax portion of the Truck Mileage Tax was reduced by 20 percent. This rate reduction is effective April 1, 2001.

In 1998, the supplemental portion of the Truck Mileage Tax was reduced by 50 percent, effective January 1, 1999. This resulted in a 25 percent overall rate reduction in the Truck Mileage Tax. This legislation also transferred revenues from General Fund Motor Vehicle Fees to hold the dedicated transportation funds constant.

Insurance Taxes are authorized by Articles 33 and 33-a of the Tax Law, and Articles 11 and 12 of the Insurance Law. Article 33 of the Tax Law imposes an income and premium tax on insurance companies. Article 33-a imposes a tax on independently procured insurance. Articles 11 and 12 impose retaliatory taxes and a tax on excess line brokers (brokers authorized to procure insurance from out-of-state carriers not authorized to do business in New York). The Franchise Tax on insurance corporations consists of a tax measured by allocated Entire Net Income (or one of three alternative bases, if a higher tax will result), plus a tax on subsidiary capital and an additional Franchise Tax based on gross premiums less certain deductions.

General Fund

The Committee Staff estimates that receipts in SFY 2001-02 will total $601 million, an increase of 2.7 percent. Growth in premiums is expected to be relatively strong due to higher expected demand for insurance as a result of the September 11 events. Although lower interest rates have lowered income from bonds, they can also be credited for the October surge in new car sales, which provided new underwriting opportunities. This estimate is $29 million lower than that of the Executive.

The Committee Staff forecast for SFY 2002-03 is $561 million, representing a decline of 6.7 percent. This forecast takes into account industry predictions of continued strong premiums growth, but is somewhat offset losses resulting from the WTC disaster. Additionally, continued rate reductions on the ENI base and an additional reduction in the non-life insurers premiums cap will lower total collections. The Committee Staff forecast is $45 million higher than that of the Executive.

All Funds

Article 33 taxpayers also pay a Regional Business Tax Surcharge, which is levied at the rate of 17.0 percent on business activity carried on within the Metropolitan Commuter Transportation District (MCTD). The district includes the City of New York and seven surrounding counties (Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester).

Collections from the surcharge are deposited into the Mass Transportation Operating Assistance Fund, associated with the Metropolitan Transportation Authority.

All Funds receipts for SFY 2001-02 are expected to reach $662 million, which is the sum of the General Fund estimate and the estimate of the Article 33 portion of the Regional Business Tax Surcharge. This estimate represents growth of 2.8 percent over SFY 2000-01. The Committee Staff Estimate is $32 million lower than the Executive estimate.

The Committee Staff All Funds forecast for SFY 2002-03 is $620 million, representing a decline of 6.3 percent. The All Funds forecast is the aggregate of the Article 33 General Funds forecast and the forecast of the Article 33 portion of the Regional Business Tax Surcharge. The Committee Staff forecast is $50 million higher than the forecast of the Executive.

Recent Legislative History

In 2000, legislation authorizing an additional $150 million in tax credits for the Certified Capital Corporations (CAPCO) program was enacted. CAPCOs are venture capital companies that are certified by the Insurance Department as meeting certain investment requirements and are required to invest in small New York based companies. Insurance companies that invest in CAPCOs will be able to claim a credit for 100 percent of their investments. In addition, the Investment Tax Credit (ITC) was extended to insurance companies engaged in securities trading.

In 1999, legislation was enacted to reduce the Entire Net Income (ENI) rate from nine percent to 7.5 percent over a three-year period. In addition, the cap of the tax as a percentage of premiums was reduced from 2.6 percent to 2.0 percent for property and casualty insurers. These changes will reduce insurance tax revenues by $50 million, when fully implemented. $30 million in credits were added to the CAPCO program.

In 1997, three Insurance Tax measures were instituted to help maintain the competitiveness of this industry in New York State. First, beginning in 1998, life insurance companies received a reduction in their premiums tax rate from 0.8 percent to 0.7 percent, and an increase in their March estimated payment from 25 percent to 40 percent. In addition, two other provisions enacted allowed for the formation of captive insurance companies and allow for investment in CAPCOs. The CAPCO program was established with $100 million in credits. A captive insurance company is a company that primarily insures the risks of a parent or its parents' affiliated companies. Captive insurers will be subject to a special premiums tax in lieu of the premiums and "income-base" tax that applies to other insurance companies.

The New York State Lottery is currently comprised of the Instant, Daily Numbers, Win 4, Pick 10, Take 5, Quick Draw, and Lotto games. A percentage of the revenue derived from the sale of each game, ranging from 20 to 45 percent, depending on the game, is dedicated to fund education. In addition, 15 percent of Lottery sales are placed into a Special Revenue account to cover the administrative expenses of the Lottery. The remaining revenues from each game's sales are the prize payouts to Lottery players. The administrative expenses are appropriated by the Legislature each year as part of the State Operating Budget. Any revenue remaining, after paying the administrative costs of the Lottery, is then transferred back to the Lottery receipts account and dedicated to education.

General Fund

The Committee Staff expects SFY 2001-02 revenues to total $1.597 billion, which exceeds the current Lottery Aid Guarantee of $1.525 billion by $72 million. However, the Executive Budget proposes to increase the Lottery Aid Guarantee to $1.562 billion so that all of the anticipated revenues estimated by the Executive are used in this fiscal year rather than being rolled into SFY 2002-03, which is the normal practice.

The increase in anticipated revenues over and above the Lottery Aid Guarantee is largely attributable to stronger than anticipated growth in Instant Games as a result of the legislatively authorized 65 percent prize payout that was implemented in October 1999. A large roll-up in the Lotto jackpot over the past few weeks has also contributed to the growth in collections. The Committee Staff estimate is the same as that of the Executive since any excess in revenues above the lottery Aid Guarantee is rolled into the next fiscal year.

The Committee Staff proposed law forecast for SFY 2002-03 is $1.973 billion, representing growth of 26.3 percent. This forecast is $63 million higher than that of the Executive.

The proposed law forecast reflects Executive initiatives to: 1) permanently extend authorization to operate Quick Draw ($147.7 million); 2) eliminate the restrictions placed on Quick Draw ($43.0 million); and, 3) to authorize a higher prize payout of 75 percent for up to three Instant Games in any given fiscal year ($17.5 million). In addition, the Lottery Division plans administrative provisions to Quick Draw which will generate an additional $36.4 million.

This forecast also reflects recent legislation authorizing the Lottery Division to enter into agreements with certain racetracks to operate video lottery terminals, which is expected to generate $60 million. Legislation allowing entrance into the Big Game, which is a multi-state lottery game, is anticipated to generate revenues of approximately $125 million in SFY 2002-03. Administrative provisions to introduce two promotional Lotto type games during the fiscal year are expected to bring in an additional $65.9 million.

The Committee Staff current law forecast is $1.729 billion, representing growth of 10.7 percent. This forecast is $63 million higher than that of the Executive.

Recent Legislative History

Legislation enacted in 2001 authorizes the Lottery Division to license the operation of video lottery gaming at Aqueduct, Monticello, Yonkers, Finger Lakes and Vernon Downs. Certain other racetracks may also be licensed pursuant to local law. This legislation expires three years after the first racetrack begins operating video lottery terminals, which is currently expected to be in late 2001.

Legislation enacted in 2001 also authorizes the Division of Lottery to enter into multi-state lottery game. The Lottery Division plans to enter into the Big Game, which is set to begin sometime late in the Spring of 2001.

Recent Administrative History

In December 2001, the Lottery Division began a second drawing at noon for Daily Numbers and Win 4. This change has already resulted in an increase in revenues, and is anticipated to bring in approximately $25.5 million in additional revenues for SFY 2001-02.

In September 2000, the Lottery added two Take Five drawings per week to the existing five drawing per week in order to boost sales. This has resulted in a large increase in sales since implementation.

In addition to the recent legislative authorization to increase the prize payout for Instant Games to 65 percent, sales for these games have increased due to the implementation of a Retailer Management Plan. Under the plan, the Lottery sends representatives every two weeks to most retailers that sell Instant Games tickets in order to help them manage their inventory of tickets.

Because the necessary legislation authorizing a multi-state lottery game like Powerball was not enacted in 2000, the Lottery announced the re-introduction of a promotional Millennium Millions game, tickets for which were sold starting in October 2000. The jackpot for this game rolled twice, producing revenues of $54.5 million, excluding the unused administrative surplus.

In March 1999, the Lottery offered a new Regional Lotto game to combat the perception that winners are always from another part of the State. This game ended in November 1999, and was replaced by a special Millenium Millions Lotto game. Excluding the administrative surplus, the Regional Lotto game produced $17.6 million in revenues dedicated to education, and the Millenium Millions game contributed $29.2 million for SFY 1999-00.

Miscellaneous Receipts are different from the Other Taxes in that they are not collected pursuant to any specific Article in the New York State Tax Law. Miscellaneous Receipts are derived from a wide range of revenue sources. There are currently six categories comprising the collections of these receipts: Abandoned Property, Federal Grants, General Fund Refunds and Reimbursements, Investment Income, Licenses and Fees, and Other Transactions. All of the receipts are deposited in the General Fund.

General Fund

The Committee Staff forecast for SFY 2002-03 is $1.619 billion, which represents a decrease in overall Miscellaneous Receipts of 0.2 percent, or $3 million, over SFY 2001-02. This reduction is mainly attributable to the net effect of an expected decline in investment income, resulting from lower balances in the Short Term Investment Pool (STIP), that is mostly offset by various transactions reflecting excess funds totaling $216 million.

Recent Legislative History

Legislation in 2000 provided amnesty on interest and penalties for private health care facilities that settled outstanding assessments by the end of SFY 2000-01. This measure increased revenues by $16 million in SFY 2000-01.

Legislation in 1999 accelerated the scheduled elimination of assessments imposed on hospitals, nursing homes and home care providers by one quarter, from April 1, 2000 to January 1, 2000. This measure reduced revenues by $41 million in SFY 1999-00.

Legislation in 1997 enacted a five-year phase-out of the Health Care Provider Assessments. The assessments levied on hospitals and nursing homes began phasing-out during SFY 1997-98 and will be completely phased-out in SFY 2001-02. The estimated impact is $540 million when fully implemented.

Currently, Article 12?A of the Tax Law imposes a tax upon motor fuel sold within New York State. It applies to motor fuel imported, manufactured or sold within the State by a distributor. For diesel, however, the tax applies to the first sale or use. The tax rate is eight cents per gallon for both motor fuel and diesel.

General Fund

Receipts for SFY 2001-02 were entirely earmarked by law to the dedicated transportation related funds, which are the Dedicated Highway and Bridge Trust Fund, the Dedicated Highway and Bridge Trust Fund, the Dedicated Mass Transportation Fund, the Emergency Highway Reconditioning and Preservation Fund, and the Emergency Highway Construction and Reconstruction Fund.

All Funds

For SFY 2001-02 All Funds receipts are estimated to total $536 million while for SFY 2002-03 All Funds receipts from this tax will total $517 million.

Recent Legislative History

Beginning April 1, 2001, the last portion of General Fund receipts from these taxes went to the Emergency Highway Fund Accounts. Receipts from gasoline taxes are dedicated as follows:

The Dedicated Funds will receive 100 percent of Article 12-A taxes beginning April 1, 2003. The new distribution would be as follows: 82 percent to the Dedicated Highway and Bridge Trust Fund and, 18 percent to the Dedicated Mass Transportation Trust Fund. Receipts from the tax on diesel will be dedicated as follows: 63 percent to the Dedicated Highway and Bridge Trust Fund and, 37 percent to the Dedicated Mass Transportation Trust Fund.

All receipts from this tax will go to the Dedicated Funds Accounts after April 1, 2003. Current dedication will also be switched to the Dedicated Funds Accounts which comprises the Dedicated Highway and Bridge Trust Fund, the Dedicated Mass Transportation Trust Fund, and the Mass Transportation Trust Fund.

Revenue from Motor Vehicle Fees comes from over 50 different license, registration, service, and penalty receipts. Passenger and commercial vehicle registrations, and licensing fees are the largest components.

General Fund

The Committee Staff estimates Motor Vehicle Fees to total $191 million in SFY 2001-02, representing a 43.5 percent decrease. This estimate is $11 million below that of the Executive. Increased dedication of Motor Vehicles registration fees and the transfer of $169 million to the Dedicated Transportation Funds explain the expected decline in receipts.

The Committee Staff proposed law forecast for SFY 2002-03 is $56 million, which includes a proposed transfer of $171.6 million to the Dedicated Funds Accounts. Moreover, legislation passed in 2000 earmarked an additional 31 percent of registration fees to the Dedicated Highway and Bridge Trust Fund as well as authorized an additional transfer of $28.4 million to such funds.

All Funds

All Funds receipts are expected to total $601 million in SFY 2001-02. This estimate reflects additional fees from reflectorized plates, charges to retain plate numbers and eight-year license renewal fees.

The Committee Staff forecast for SFY 2002-03 is $571 million. This forecast reflects a full year of licenses renewals and nine months of new reflectorized plate fees.

Recent Legislative Changes

In 2000 the Department of Motor Vehicles was authorized to reissue license plates and renew licenses for a period of eight years.

Due to legislation passed in 2000, an additional 23.5 percent of registration fees will be dedicated to the Dedicated Highway and Bridge Trust Funds and the dedicated Mass Transportation Trust Fund, receiving 60.3 percent and 8.7 percent of registration fees, respectively.

In 1998, auto registration fees were reduced by 25 percent and the percentage earmarked to the dedicated transportation fund was increased to hold this fund neutral from the fee reduction.

Article 19 of the Tax Law imposes a three percent tax on gross receipts from boxing and wrestling exhibitions, including receipts from broadcasting rights. Article 2 of the Racing, Pari-Mutuel Wagering and Breeding Law levies a State tax of four percent on admissions charges to racetracks and simulcast theaters. All of the receipts are deposited in the General Fund.

General Fund

The Committee Staff estimates that receipts from Other Taxes in SFY 2001-02 will total $1 million. This estimate is the same as that of the Executive.

The Committee Staff forecast for SFY 2002-03 is also $1 million.

Recent Legislative History

Legislation enacted in the 1999 State Budget reduced the rate of the gross receipts tax for boxing and wrestling exhibitions to 3 percent from 5.5 percent effective October 1, 1999. This legislation also imposed a cap on the total tax at $50,000 per match for gross receipts from ticket sales, and $50,000 per match for gross receipts from broadcasting rights.

The Racing, Pari-Mutuel Wagering and Breeding Law imposes a Pari-Mutuel Tax on bets placed at racetracks, simulcast theaters and Off-Track Betting (OTB) facilities. For-profit and not-for-profit racing associations, as well as OTB Corporations, are taxed a percentage of their total betting pools for the privilege of conducting pari-mutuel wagering. All of the receipts are deposited in the General Fund.

General Fund

The Committee Staff estimates that receipts will total $30 million in SFY 2001-02, representing an increase of 3.4 percent over last fiscal year. This estimate is $1 million higher than that of the Executive.

The Committee Staff forecast for SFY 2002-03 is $29 million, representing an $1 million decline over SFY 2001-02.

Recent Legislative History

In 2001, the takeout on New York Racing Association (NYRA) was lowered, the percentage of takeout going to purses was decreased, a "pick six" wager was allowed, provided two out-of-state simulcasts on those days that NYRA is conducting racing at Saratoga Race Course and added an additional thoroughbred simulcast from out-of-state during the winter months from January 15 through April 15, and lowered tax rates for the additional simulcasting racing.

In 2000, the Pari-Mutuel Tax was eliminated on races taking place at NYRA racetracks for three days surrounding the Breeder's Cup event. This provision sunsets in December 31, 2002.

In 1999, the budget legislation reduced the tax on "on track" wagering at NYRA facilities from 3.7 to 2.6 percent effective September 10, 1999, and provided for a further reduction to 1.6 percent effective April 1, 2001. These rate reductions expire on December 31, 2007. The provisions also direct money to NYRA purses and the NYS Thoroughbred Breeding and Development Fund.

In 1998, the Legislature extended for four years through June 30, 2002, provisions affecting various statutes relating to takeouts, tax rates, and the purse payments of non-profit racing, as well as authorizations for on-track and off-track simulcast wagering.

In 1997, NYRA was authorized to conduct racing at Belmont, Aqueduct, and Saratoga through December 31, 2007. Furthermore, various simulcasting provisions were extended for an additional one year, including in-home experiment, telephone wagering and out-of-state harness simulcasting.

NYRA was also required to use the first $2 million in annual profits for increasing purses. Any additional profits are to be used to reduce debt obligations.

Article 22 of the Tax Law imposes a Personal Income Tax (PIT) on the income of New York State individuals, estates, and trusts. Tax collections are received through employee withholding, estimated tax payments, payments accompanying tax returns, late payments, and assessments.

General Description

PIT receipts contribute over one-half of all receipts to the General Fund. Withholding is the single largest component, comprising roughly 80 percent of PIT receipts.

New York State's definition of income closely mirrors federal rules, which include wages, salaries, capital gains, unemployment compensation, and interest and dividend income. The sum of these sources is Federal Adjusted Gross Income (FAGI). New York Adjusted Gross Income (NYAGI) is calculated starting with Federal Adjusted Gross Income, from which certain income is added or subtracted to arrive at New York Adjusted Gross Income.

The New York standard deduction or itemized deductions, and a dependent exemption are subtracted from NYAGI, which yields New York State Taxable Income. Taxes are calculated based on this amount. Certain credits are then subtracted from the calculated tax to determine total tax liability.

General Fund

The Committee Staff estimates that SFY 2001-02 receipts will total $26.842 billion, which reflects an increase of 13.9 percent from SFY 2000-01. However, this includes a $2.905 billion Refund Reserve transaction, which is an administrative adjustment used to transfer General Fund surpluses from one fiscal year to the next, a STAR transfer of $1.310 billion, and a deposit of $250 million into the Debt Reduction Reserve Fund. This estimate is $135 million lower than that of the Executive.

The largest component of the Personal Income Tax is withholding. Employers withhold tax from wages based on the estimated liability of each employee. Receipts from withholding also include taxes withheld on bonus payments paid to employees.

Withholding receipts are projected to total $20.125 billion in SFY 2001-02. This represents a decrease of $830 million, or 4.0 percent from SFY 2000-01. This decline is attributable to several factors, including rising unemployment rates and falling wages as a result of the on-going economy-wide recession.

Estimated payments are projected to total $6.360 billion. This represents a decrease of $514 million, or 7.5 percent from last fiscal year. Estimated payments consist of quarterly payments made by certain taxpayers on their estimated tax liability. These taxpayers historically have consisted of high income earners, or people who realize significant capital gains. The recent decline of the financial markets in 2001 is expected to lower capital gains realizations by approximately 30.5 percent over 2000.

The Committee Staff current law forecast for Personal Income Tax collections is $23.566 billion in SFY 2002-03.

Legislation submitted with the Executive Budget will reduce to $100,000 from $400,000 the aggregate annual withholding tax liability that triggers required participation in the Electronic Funds Transfer (EFT) program. This proposal will provide a one-time acceleration of personal income tax receipts of $25 million into SFY 2002-03 from SFY 2003-04.

Additionally, a budget proposal for new technology allowing the Tax Department to validate tax information more quickly and improve the selection process for identifying areas of noncompliance is expected to increase audit collections by $130 million in SFY 2002-03.

There are also Executive initiatives to make technical amendments to conform the tax law to the intent of certain legislation passed in 2000 in relation to the college tuition deduction/credit, and to the petroleum storage tank credit. In addition to these technical amendments, the Executive proposes to extend the petroleum storage tank credit for one additional year.

The Committee Staff proposed law forecast for Personal Income Tax collections, therefore, is $23.721 billion in SFY 2002-03.

Withholding receipts are projected to increase to $21.249 billion in SFY 2002-03. This represents growth of $1.124 billion or 5.6 percent over SFY 2001-02. The Committee Staff wage growth forecast of 3.9 percent will allow withholding to increase by 5.6 percent.

The Committee Staff forecasts that estimated payments will total $6.581 billion representing an increase of $221 million or 3.5 percent from SFY 2001-02. The Committee Staff forecasts that capital gains will grow by 14.9 percent in 2002, after an estimated 30.5 percent decline in 2001. This will contribute to an increase in estimated payments of 3.5 percent in SFY 2002-03.

All Funds

In 1998, the Legislature created the School Tax Relief (STAR) Fund to help finance school tax reductions under the STAR program. Every fiscal year, revenues from the Personal Income Tax are diverted to finance this State-funded program. As a result, $1.310 billion in General Fund revenues will be dedicated in SFY 2001-02. In SFY 2002-03, an estimate $2.630 billion will be diverted to fund the Program.

Recent Legislative History

In 2000, the Legislature enacted Personal Income Tax provisions, which:

• Increased the amount of the State Earned Income Tax Credit (EITC) from the current 25 percent of the federal credit to 30 percent, phased-in over a two-year period. Beginning in Tax Year 2002, the State credit will be 27.5 percent of the federal credit. Beginning in 2003, the State credit will be 30.0 percent of the federal credit;

• Enhanced the current Child and Dependent Care Credit to 110 percent of the Federal credit for taxpayers with income of less than $25,000 beginning in Tax Year 2000. The credit will be phased-down from 110 percent to 100 percent of the Federal credit for taxpayers with income between $25,000 and $40,000. The credit will equal 100 percent of the Federal credit for incomes between $40,000 and $50,000. The credit will be phased-down to 20 percent of the Federal credit at $65,000;

• Provided taxpayers with a choice of an itemized deduction or a refundable credit for qualified college tuition expenses. The itemized deduction will be 100 percent of qualified tuition expenses up to $10,000. For qualified tuition expenses of up to $5,000, the credit will be the lesser of $200 or tuition paid. For qualified tuition expenses between $5,000 and $10,000, the credit will be equal to four percent of tuition paid. This proposal will be phased-in over a four-year period beginning in Tax Year 2001;

• Increased the standard deduction for married taxpayers filing joint returns and widowers from $13,000 to $14,600 over a three-year period. Beginning in Tax Year 2001, the standard deduction will be raised to $13,400. Beginning in Tax Year 2002, the standard deduction will be increased to $14,200. Beginning in Tax Year 2003 and thereafter, the standard deduction will be increased to $14,600;

• Provided taxpayers with an income tax credit equal to 10 percent of their long-term care insurance premiums beginning in Tax Year 2002. Both individuals and businesses that purchase this insurance for their employees will qualify for the credit;

• Provided taxpayers with an income tax credit equal to 20 percent of the cost of purchasing and installing a fuel cell to supply power to their homes, up to a maximum of $1,500; and,

• Provided homeowners who replace a residential fuel oil storage tank with a $500 income tax credit. The credit will be available for only two years beginning in Tax Year 2001, and a homeowner will be eligible to receive this credit only once.

In 1999, the Legislature enacted Personal Income Tax provisions which:

• Increased the EITC from 20 percent of the federal credit to 22.5 percent in Tax Year 2000, and to 25 percent in tax years beginning in 2001;

• Extended the emerging technology tax credits to businesses who pay tax under the Personal Income Tax;

• Enhanced the farmer school tax credit to expand the definition of qualified agricultural property to include land set aside or retired under a federal supply management or soil conservation program; and,

• Amended the State's innocent spouse relief measures to conform to that provided by the federal government.

In 1998, the Legislature enacted Personal Income Tax provisions, which:

• Enhanced the Child and Dependent Care Credit to 100 percent of the Federal credit for taxpayers with incomes of $35,000 or less. The credit will be phased-down to 20 percent of the Federal credit for taxpayers with incomes between $35,000 and $50,000;

• Accelerated the date for which the base acreage amount used when determining the Agricultural School Tax Credit increases from 175 to 250 acres from Tax Year 1999 to Tax Year 1998;

• Created an exclusion from the Personal Income Tax for income and assets derived from assets stolen from, hidden from, or otherwise lost to Holocaust victims and their families; and,

• Allowed for the one-time deferral of capital gains taxation if the gain is reinvested in an emerging technology company.

In 1997, the Legislature enacted Personal Income Tax provisions which:

• Increased the Child and Dependent Care Credit to 100 percent of the Federal credit for taxpayers with adjusted gross income of $17,000 or less;

• Created the New York State College Choice Tuition Savings Program. New York State residents and non-residents can establish savings accounts to pay for qualified higher education expenses;

• Enhanced the Farm School Property Tax credit by exempting up to the first $30,000 of non-farm Federal gross income in the determination of eligibility for the credit. It also provides for subtracting principal payments on farm debt when calculating the income limit for the phase-out of the credit;

• Extended the Employment Incentive Credit and Economic Development Zone Employment Incentive Credit to businesses whose owners are taxable under the Personal Income Tax; and,

• Established a new solar credit for residential investment in solar electric generating equipment.

In 1996, the Legislature enacted Personal Income Tax provisions which:

• Enhanced the Child and Dependent Care Credit by increasing the credit to 30 percent of the Federal credit in 1996, and to 60 percent in 1997, for taxpayers with incomes less than $10,000. The credit is phased down to 20 percent for taxpayers with income greater than $14,000. The credit was also made refundable; and,

• Established a tax amnesty program in 1996, which was provided to taxpayers with outstanding liability for Tax Years up to and including 1994. Penalties, but not interest, were waived. Gross Personal Income Tax revenues collected exceeded $130 million under the program.

In 1995, the Legislature enacted a three-year Personal Income Tax reduction plan which:

• Reduced the top rate from 7.875 percent in 1994 to 6.85 percent in 1997;

• Accelerated the increase in the EITC for 1996 to a fully phased in level of 20 percent of the Federal credit;

• Reduced the EITC in 1996, and every year thereafter, by the amount of the Household Credit used by the taxpayer;

• Introduced an Excess Deductions Credit for 1995 only, to ensure that middle income itemizers will not experience a tax increase due to the change from the 5-bracket to the 4-bracket structure; and,

• Maintained the scheduled increases in the standard deduction from $9,500 for married couples filing jointly in 1994 to $13,000 in 1997.

Article 13-A of the Tax Law imposes the Petroleum Businesses Tax (PBT) for the privilege of extracting, producing, refining, manufacturing or importing petroleum in New York State. Imposition of the tax occurs at different points in the distribution chain, depending upon the type of petroleum product.

General Fund

All Receipts from the Petroleum Business Tax are set aside for the Dedicated Transportation Funds. The dedication is as follows: 19.7 percent to the Mass Transportation Operating Assistance Fund , and 80.3 percent to the Dedicated Mass Transportation Trust Fund and the Dedicated Highway and Bridge Trust Fund,²⁵

All Funds

In SFY 2000-01, All Funds receipts are estimated to total $989 million, a 1.9 percent increase. Receipts for SFY 2002-03 are projected to total $1.003 billion, a 1.4 percent increase.

Recent Legislative History

In 2000, legislation reduced by 33 percent the tax rate for commercial heating oil, effective September 1, 2002. Also, the PBT minimum tax was repealed effective March 1, 2001.

In 1997, additional refunds and credits were created for the Petroleum Business Tax and Motor Fuel Taxes for commercial vessels where the purchases of fuel exceed consumption of fuel in the State.

In 1996, legislation was enacted that: reduced the tax on "railroad diesel" by seven cents per gallon; eliminated the Petroleum Business Tax on non-automotive diesel motor fuel and residual used in manufacturing; increased the basic credit or reimbursement on residual petroleum products or diesel fuel for utility companies by 0.5 cents per gallon; reduced the automotive diesel motor fuel component by 1.75 cents per gallon; and changed the distribution of revenues from the Petroleum Business Tax to hold the transportation funds and MTOAF neutral from these reductions. Furthermore, other provisions included: the reimbursement of the Petroleum Business Tax on aviation and kero-jet fuel purchased in-state but consumed out-of-state; expanded the time for which taxpayers may claim a refund for taxes paid on fuel purchased in-state but consumed out-of-state; and allowed taxpayers to file for refunds for taxes paid up to four years after the tax was paid.

The Real Estate Gains Tax is imposed, pursuant to Article 31-B of the Tax Law, at a rate of 10 percent. This tax is placed on the gains from certain large realty transfers, where the consideration is $1 million or more and that took place prior to June 16, 1996. All of the receipts are deposited into the General Fund.

General Fund

The Committee Staff estimates that Real Estate Gains Tax collections will exceed refunds by $5 million in SFY 2001-02. This estimate reflects the repeal of this tax effective for transfers that occurred after June 15, 1996. Collections totaled approximately $4 million for the first three quarters of this fiscal year. Receipts primarily reflect collections from transactions that occurred prior to June 15, 1996.

The Committee Staff forecasts net receipts of $2 million for SFY 2002-03. Revenues from this tax will diminish as taxpayers begin to complete payments on existing installment agreements.

Recent Legislative History

Chapter 309 of the Laws of 1996 repealed the Gains Tax, retroactive to all conveyances of property that took place after June 15, 1996.

The Real Estate Transfer Tax, Article 31 of the Tax Law, is levied on real property transfers where the value of the interest in the property exceeds $500. The rate is $2 for each $500, or a fraction thereof, of net consideration. An additional tax of one percent is levied on residential transfers where the consideration is over $1 million. The party that sells the property pays the tax.

General Fund

Real Estate Transfer Tax revenues are entirely dedicated to environmental programs.

All Funds

The Committee Staff estimates Real Estate Transfer Tax receipts of $387 million in SFY 2001-02, a 4.4 percent decrease. In SFY 2001-02, collections were bolstered from several large real estate transactions. Under current law, $112 million in Real Estate Transfer Tax revenue is dedicated to the Environmental Protection Fund, and all remaining revenue is dedicated to pay debt service on the Clean Air/Clean Water Bond Act.

The Committee Staff forecast for SFY 2002-03 is $379 million, a 2.1 percent decrease. This forecast is based upon a weakening real estate market within New York City. Specifically, the current decline in asking rents and increases in vacancy rates in Manhattan are expected to continue into SFY 2002-03.

Legislation submitted with the Executive Budget extends for three years, until September 1, 2005, the tax rate reductions for the State and New York City Transfer Taxes for conveyances of real property to existing real estate investment trusts (REITs). This legislation is expected to generate a $0.4 million State revenue loss in SFY 2002-03 and $0.8 million each year thereafter. This proposal will not affect the forecasted 2002-03 All Funds net collections because it is an extension of current law. Therefore, the Committee Staff proposed law forecast remains $379 million.

Recent Legislative History

Legislation enacted in 1999 extended the reduced rate for the State and New York City Transfer Taxes for Real Estate Investment Trusts (REITs) through September 1, 2002. The current rates are reduced for these transfers from $2 to $1 per $500 of conveyance under the New York State Real Estate Transfer Tax Rate and it was estimated that it will cost the State $1.3 million in SFY 1999-00.

The Sales and Compensating Use Tax, imposed by Article 28 of the Tax Law, is a broad-based consumption tax levied on the sale of tangible personal property, excluding items such as food and products used in manufacturing, and including a limited number of services such as trash removal and interior design services. The State Sales Tax rate is four percent.

General Fund

The Committee Staff estimate for SFY 2001-02 is $6.161 billion. This represents a decline of $111 million, or 1.8 percent, from SFY 2000-01. This estimate is $41 million higher than that of the Executive. Through January 2002, year-to-date collections have declined by 2.4 percent.

Collections for the remainder of the fiscal year are expected to rebound somewhat from earlier patterns. Consumer confidence has begun to show signs of improvement and in January moved above levels registered just after September 11.

The Committee Staff forecast for SFY 2002-03 is $6.381 billion, which represents growth of $220 million, or 3.6 percent. This forecast is based on the expectation that the economy will begin to recover in 2002, though employment growth will continue to lag that of the nation. The Committee Staff forecast is $96 million higher than that of the Executive.

The Executive has submitted Article VII legislation that reduces the threshold for requiring sales tax vendors to make payments via certified check or EFT to $500,000 of annual sales tax liability from the current threshold of $1 million. This proposal is expected to generate a one-time increase in revenue of $32.5 million in SFY 2002-03.

An additional provision in the Executive's Article VII submission provides a new index for use in calculating pre-paid sales tax on cigarettes. The Executive expects this provision will generate an additional $5.8 million in revenue in SFY 2002-03.

The Legislature recently passed legislation that raised the Cigarette Tax by 39 cents, to $1.50 per pack. This action is expected to generate additional sales tax revenues in SFY 2002-03 of $11.3 million.

All Funds

The All Funds category is comprised of the General Fund, the local Government Assistance Tax Fund, and the Mass Transportation Operating Assistance Fund (MTOAF). The Committee Staff estimates that All Funds receipts in SFY 2001-02 will total $8.583 billion. All Funds receipts in SFY 2002-03 are projected to total $8.877 billion.

One quarter of the receipts generated from the State Sales Tax are dedicated to pay for the debt service of the Local Government Assistance Corporation (LGAC), which was created in 1990 to eliminate the annual Spring borrowing. Once the debt service obligations are paid, any remaining excess revenue is then transferred back to the General Fund along with certain other transfers. In SFY 2001-02, $2.172 billion will be transferred back to the General Fund. A total of $2.361 billion is forecasted to be transferred back to the General Fund in SFY 2002-03.

In 1981, MTOAF was created to help finance the State's public transportation system. A portion of the revenue is derived from the 0.25 percent Sales Tax that is imposed in the Metropolitan Commuter Transportation District (MCTD). In SFY 2001-02, the Committee Staff estimates that $370 million will be deposited in MTOAF. Revenues dedicated to MTOAF are expected to total $371 million in SFY 2002-03.

Recent Legislative History

The permanent exemption for articles of clothing and footwear costing less than $110 began on March 1, 2000. This exemption is the main reason for the expected slow growth in Sales Tax revenues for SFY 2000-01.

Other provisions enacted in 2000 involving the Sales Tax include the following:

• The current exemption for farmers was expanded to include plumbing and electrical systems and became applicable to commercial horse boarding operations effective September 1, 2000;

• A broad-based exemption was granted to web-hosting facilities effective September 1, 2000;

• All sales of food and drink sold through vending machines costing seventy-five cents or less became exempt effective September 1, 2000;

• The current exemptions provided to the telecommunications industry were enhanced and modernized effective September 1, 2000;

• Machinery and equipment utilized by the cable industry to upgrade to digital television and applicable services will be exempt for the period September 1, 2000 through September 1, 2003;

• Machinery and equipment used in television broadcasting became exempt September 1, 2000;

• Sales tax on the unbundled transmission and distribution of energy will be phased-out over a three-year period, fully effective September 1, 2003;

• Certain types of pollution control equipment will be come exempt effective September 1, 2001; and,

• All tangible personal property and services used or consumed by qualified businesses within an Empire Zone will become exempt effective March 1, 2001.

The Corporations and Utilities Tax, Article 9 of the Tax Law, imposes a gross receipts and franchise tax on regulated utilities and industries. The major industries subject to this tax are utilities (gas, electric, water and steam), telecommunications (telephone and telegraph), and transportation industries (trucking and railroad). The majority of revenue from Article 9 is deposited into the General Fund. However, a portion of the tax imposed on the capital stock of telecommunications and transportation companies is dedicated to the Mass Transportation Operating Assistance Fund (MTOAF).

General Fund

The Committee Staff estimates receipts for SFY 2001-02 to total $1.008 billion, an increase of 23.4 percent. This estimate is $21 million higher than that of the Executive. Receipts take into consideration legislation enacted last year to reinstate the gas import tax, preserving $114 million in receipts. The communications services industry aided by relative low prices and strong demand for services explain the growth. In addition, an extraordinary refund of $114 million for Section 186 was accounted during the month of October 2000 which reduced receipts from the previous fiscal year.

The Committee Staff forecast for SFY 2002-03 is $1.022 billion, representing an increase of 1.4 percent. The Committee Staff forecast is $27 million higher than that of the Executive.

All Funds

Through a Special Revenue Fund, the Metropolitan Transportation Operation Assistance Fund (MTOAF) receives 20 percent of collections from Sections 183 and 184 of the Tax Law. In addition, businesses operating in the Metropolitan Commuter Transportation District (MCTD) are subject to a 17 percent surcharge on their liability attributable to the MCTD to be deposited in the Metropolitan Transportation Operation Assistance Fund. The amount deposited to the dedicated fund is estimated to total $208 million in SFY 2001-02 and $211 million in SFY 2002-03.

Recent Legislative History

In 2001, Section 189 was amended to create credits for taxes paid to other states where natural gas is purchased.

During 2000, the Gross Receipts Taxes (GRT) on utility companies was eliminated. Such companies will now be subject to the Corporate Franchise Tax instead, reducing Article 9 revenues by approximately $300 million in SFY 2000-01. The GRT on energy used in manufacturing was eliminated and other portions of the tax were phased down. Additionally, 300 more megawatts were made available under the Power for Jobs program.

In 1999, two measures were enacted. First, independent power producers who import natural gas for the production of electricity will be exempt from the gas import tax, effective January 1, 2001. This measure will reduce revenues by $5 million when fully implemented.

In addition, local telecommunications companies with fewer than one million access lines will be exempt from the excess dividends base under Section 183 of the Tax Law effective January 1, 2002. This exemption is expected to reduce revenues by $2 million when fully implemented.

In 1997, legislation that was enacted included:

• A rate reduction for Sections 186-a and 186-e of Article 9 from 3.5 percent to 3.25 percent on October 1, 1998. A further reduction of the rate to 2.5 percent occurred on January 1, 2000;

• A rate reduction for the Gross Earnings Tax in Section 184 from 0.75 percent to 0.375 percent. For transportation companies the rate reduction is from 0.6 percent to 0.375 percent, effective July 1, 2000;

• For the purpose of computing the MTA Surcharge on the above, Sections 184, 186-a and 186-c, the tax shall be computed as if the rate reduction had not occurred; and,

• The formula for the distribution of revenues from Sections 183 and 184 will be changed to maintain the required funding level for the MTOAF.

In 1996, the tax rate on trucking and railroad industries, under Section 184 of Article 9, was reduced from 0.75 percent to 0.6 percent of gross receipts starting in Tax Year 1997. Further, these industries have the option of converting from taxation under Article 9 to Article 9-A beginning in Tax Year 1998 and thereafter. There was no fiscal impact for SFY 1996-97, and a reduction of $6 million was estimated for SFY 1997-98.

In 1995, Telecommunications Tax reform was enacted in response to a Court of Appeals decision. The major implications involved the moving of the access charge deduction from long distance companies to local telephone companies, updating the computation of the tax (Goldberg methodology) for providing telecommunication services, and the agreement that long distance companies will forgo refunds due to them.

In 1994, the dedicated portion of receipts to the MTA was temporarily reduced for two years. The "undedicated" revenues were deposited in the General Fund.