FISCAL OVERVIEW

General Fund disbursements for the enacted State Fiscal Year (SFY) 2000-01 Budget are estimated at $38.92 billion, a net increase of $1.75 billion or 4.7 percent over the previous fiscal year. Disbursements on an All Funds basis are projected at approximately $77.53 billion, a net increase of $4.17 billion or 5.7 percent over SFY 1999-2000. This increase in spending reflects an agreement of $1.40 billion in available resources over the amount projected in the Governor’s 30-day amendments to the Executive Budget.

Highlights of the enacted SFY 2000-01 Budget include the following:

• $1.2 billion increase in school aid on a school year basis, including restoration of the LADDER program and the creation of a new summer school program;

• $61.4 million for the first year of enhancements to the Tuition Assistance Program (TAP), including increases in the minimum and maximum TAP awards and income eligibility expansion;

• $55.4 million to expand and improve the Elderly Pharmaceutical Insurance Coverage (EPIC) Program, including income eligibility increases and fee and co-payment reductions; and

• $106.1 million in additional funding for localities across the State.

The enacted budget also provides for $325 million in additional Capital Projects funding, as follows:

• $225 million for economic development projects; higher education and emerging high technology projects; environmental, recreational, and historical projects; and arts and cultural projects;

• $50 million for school construction and rehabilitation projects;

• $15 million for the construction of housing for low and moderate income families and the elderly;

• $15 million for the construction, expansion, or renovation of child care centers;

• $10 million to increase the supply of housing arrangements for homeless persons; and

• $10 million for incubator facilities to accommodate bio-technology companies.

The enacted budget provides for $1.1 billion in tax cuts when fully effective, as well as an additional $250 million in Power for Jobs tax credits over the next three years. Also, a $148 million administrative increase in sales taxes on utility services was prevented through this budget agreement. Some highlights of the tax reductions contained in the budget include the following:

• $150 million to increase the Earned Income Tax Credit, from 25 percent to 30 percent of the Federal credit and to increase the Child and Dependent Care Credit;

• $400 million for family oriented tax reductions, including a reduction in the marriage penalty and the establishment of a college tuition tax reduction plan; and

• $137 million to reduce various corporate taxes; and

• $362.9 million for utility reforms, and various sales tax exemptions.

In addition, the enacted SFY 2000-01 Budget provides for approximately $1.7 billion in General Fund reserves.

Definition

Tax expenditures refer to the indirect financing of certain governmental programs through tax relief. Tax expenditures reduce the tax liability of certain taxpayers in particular circumstances and encourage certain activities in order to achieve a public purpose. For instance, to help low-income families with children and encourage the creation of jobs in economically deprived areas, New York State instituted a child care credit on December 31, 1976 and an Economic Development Zone Tax Credit on January 1, 1986.

Tax expenditures take the form of exclusions, exemptions, deductions, allowances, credits, deferrals, preferential rates, and other statutory devices designed to influence the economic behavior of certain taxpayers. As such, tax expenditures involve foregone or deferred tax revenues and are thus comparable to programs financed by direct appropriation. Since programs financed through tax relief are comparable to those financed by direct appropriation, they should be subject to a review process similar to the one received by the appropriation budget.

New York State Tax Expenditure Programs

As part of the budget review process, the Division of the Budget and the Department of Taxation and Finance are jointly required to prepare an annual New York State Tax Expenditure Report. The report currently offers a summary of the tax expenditures affecting eight taxes from which the State derives about 92 percent of its General Fund Tax Revenues. The taxes covered by the report are: the Personal Income Tax (Article 22), the Franchise Tax on Business Corporations (Article 9-A), the Sales and Compensating Use Tax (Article 28), the Corporation and Utility Tax (Article 9), the Bank Tax (Article 32), the Insurance Tax (Article 33), the Petroleum Business Tax (Article 13-A), and the Real Estate Transfer Tax (Article 31). The report no longer covers the Real Property Gains Tax (Article 31-B), which was repealed in 1996.

The report provides revenue estimates for each tax expenditure, as defined by the Department of Taxation and Finance. In addition, it describes tax proposals contained in the Executive Budget that modify, add or repeal specific tax expenditures. The report does not provide an evaluation of the incidence of each tax expenditure.

For Fiscal Year 2000, the Tax Expenditure report itemizes 344 distinct tax expenditures. The costs associated with the tax expenditures vary widely, ranging from a $1.4 billion for the exclusion of employer contributions for medical insurance and care and long term care insurance under the Personal Income Tax to a minimal credit for Eligible Business Facilities granted to insurance companies that create or retain jobs in certain areas.

Technical measurement problems prevent the summing of tax expenditures and the drawing of any precise conclusions about their aggregate value. The estimation process cannot always accurately capture these problems, which include the interaction of different tax provisions or how the elimination of a tax provision might alter taxpayer behavior. Given these caveats, it is estimated that tax expenditures will account for $20.4 billion in foregone tax revenue in Fiscal Year 2000 ($11.4 billion in Personal Income Tax, $6.1 billion in Sales Tax, $2.3 billion in Corporate Franchise, Bank and Insurance Taxes, $0.2 billion in Corporation and Utility Tax and $0.4 billion in Petroleum Business and Real Estate Transfer Taxes).

Legislative Action

The Governor's Executive Budget contained ten new tax expenditure proposals which included a Green Buildings Tax Credit, a Low Income Housing Tax Credit, a Sales Tax exemption for web hosting facilities and a Sales Tax exemption for farmers.

In addition to the proposals contained in the Executive Budget, the Legislature enacted additional tax relief measures. These new tax expenditures are intended to provide relief to personal income tax payers, business tax payers and to certain consumers through sales tax reductions.

The Legislature enacted tax expenditures under the Personal Income Tax to expand the Earned Income Tax credit from 25 percent to 30 percent of the allowable Federal credit in order to bolster the incomes of individuals and families near the poverty level. The Legislature also enacted a college tuition deduction and tax credit.

Further, the Legislature enacted tax expenditures under the Corporate and Utility Tax and the Corporation Franchise Tax to change the method by which utility companies are taxed, and to create an Empire Zone program which provides a "tax-free" environment for businesses that create jobs.

In addition, the Legislature enacted tax expenditures under the Sales and Compensating Use Tax, including exemptions for equipment purchased by the telecommunications, cable and broadcasting industry, for food and drink costing less than 75 cents sold through a vending machine, and for equipment purchased by companies for pollution abatement.

The new tax expenditures created by the Executive and the Legislature are listed on the following tables.

TABLE 1
2000-2001 EXECUTIVE BUDGET TAX EXPENDITURE PROPOSALS
($ Millions)

TABLE 2
2000-2001 LEGISLATIVE TAX EXPENDITURES

2000-2001 ENACTED TAX LAW CHANGES

The tax cut package enacted with the State’s 2000-01 Budget will save New York taxpayers $1.1 billion when fully effective, while an additional $250 million in tax credits will also be provided under the Power for Jobs Program. Also, a $148 million administrative increase in sales taxes on utility services was prevented through this budget agreement. The major highlights of the tax reduction plan include the following:

Personal Income Taxes

The State’s Earned Income Tax Credit (EITC) will be increased from 25 percent of the federal credit to 30 percent of the federal credit, and will save low and moderate income working families $125 million. The Child and Dependent Care Credit will be enhanced for all taxpayers with income of less than $65,000. Working families will be allowed either a tax credit or a deduction for college tuition expenses. A tax credit equal to 10 percent of long-term care insurance premiums will be allowed. The standard deduction for married filing joint taxpayers will be increased from $13,000 to $14,600, to help reduce the marriage penalty. Two other credits relating to the cost of fuel cells and petroleum storage tanks will provide additional relief to homeowners.

Utility Reforms

The restructuring of electric utility companies to encourage competition and lower energy prices will be assisted by eliminating the Gross Receipts Tax on energy consumed by businesses, and by lowering the tax rate for residential consumers. The Sales tax on unbundled transmission and distribution of gas and electricity will be phased-out over a four-year period. In addition, the method by which utility companies are taxed will be changed from a gross receipts base to a net income base. In addition, an additional 300 megawatts of low-cost power will be allocated to businesses that create or maintain jobs, through the Power for Jobs Program. An administrative increase in sales taxes on utility services was also prevented by this agreement.

Business Taxes

To enhance distressed economic areas of the State, current Economic Development Zones will be transformed into Empire Zones. Businesses that create jobs will be afforded a tax-free environment. The CAPCO Program, which was initiated in 1997, will be expanded to allocate an additional $150 million in tax credits to insurance companies that invest in venture capital pools. One-third of the credits must be allocated to Empire Zones, one-third to areas currently not benefiting from CAPCO and the rest will have an unrestricted allocation.

The sales allocation for financial service companies will be changed from the location of the service to the mailing address of the customer. This allocation will also similarly apply to banks that own mutual funds.

The Entire Net Income (ENI) rate of 7.5 percent that small corporations face under the Corporate Franchise Tax will be reduced to 6.85 percent, which is the same tax rate that businesses face under the Personal Income Tax. The S-Corporation Differential Rate will also be lowered to allow these corporations to be taxed more closely to the rate for small, unincorporated businesses.

The plan also includes a tax credit for the construction of rehabilitation of buildings that exceed current environmental standards. A credit is provided for the construction of apartment buildings targeting low to moderate income families. This credit will supplement the current federal low income housing tax credit. In addition, the Alternative Fuels Tax Credit will be extended for two years, to encourage the production of these vehicles in the State.

Racing Tax Reductions

The New York Racing Association (NYRA) will be exempt from paying pari-mutuel taxes during the three-day period surrounding the Breeder's Cup.

Sales Tax Exemptions

Several sales tax exemptions are included to encourage economic activity such as property and services purchased by web hosting facilities, television broadcasters and farmers. The current exemption for food and drink sold purchased through a vending machine will be increased to 75 cents. The current exemption provided to the telecommunications industry will be expanded to include property used or consumed outside of the central office. This exemption will also be granted to the cable industry for the purchase of equipment necessary to upgrade to digital cable television. Finally, an exemption is provided for certain types of pollution abatement equipment and machinery.

Other Taxes

Finally, the supplemental portion of the truck mileage tax will be reduced from 50 percent to 40 percent of the base rates. In addition, the beer excise tax is reduced by 1.5 cents, and the petroleum business tax on commercial heating will also be reduced.

Several additional reforms including elimination of various minimum taxes, a one-year moratorium on the effects of the Federal repeal of Glass-Steagall, and an acceleration of the small brewers' exemption were included.