Tax Reductions Since 1994-95

Since State Fiscal Year 1994-95, New York State has enacted several tax reductions, which have resulted in a substantial decrease in revenues. By far, the largest reduction in State receipts occurred in the Personal Income Tax. In State Fiscal Year 1995-96, New York enacted a major reduction in Personal Income Tax rates, coupled with an increase in the standard deduction. A newly created State Earned Income Tax Credit and enhancements to New York State’s Child and Dependent Care Credit are just a preview of some of the tax law changes that have resulted in reductions in tax revenues.

In 1995, the Legislature enacted a three-year Personal Income Tax reduction plan. Effective in 1997, the top tax rate was reduced from 7.125 percent to 6.85 percent, accompanied by an increase in the standard deduction from $12,350 to $13,000 for married couples filing jointly. Over 60 percent of the benefits from the Personal Income Tax reduction will go to those earning less than $100,000 per year. The 1995 Budget contained additional tax cuts as well, including Pari-Mutuel Tax reductions, a one-cent reduction in the Container Tax, a reduction in the Beer Tax, reductions in the Petroleum Business Tax, and an exemption from the Estate Tax for principal residences.

Since the final phase of the three-year Personal Income Tax reduction plan occurred in 1997, State Fiscal Year 1998-99 receipts will benefit from growth of 6.8 percent in Personal Income Tax receipts as a result of no additional tax reductions. The final phase of the tax reduction plan reduced Personal Income Tax receipts by approximately $1.7 billion in State Fiscal Year 1997-98.

In 1996, the Legislature enacted various tax reductions to be phased in over several years. These tax reductions included an enhancement in the Child and Dependent Care Credit, Petroleum Business Tax reductions, the repeal of the Real Property Gains Tax, an agricultural school tax credit, a one-week exemption from the Sales Tax on clothing, and various other Sales Tax exemptions. In total, these reductions were estimated to reduce receipts by $83 million in State Fiscal Year 1996-97 and by an additional $95 million in State Fiscal Year 1997-98.

In 1997, the Legislature enacted several additional new tax cuts. When fully implemented in State Fiscal Year 2000-01, the tax reductions enacted in the 1997-98 budget will total $1.5 billion.5 This figure, however, does not include over $2 billion dollars in State expenditures dedicated to local tax relief through the School Tax Relief Program and a State-financed reduction in the New York City Personal Income Tax.
5. The tax reduction package enacted in 1997 included other revenue reductions not classified as State tax cuts. Among those reductions are the elimination of Health Care Provider Assessments and a State-funded Property Tax reduction program. In total, all of the reductions combined will total approximately $5.0 billion when fully implemented in State Fiscal Year 2000-01.

Among the many tax reductions enacted is a new exemption from the State Sales Tax for items of clothing valued under $100. Coupled with an option for local governments to reduce their portion of the sales tax, this exemption will benefit low-income families who spend a disproportionate share of their disposable income on clothing purchases. In addition, this exemption will benefit the retail sector of New York State by making the State more competitive with neighboring states such as New Jersey and Pennsylvania, which do not tax most clothing purchases.

The reduction in the Gross Receipts Tax, together with reforms in the State’s energy policy, will assist ratepayers and small businesses by lowering the cost of energy in New York. Other provisions to aid businesses in the State were also provided. A tax credit for insurance companies was created for insurance companies that invest in certified venture capital companies, which are essentially funding vehicles to finance small New York State businesses. Businesses were also allowed an employment incentive credit. This credit allows businesses taxed under the Personal Income Tax that have earned investment tax credits, to earn employment incentive and special economic development zone employment incentive credits. Finally, under the Power for Jobs Program, a tax credit against the tax on the provision of utility services is available. The Power for Jobs Program was established to make low-cost power available to small businesses for the purpose of job creation and retention. This credit is designed to compensate utility companies for the revenue losses sustained by participating in the program.

An increase in New York State’s Child and Dependent Care Credit is part of a multi-faceted approach to assist many lower and middle income families. The increased credit will enable families to afford safe and dependable child care for their children.

  
Figure 12

In State Fiscal Year 1998-99, the Executive has proposed dedicating $724 million in Personal Income Tax receipts to reimburse localities for lost revenues associated with the School Tax Relief Program (STAR). This would have the effect of reducing General Fund and Lottery receipts in State Fiscal Year 1998-99.

Tax reductions in the 1997-98 budget, when coupled with previously enacted tax reductions, will reduce State Fiscal Year 1997-98 receipts by over $2  billion.

 
FEE/REVENUE INCREASES

Department of Environmental Conservation

Department of Motor Vehicles

TAX CUTS

• $537 million from an acceleration in the School Tax Relief (STAR) Program. This would provide the full exemption benefit of $50,000 to seniors in the upcoming school year;

• $25 million from including footwear in the scheduled one-week sales tax exemption period on clothing in September 1998, and from providing an additional one-week exemption period in January 1999 for items of clothing and footwear costing less than $500;

• $3 million from conforming State Estate and Gift Tax Laws to the corresponding Federal provisions. The exemption threshold for family-owned businesses would be increased to $1.3 million from the current $1 million threshold. This proposal would also eliminate a $10 fee for obtaining certain releases of liens under the Estate Tax;

• $3 million from accelerating the base acreage amount used in calculating the agricultural credit for farmers in 1998 to the scheduled amount of 250 acres in 1999;

• $1 million from extending the authority for expanded racing simulcasting and the existing tax rates on New York Racing Association (NYRA) for an additional year to July 1999;

• $100 million from establishing a reserve fund for accelerating the implementation of current tax reductions to be agreed upon by the Legislature; and

• A minimal cost from the exclusion of income received by Holocaust survivors through a Holocaust Victims’ Fund from adjusted gross income.

Tax Reductions Mask Healthy Underlying Growth

Figure 13

The process of estimating General Fund tax receipts begins with the concept that there is a strong correlation between the economy and revenues. When the economy is doing well, one would expect corresponding growth in revenues. While this is often the case, other considerations such as Tax Law changes and accounting practices must be factored into the estimation process. These considerations often mask the true growth in revenues.

What does this mean for revenues in State Fiscal Year 1997-98? To examine the true relationship between the economy and revenues, one must examine "underlying growth." As indicated in Figure 13, projected General Fund taxes show growth of 3.2 percent in State Fiscal Year 1997-98, and 6.3 percent in State Fiscal Year 1998-99. As mentioned earlier, revenues are often affected by considerations other than the performance of the economy. Underlying growth takes into account these factors, and shows what growth in revenues would have been absent them. The following examination of State Fiscal Year 1997-98 receipts will outline how different factors affect revenues.

The Committee staff estimates that General Funds and Lottery receipts will total $36,892 million in State Fiscal Year 1997-98. This is $2,317 million above receipts from the previous fiscal year, representing growth of 6.7 percent. While this 6.7 percent growth reflects growth in actual revenues, much of this growth can be attributed to an accounting measure known as a refund reserve transaction. This transaction is often used to transfer excess or surplus money, when the books are closed at the end of each fiscal year. In State Fiscal Year 1996-97, this transaction artificially deflated receipts by $1,183 million, which, in turn, inflates growth for State Fiscal Year 1997-98.

If we examine the growth in General Fund taxes absent the Refund Reserve Transaction, growth is a modest 3.2 percent. Since the Committee Staff estimates an economy that continues to surprise forecasters by both its strength and the benefits of another banner year on Wall Street, why is the growth so modest?

One factor contributing to the modest revenue growth is that over the past several years, the State has implemented various tax reduction programs. These tax reductions have depressed growth in General Fund taxes.

A second factor depressing the growth in General Fund taxes is the dedication of tax revenue for specific purposes. A clear example of this is the Real Estate Transfer Tax. Prior to State Fiscal Year 1995-96, Real Estate Transfer Tax revenues were deposited into the General Fund. However, legislation enacted in 1995, dedicated these revenues to the Environmental Protection Fund and to pay debt service on the 1996 Clean Air/Clean Water Bond Act. This dedication has reduced General Fund Revenues by over $200 million.

Absent these tax cuts and additional dedications, General Fund taxes would have grown by 8.2 percent in State Fiscal Year 1997-98. Strong growth in wages, employment, and personal income has played a major role in the health of the State’s fiscal system. For State Fiscal Year 1998-99, underlying growth should increase by 7.2 percent. This reflects Committee Staff expectations for continued growth in New York State’s economy, especially those parts closely tied to Wall Street.