1. Executive Summary

2. The U.S. Economy

3. The New York State Economy

4. Tax Revenue Outlook
   General Fund Tax Revenue
   Personal Income Tax
   Consumption and Use Taxes and Fees
   Business Taxes
   Other Taxes
   

5. Revenue Actions

6. Revenue Tables

State fiscal year 2003-04 will be another difficult year for New York State. Estimates provided as part of the 2003-04 Executive Budget project that without any action, New York faces a $2.2 billion dollar deficit for the remainder of SFY 2002-03, and a budget gap of $9.3 billion for the 2003-04 SFY. These budget gaps have followed actions taken since October 2001, which have closed budget shortfalls totaling $8.8 billion for the 2001-02 and 2002-03 SFYs.

The majority of the State's current financial difficulties can be attributed to events that are beyond the control of the State. The U.S. economy slipped into recession in early 2001 at the same time the high-tech bubble burst. This led to what has turned out to be a long downturn in the financial markets. Furthermore, on September 11, 2001, terrorists attacked and destroyed the World Trade Center in downtown Manhattan, which in turn dealt a crushing blow to the State's finances.

As SFY 2003-04 approaches, New York continues to be impacted by this series of events, which have hit New York harder than most other States. However, New York is not alone in facing these financial difficulties. In a report issued in February 2003, the National Conference of State Legislatures reported that 36 states are facing a cumulative budget gap of approximately $25.7 billion for FY 2003 and that at least 36 states face budget gaps for FY 2004. The cumulative total for the 36 states that have already indicated they face budget gaps in FY 2004 is $68.7 billion.

New York's fiscal difficulties would have been much worse had the State not entered the 2001-02 SFY in the best financial condition in decades. Numerous tax cuts implemented in the second half of the 1990's drastically improved the State's business climate, which helped cushion the impact of the national recession. The State also entered this period with a record level of reserves, which were increased from a mere $158 million in 1993-94 to nearly $2.6 billion in 2001-02. These reserves have been used to off-set part of the revenue loss suffered due to the World Trade Center attack and the national recession.

Economic Outlook
The U.S. economy slowly began to recover in 2002 from the recession of 2001, but the lingering impact of the high-tech bubble collapse continued to be a drag on the economy. New concerns over possible military action against Iraq, a continued increase in unemployment, and a drop in consumer confidence slowed economic growth to a crawl by the fourth quarter of 2002.

The current economic slowdown is expected to continue through much of 2003. The Assembly Minority Ways & Means Committee projects that the U.S. economy will grow at an average of 2.0 percent during the first three quarters of 2003, before the economy picks up in the fourth quarter. Employment levels will begin to increase in 2003, after falling in 2002.

The continuation of the U.S. economic slowdown will continue to impact the New York economy. After a unique series of events (a prolonged downturn in the financial markets, a national manufacturing recession, and a terrorist attack on the World Trade Center) triggered a downturn in the New York economy in 2001, the economy continued to struggle in 2002. A full recovery in New York's economy is not projected to occur until the U.S. economy picks up and there is a recovery in the financial markets.

There continues to be significant potential risks to the economy. These risks pose the potential of further disrupting the economy and the State's tax revenue streams. Among the risks are: an extended conflict with Iraq; a severe spike in oil prices; and the potential of an additional terrorist attack on U.S. soil.

The Forecast
This Assembly Minority Ways & Means Committee report on the State and national economy projects that, for the balance of the current fiscal year and for fiscal year 2003-04, New York State will realize General Fund tax revenues $431 million below those projected in the 2003-04 Executive Budget, as changed by the 30-day amendments. This includes $62 million in lower revenues during the remainder of the 2002- 03 fiscal year, which will bring General Fund tax receipts to $28.29 billion. For the 2003-04 fiscal year, the Committee is projecting General Fund tax revenues of $26.85 billion, $369 million below the Governor's projections. New York State will realize All Funds tax revenues $507 million below those projected in the 2003-04 Executive Budget. All Funds receipts are projected to be $29 million below the Executive's projection for 2002-03 and $478 million below the Governor's forecast for 2003-04.

In developing this forecast, the Committee has utilized the Washington University Macro Model of the United State economy, developed and maintained by Macroeconomic Advisers, LLC. The Committee has also utilized New York State economic data and forecasts from Economy.com to supplement the Committee's in-house model of the State economy.

Revised FY 2002-03 Projections
Based on the re-estimates included in this report, the Committee expects SFY 2002-03 All Funds tax collections to total $41.01 billion. This estimate is $29 million below the Division of the Budget's (DoB) estimate contained in the 2002-03 Executive Budget which projects All Funds tax collections in the current fiscal year of $41.04 billion. The Committee projects General Fund collections of $28.29 billion, $62 million below the Division of the Budget. Adjusted for the Revenue Bond Tax Fund transfer, the Committee's projections for 2002-03 are $92 million below the Executive.

FY 2003-04 Projections
All Funds tax collections in 2003-04 are projected to decline to $40.46 billion, a decrease of $554 million, or 1.4 percent from 2002-03. This forecast is $478 million below the DoB's estimate of $40.93 billion.

The Committee is forecasting General Fund tax collections of $26.85 billion in 2003-04, a decline of $1.45 billion, or 5.1 percent from 2002-03. This decline is due to the use of $1.25 billion from the Refund Reserve Account in 2002-03 and the full year impact of the Revenue Bond Tax Fund transfer. After adjusting for these transactions, General Fund collections are projected to increase by $618.8 million, or 1.8 percent in 2003-04. The Committee's estimate of General Fund collections is $369 million below the Division of the Budget. Adjusted for the Revenue Bond Tax Fund transfer, the Committees projections for 2003-04 are $494 million below the Executive.

Need for Fiscal Restraint
While the Committee recognizes that additional resources above their estimates may be realized during the 2003-04 State Fiscal Year, the Committee believes that now, more than ever, is the time to forecast conservatively. During the past two years, the State has used its unrestricted reserves to balance the its budget. The loss of these reserves leaves little room for error to absorb a negative variance from any revenue estimate that is agreed upon as part of the 2003-04 budget. The Committee emphasizes that there remains significant risk to the State's tax revenue base, and urges the State to forecast revenues accordingly.

The Committee once again emphasizes the need to utilize revenue projections for the entire three year State Financial Plan period. In this report, the Committee has built on last year's report by providing outyear All Funds and economic projections, in addition to out-year estimates of General Fund tax receipts. Increasing the scope of the forecast discussion can only lead to improvements in the State's budgeting process.

The U.S. economy slowly began to recover in 2002 from the recession of 2001, but the lingering impact of the bursting of the high-tech bubble continued to be a drag on the economy. New concerns over possible military action against Iraq, a continued increase in unemployment, and a drop in consumer confidence slowed economic growth to a crawl by the fourth quarter of 2002. Personal consumption expenditures, which had remained strong early in the recession, grew by just 1.0 percent during the fourth quarter, the slowest rate of growth during the current economic slowdown.

Economic Activity in 2002
Real Gross Domestic Product grew by 2.4 percent in 2002. After growing at an annual rate of 3.4 percent during the first three quarters of 2002, growth cooled to 0.7 percent in the fourth quarter. This increase in real GDP follows growth of 0.3 percent in 2001, which contained three quarters of negative growth. On a fourth quarter to fourth quarter basis, real GDP increased by 2.8 percent, compared to growth of 0.1 percent in 2001.

• Employment: The U.S. economy continued to lose jobs in 2002. Non-agricultural employment fell by over 1.1 million in 2002. Private sector employment fell by 474,000 in 2002, after the economy lost 1.9 million private sector jobs in 2001. The U.S. unemployment rate increased to 5.8 percent in 2002 from 4.8 percent in 2001.

• Consumer Spending: Personal consumption expenditures led the U.S. economic recovery during the fourth quarter of 2001 and the first three quarters of 2002. In the first three quarters of 2002, personal consumption increased at an annual rate of 3.0 percent. Zero-percent financing offers continued to drive strong demand in the automotive sector, while growth in services remained solid. However, personal expenditures weakened substantially in the fourth quarter, growing by just 1.0 percent. Durable goods expenditures fell by 7.3 percent in the fourth quarter, and growth in services fell to only 1.3 percent.
  

• Non-Residential Fixed Investment: Business investment continued to be weak through most of Source: Macroeconomic Advisors and *Ways and Means - Minority Forecast Assembly Ways and Means Committee - Minority Page 5 2003-04 Revenue & Economic Report 2002. During the first three quarters , non-residential fixed investment declined at an annual rate of 3.1 percent, driven by a 17.8 percent drop in investment in structures. Business investment did show signs of improvement throughout the year. After a decline of 5.8 percent in the first quarter, the rate of decline in investment improved to 0.8 percent in the third quarter. In the fourth quarter, business investment had posted a modest increase, growing by 1.5 percent, just as consumer spending began to weaken.

• Industrial Production: Industrial production increased during the first three quarters of 2002. Production increased at an annual rate of 4.4 percent in the second quarter of 2002 and 3.4 percent in the third quarter. Manufacturing capacity utilization increased from 73.4 percent in the first quarter of 2002 to 74.2 percent in the third quarter. In the fourth quarter of 2002, industrial production began to decline once again. Production declined at an annual rate of 2.4 percent while capacity utilization fell to 73.7 percent.

• Financial Markets: 2002 was another disappointing year for the U.S. equity markets. The S&P 500 closed 2002 down 23.4 percent from its 2001 close. The Dow Jones Industrial Average closed down 16.8 percent while the NASDAQ Composite Index closed down 31.5 percent. From their closing value at the end of 1999, the S&P 500 lost 40.1 percent, the Dow lost 27.4 percent, and the NASDAQ lost 67.2 percent of their values.

• Corporate Profits: Business profits before tax declined for the second consecutive year in 2002. The annual decline of 2.9 percent followed a drop in profits of 14.3 percent in 2001. On a quarterly basis, corporate profits showed improvement through the first three quarters of the year, before falling back in the fourth quarter of 2002.

• Inflation: Inflation remained in check during 2002. The All-Urban Consumer Price Index increased by 2.3 percent in 2002 after increasing by 1.9 percent in 2001. The Producer Price Index for finished goods increased by 0.9 percent after falling by 1.0 percent in 2001.

• Housing Market: Low interest rates are supporting the current boom in the housing market. New housing starts increased by 6.4 percent over 2001 levels. Real residential fixed investment rose by 6.1 percent in 2002, after increasing 1.0 percent in 2001.

U.S. Outlook
The U.S. economy still faces significant hurdles in 2003. What was originally believed to be one of the mildest recessions on record, has turned out to be more persistent. Although the actual recession only resulted in a 0.6 percent decline in Real GDP during the first three quarters of 2001, the lingering effects of the current economic slowdown will continue into 2003. After growth of only 0.7 percent in the fourth quarter of 2003, the Assembly Minority Ways & Means Committee believes that this slow growth will continue through much of 2003. The Committee projects that growth will average 2.0 percent during the first three quarters of 2003 before beginning to pick up in the fourth quarter. The economy will continue to pick up steam in 2004, growing by 3.7 percent.

Following continued job loss in the first quarter of 2003, the U.S. labor market will begin to recover in the second quarter. After falling by an annual rate of 0.7 percent in the first quarter, non-agricultural employment growth will increase to an annual rate of 2.1 percent by the fourth quarter. On an annual basis, the U.S. economy will add 432,000 new jobs in 2003, an increase of 0.3 percent. This increase follows a 0.9 percent job loss in 2002. On a fourth quarter to fourth quarter basis, U.S. non-farm employment will increase by 0.9 percent, adding back 1.12 million jobs.

The unemployment rate will continue to rise through the second quarter of 2003, peaking at 6.4 percent. The Committee projects that the unemployment rate will average 6.3 percent for 2003, after averaging 5.8 percent in 2002. The unemployment rate will steadily decline through the second half of 2003 and continue to decline in 2004, averaging 5.8 percent for 2004.

After falling in the fourth quarter of 2002, the Committee estimates that industrial production will increase by 1.6 percent in 2003. Manufacturing activity is also projected to pick up in 2003, increasing by 1.7 percent.

Inflation will remain moderate in 2003; however, higher energy prices will introduce some inflationary pressure into the economy. The Committee projects that the All-Urban Consumer Price Index will increase by 2.5 percent, following a 1.6 percent increase in 2002. The Federal Reserve is expected to overlook the increase in energy prices, and maintain the federal funds rate at 1.25 percent through most of the year. The Fed is expected to raise interest rates late in 2003 as the U.S. economy begins to show signs of stronger growth.

Corporate profits in 2003 are projected to remain relatively flat from 2002 levels. The Committee projects that after a decline in the second quarter of 2003, pre-tax profitability will improve as the U.S. economy picks up later in the year.

Risks to the Forecast
In developing this forecast, the Committee assumes there will be quick resolution in the current conflict with Iraq (either peacefully or militarily). The forecast also assumes that the current economic slowdown will continue into 2003, but the U.S. economy will pick up late in the year as consumer confidence improves with an end to the Iraqi conflict. The impact of an additional external shock could drastically slow down the already fragile U.S. economy

Potential risks to the economy include:

• Prolonged Conflict with Iraq: An extended conflict with Iraq (either due to extended attempts at a diplomatic resolution or from protracted military action) could stall the economic expansion later in 2003.

• Severe Spike in Oil Prices: The national average for a gallon of gasoline is currently 49 percent higher than the average last year, and has increased by 21 cents, or 14 percent, in the last month alone. Military action in the Persian Gulf combined with continued production disruptions in Venezuela could result in record high gasoline prices.

• Failure of the Equity Markets to Recover: Continued declines in the stock markets could suppress consumer confidence heading into the fourth quarter of 2003, resulting in another disappointing holiday shopping season.

• Terrorist Attack in the United States: A successful terrorist attack would also result in a decline in consumer confidence and spending. A large scale attack could result in another economic recession.

A unique set of events has resulted in the 2001 U.S. economic recession having a greater and prolonged impact on the New York State economy than many other areas of the country. A prolonged decline in the U.S. equity markets effected the Downstate economy at the same time that the Upstate manufacturing economy was being impacted by the national manufacturing recession. These economic conditions were exacerbated by the September 11, 2001 terrorist attack which destroyed the World Trade Center in downtown Manhattan.

Seasonally adjusted non-agricultural employment in New York State peaked in January of 2001. Since that peak, New York has lost 170,000 jobs. The manufacturing and finance, insurance, and real estate sectors have been hard hit by the current economic downturn. Manufacturing employment has declined by 90,000, or 10.3 percent, since January 2001. The FIRE sector has lost 29,600 jobs since September 2001, representing four percent of the FIRE workforce. Employment in the services sector has fared much better. The service sector had lost 31,400 jobs, a decline of 1.0 percent from its peak in January 2001; however, employment in this sector has been growing since February 2002 and has regained almost all of the lost jobs.

On a December to December basis, the New York State economy lost 44,800 jobs in 2002. The overwhelming majority of those job losses occurred in New York City, which lost 43,400 non-agricultural jobs between December 2001 and December 2002. Employment declines continued in the FIRE sector and in manufacturing in 2002. FIRE employment fell by 1.0 percent (7,200 jobs), while manufacturing employment fell by 0.6 percent (19,700 jobs). Employment in the services sector increased by 36,500, or 4.5 percent, from December 2001 to December 2002.

The State's unemployment rate continued to rise in 2002, reaching 6.1 percent in December 2002. The average unemployment rate for 2002 was 6.0 percent, up from 4.9 percent in 2001. Personal income in 2002 rose by 1.0 percent, with wage and salary disbursements increasing by just 0.4 percent. The State's output, measured by Real Gross State Product increased by 2.0 percent.

The New York State Outlook
The continuation of the U.S. economic slowdown will continue to have an impact on the New York State economy in 2003. The Committee projects that Real Gross State Product will continue to grow in 2003, but at a slow pace of 2.6 percent. Growth in the New York economy is projected to pick up late in 2003, along with the U.S. economy, resulting in an increase in Real GSP of 3.6 percent in 2004.

The Committee projects that the New York labor market will continue to constrict during the first half of 2003. On an annual basis, total non-agricultural employment is projected to decline by 0.2 percent. However, the Committee anticipates job growth to resume in the third quarter of 2003, with total employment in the fourth quarter of 2003 exceeding the level of employment in the fourth quarter of 2002.

New York personal income is projected to increase modestly in 2003. Growth of 2.2 percent in 2003 precedes a return to healthier growth in 2004 of 4.1 percent. Wage and salary disbursements are projected to increase by 2.9 percent and 5.3 percent in 2003 and 2004, respectively.

The performance of the stock market is a vital determinate in the fortunes of the New York economy. The Committee is projecting that, after a small rebound in stock prices in the second quarter, stocks will once again decline in the third quarter of 2003 as a result of disappointing second quarter corporate earnings. A full recovery in stock prices will begin in the fourth quarter of 2003, with stock prices ending the year near their closing value at the end of last year. However, this delay in the stock market recovery will prevent the New York economy from fully recovering in 2003 from the current economic slowdown.

The Security Industry in 2002
2002 was another difficult year for the financial sector. The U.S. stock markets suffered through a third consecutive year of declines, with the S&P 500 closing down 23.4 percent for the year. Revenue and profits in the securities industry also fell for the third consecutive year. According to estimates from the Securities Industry Association, net revenue of the industry fell to $98 billion in 2002, from $113 billion in 2001, the lowest level since 1999.

Profits of the securities industry fell to an eight year low in 2003, estimated at $7.0 billion prior to a $2.2 billion write-off in the fourth quarter of 2002 associated with the settlement of litigation brought against the industry. Including this write-off, reported pre-tax profits are estimated at $4.8 billion.

The value of initial public offerings fell to a 10 year low in 2002, at $25.8 billion, compared to a record $75.8 billion in 2000. IPO deal volume fell to the lowest level since 1978. Only 86 deals were completed in 2002, one-tenth the record level of 871 IPOs in 1996. The IPO market shows no sign of improvement in 2003, with only 38 deals totaling $4.9 billion currently in the works.

Merger and Acquisition activity also declined in 2002. The value of M&A activity of U.S. target companies fell to an eight year low of $458 billion, down 41 percent from 2001, and 74 percent down from the record levels of 2000.

2002-03 All Funds Collections
The Committee estimates that All Funds tax collections in 2002-03 will equal $41.01 billion, a decrease of $3.31 billion, or 7.5 percent from 2001- 02 collections. The Committee is projecting declines of: $3.54 billion (12.9 percent) in Personal Income Tax receipts and $136.2 million (2.6 percent) in Business Tax receipts. These decreases are partially offset by estimated increases of $302.5 million (2.9 percent) in Consumption and Use Taxes and Fees and a $63.8 million (5.4 percent) increase from other tax revenues.

The Division of the Budget's (DoB) estimate contained in the 2003-04 Executive Budget projects All Funds tax collections in the current fiscal year of $41.04 billion, $29 million above the Committee's projections. The Committee expects a negative $127 million variance will come from lower income tax collections, offset by $58 million from higher sales and compensating use tax collections, $13 million in higher business tax collections, and $28 million in higher other tax revenue.

2003-04 All Funds Collections
All Funds tax collections in 2003-04 are projected to decline to $40.46 billion, a decrease of $554 million, or 1.4 percent from 2002-03 estimated collections. The Committee's projections are $478 million below DoB's estimate contained in the 2003- 04 Executive Budget which projected All Funds tax collections in the 2003-04 SFY of $40.93 billion. The Committee expects a negative variance of $502 million from lower income tax collections and $36 million from sales and compensating use tax collections, offset by $15 million from higher business tax collections and $44 million less in other tax revenue.

The Committee is projecting declines of: $1.32 billion (5.5 percent) in Personal Income Tax receipts and $17.1 million (1.4 percent) in other tax receipts. These declines are partially offset by increases of $581.1 million (5.4 percent) in Consumption and Use Taxes and Fees collections and $202.7 million (4.0 percent) in Business Tax receipts.

2002-03 General Fund Collections
The Committee estimates that General Fund tax collections in 2002-03 will drop to $28.29 billion, a decrease of $9.08 billion, or 24.3 percent from 2001-02 collections. A substantial portion of this decrease is due to the movement of Personal Income Tax receipts into the Revenue Bond Tax Fund and the use of reserves in the 2001-02 SFY. After adjusting for these actions, General Fund tax collections are expected to decrease by approximately $3.14 billion, or 8.5 percent in 2002-03.

Adjusting for reserves and transfers, the Committee is projecting declines of: $2.95 billion (11.5 percent) in Personal Income Tax receipts; $15.2 million (0.2 percent) in Consumption and Use Taxes and Fees collections; and $162.1 million (4.5 percent) in Business Tax receipts.

The Division of the Budget's (DoB) estimate contained in the 2003-04 Executive Budget projects General Fund tax collections in the current fiscal year of $28.36 billion, $61.7 million higher than the Committee's projections. The Committee expects $96.6 million of this variance will come from lower Personal Income Tax collections and $18.1 million from business tax collections. These lower projections are partially offset by $31.1 million from higher sales and use tax collections and $21.9 million in higher other tax revenue. Adjusting for the Revenue Bond Tax Fund transfer, the Committee is projecting General Fund tax collections to be $92.1 billion below the Executive's projections.

2003-04 General Fund Collections
General Fund tax collections in 2003-04 are projected to decline to $26.85 billion, a decrease of $1.45 billion, or 5.1 percent from 2002-03 estimated collections. The decrease is due to the use of $1.25 billion from the Refund Reserve Account and the full year impact of the Revenue Bond Tax Fund Transfer. After adjusting for these transactions, General Fund tax collections are projected to increase by $618.8 million, or 1.8 percent in 2003-04.

The Committee's projections are $369 million below DoB's estimate contained in the 2003-04 Executive Budget projecting General Fund tax collections in the 2003-04 SFY of $27.22 billion. The Committee expects a negative variance of $377 million from lower income tax collections and $27 million from sales and compensating use tax collections. Adjusting for the Revenue Bond Tax Fund transfer, the Committee is projecting General Fund tax collections to be $494 billion below the Executives projections.

Adjusting for reserves and transfers, the Committee is projecting a decrease of $29.7 million (0.1 percent) in Personal Income Tax receipts. The decrease in Personal Income tax collections is offset by increases of $397.5 million (5.6 percent) in Consumption and Use Taxes and Fees collections, and $238.7 million (6.9 percent) in Business Tax receipts.

Summary
The Personal Income Tax is imposed on residents of and individuals employed in New York State by Article 22 of the Tax Law. New York uses an Adjusted Gross Income (AGI) and a progressive tax bracket structure to determine tax liability, with a top tax bracket of 6.85 percent. New York's definition of AGI closely follows the Federal definition. The major components of AGI are wages, capital gains, interest and dividend income, taxable pensions and business and partnership income. Personal Income Tax receipts are the State's largest source of tax revenue. Beginning in 2002-03, 25 percent of net Personal Income Tax Collections are transfered to the Revenue Bond Tax Fund as dedicated receipts to pay debt service on the State's revenue bonds.

2002-03 Collections
The Committee estimates that Personal Income Tax receipts, excluding reserves and transfers, will decline by $2.95 billion from 2001-02, to $22.63 billion. The decline is largely due to lower bonus payments, lower capital gain realization, and a decline in employment level. Withholding is estimated to decline by 1.4 percent with estimated payments projected to drop by 23.4 percent. Refunds in 2002-03 increased by $839.2, or 23.9 percent from last year. Through 10 months of 2002-03, Personal Income Tax receipts are already down by $2.95 billion.

Receipts including reserves and transfers are anticipated to decrease by $8.88 billion, or 34.3 percent, to $16.97 billion. The decline in receipts are exaggerate by the use of the $1.2 billion STAR reserve and the use and the transfer of $4.24 billion to the Revenue Bond Tax fund.

2003-04 Collections
Personal Income Tax receipts excluding reserves and transfers are expected to decrease an additional $29.7 million, or 0.1 percent, to $22.60 billion in 2003-04. Withholding is projected to increase by $716.8 million, helped by improvements in the labor markets during the second half of the fiscal year. The increase in withholding is largely offset by declines in estimated payments and final returns, which have large components that are determined by prior year tax liability. Assessments will decline by $100.6 million due to a loss of revenue from the 2002-03 tax amnisty program.

The use of $1.25 billion from the Refund Reserve Account and the full year impact of the Revenue Bond Tax Fund transfer will result in a decline of $2.10 billion, or 12.3 percent, in total Personal Income Tax receipts including reserves and transfers. STAR payments are expected to increase by $40 million in 2002-03.

Summary
The largest component of the consumption and use taxes is the Sales and Compensating Use Tax. New York's Sales Tax is imposed by Article 28 of the Tax Law. The tax is imposed on the retail sale of tangible personal property (unless specifically exempt) and on certain services. Sales Tax is the State's second largest source of tax revenue. Other consumption taxes include Cigarette and Tobacco Tax (Article 20), Alcohol Beverage Tax (Article 18), and Motor Vehicle fees. Motor Fuel Taxes (Article 12-A) and Auto Rental Tax (Article 28-A) are fully dedicated to Special Revenue Funds.

2002-03 Collections
Consumption taxes are expected to decline by $15.2 million in 2002-03. General Fund Sales and Use Tax collections are estimated at $6.32 billion, up $191.8 million, or 3.1 percent. Despite a disappointing holiday shopping season, taxable sales increased, auto sales remained strong, and the housing boom continued. The General Fund will lose $146.9 million in 2002-03 due to an increase in the amount of Motor Vehicle fees that are placed into dedicated funds, and the complete dedication of Auto Rental tax receipts. Cigarette and Tobacco Tax receipts are projected to decline by $67.7 million as a result of the continuing trend of lower smoking and the State and New York City tax increases.

2003-04 Collections
The Committee projects that Sales and Use Tax collections will increase by $418.2 million, or 6.6 percent, from 2002-03 levels. Taxable sales are expected to increase as the economy and consumer confidence improve in the second half of the fiscal year. A proposed change in the clothing exemption is also projected to increase Sales Tax collection. Cigarette and Tobacco tax collections are projected to decline by 21.4 percent as cigarette sales continue to decline.

Summary
Business Taxes are comprised of taxes imposed by Articles 9 (Corporate and Utilities), 9-A (Corporate Franchise), 32 (Bank Franchise), and 33 (Insurance Franchise) of the Tax Law. The Corporate and Utility Tax is imposed on telecommunications, energy, and rail and trucking companies. The Corporate Franchise Tax is imposed on general business corporations doing business in New York and on the unrelated business income of nonstock not-for-profit corporations (Article 13).

2002-03 Collections
Business tax collections are estimated to decline by $162.1 million, or 4.5 percent, to $3.45 billion. Lower corporate profits combined with the effects of the final phase of the Corporate Franchise Tax rate cut will result in a drop in Corporate Franchise Tax receipts of $36.5 million, or 2.4 percent. Corporate and Utility Tax receipts are projected to decrease by $97 million, due to lower collections from telecommunications companies and the continuation of tax reductions on energy utilities. Insurance Franchise Tax receipts are estimated to increase by $29.5 million, and higher prior year adjustments are expected to result in a $58.1 million decline in Bank Franchise Tax collections.

2003-04 Collections
The Committee estimates that corporate profits will begin to improve in 2003, leading to a modest increase of 2.7 percent, or $39.9 million in Corporate Franchise Tax collections. Insurance Franchise Tax collections are projected to increase by $190.3 million, or 28.7 percent, due to a proposed change in the Insurance Tax and increases in premiums. Corporate and Utility taxes are expected to decline by $42.8 million, or 4.9 percent, to $832.4 million. Bank Franchise Tax collections are projected to increase by $51.3 million, or 11.7 percent, to $489.0 million. Total business tax collections will increase by $238.7 million, or 6.9 percent, to $3.69 billion.

Summary
The other taxes category primarily consists of collections from New York's Estate Tax, which is imposed by Article 26 of the Tax Law. Also included in the category are Pari-Mutuel Taxes and the Boxing and Wrestling Exhibition Tax (Article 19).

2002-03 Collections
The Committee estimates that other General Fund tax collections are expected to decline by $20 million, or 2.5 percent in 2002-03, to $782.7 million. Estate and Gift tax receipts are expected to fall by $19.5 million, due mostly to a decrease in household net worth.

2003-04 Collections
Other tax collections are projected to increase by $12.3 million, or 1.6 percent, to $795.0 million in 2003-04. Estate tax collections are expected to increase by $11.8 million, as the value of estates increase. However, growth in the Estate tax base will be partially offset by an increase in the Federal Unified Credit. Pari-mutuel tax collections are projected to increase by $2 million, as a proposed change to the take-out schedule is expected to increase betting handles.

In 1995, Governor Pataki inherited a $5 billion budget gap for the 1995-96 State Fiscal Year. His response to this gap marked a historic shift in the State's fiscal policy. Instead of increasing taxes and raising revenue to close the gap, the 1995-96 State budget cut the size of government and set forth a historic series of tax cuts which highlighted the Governor's first two terms.

The 1995-96 State budget marked the realization that the State could not tax its way out of fiscal distress. The tax increases which had occurred during the early 1990's had only compounded the State's troubles. In contrast to the high taxes that drove jobs from the State during the early 90's, the tax reduction during the Pataki administration promoted a stronger business climate, which created jobs and built a larger tax base.

A comparison of the growth in tax collections during the last five years of the Cuomo administration and the first five years of the Pataki administration provides a dramatic example of how lowering tax rates can build the overall tax base. During the period between SFYs 1989-90 and 1994-95, while the State was increasing taxes, State tax receipts increased by only $5 billion, from $28.1 billion to $33.1 billion.

By comparison, between 1994-95 and 1999-00 tax collections increased by $8.3 billion, a 25.2 percent increase compared to the 15 percent increase during the last five years of the Cuomo administration. Although the increase in growth rates does not seem that great, consider that the growth during the early 1990's relied on tax increases to generate growth while large tax cuts were implemented at the same time collections were increasing during the Pataki administration. By the 1999-00 SFY, the value of tax cuts implemented during the Pataki administration had reached $7.8 billion, an amount equivalent to 23.7 percent of all tax collections in 1994-95.

As the State faces new fiscal difficulties in the 2003-04 budget, we must remember the lessons of the 1990's. Increasing taxes may be a quick fix, but in the long run will lead to lower tax collections, job losses, and will cut into the State's tax base. The State can grow out of the current difficulties by maintaining low tax rates, encouraging job growth, and building an even stronger tax base.

It is also important to distinguish between the underlying causes of the 1995-96 budget gap and the gap faced this year. In 1995, the State's economy was struggling to create new jobs despite the fact that the U.S. economy was growing strongly. In 1994, U.S. Gross Domestic Product rose by 6.2 percent, while New York's Real Gross State Product increased by only 2.2 percent. New York's business climate and culture of high taxes discouraged economic growth in the State.

By 2001, the State's business climate had dramatically improved, largely due to the tax cuts of the later half of the 1990's. New York was poised to continue to operate from a solid financial position when the State was struck with a unique series of events that presented a significant challenge to New York's economy. A prolonged decline in stock prices hurt New York's vital Wall Street at the same time the U.S. economy was slipping into a recession. These factors were exacerbated on September 11, 2001, when a terrorist attack struck the heart of downtown Manhattan. The combination of these events resulted in a significant decline in tax collections, leading to the current budget gaps. Unlike in 1995, New York's overall economy is much stronger now, and is poised to recover on its own. The State, however, must be careful not to harm the economy by placing new burdens on its citizens by increasing taxes.

Taxpayer Relief
Since 1995, New York has been the nation's leader in cutting taxes. Under the leadership of Governor Pataki, the State has reduced 19 different taxes 63 times, returning nearly $65 billion back into the New York economy over the past eight years.

In SFY 2003-04, New Yorker's will save an additional $13.5 billion from these tax cuts, including:

• $6 billion in Personal Income Tax savings;
• $3 billion in savings to New York's business community from reductions in business taxes;
• $2.7 billion in savings provided to local property taxpayers from relief provided through the STAR program; and
• $900 million from reductions in the State's Sales and Use taxes.

The savings in 2003-04 will bring the total cumulative value of these cuts to $78.2 billion. This value includes $177 million from previously enacted tax cuts that will take effect during the 2003 tax year. These scheduled tax cuts include:

Personal Income Taxes $41 million

Earned Income Tax Credit ($15 million)
Under current law, New York's EITC is equal to 27.5 percent of the Federal credit. The EITC is scheduled to increase to 30 percent of the Federal Credit.

College Tuition Deduction/Credit ($14 million)
New York's college tuition deduction/credit is now based on up to $5,000 of eligible tuition expenses. This amount will increase to $7,500 in tax year 2003, and will increase to $10,000 in tax year 2004.

Marriage Penalty Reduction ($11 million)
New York's standard deduction for married couples filing jointly was increased to $13,400 in 2001 and $14,200 in 2002. This reduction will increase to $14,600 in 2003.

Alternative Fuel Cell Credit ($1 million)
Under current law, New York's alternative energy fuel cell credit will provide a credit equal to 20 percent of the cost of purchasing and installing a fuel cell to supply power to a taxpayer's home beginning in the 2003 tax year.

Business Taxes $131 million

Energy Gross Receipts Tax (GRT) Reduction and Reforms ($90 million)
These reforms include the phase-out of the GRT on energy commodities, the phase-out of the Gas Importation Tax, a reduction in the GRT on transmission and distribution service, and the complete elimination of all energy gross receipt taxes imposed on commercial customers.

Financial Services Allocations ($30 million)
Enacted as part of the 2000-01 State budget, the allocation rules for broker/dealers were modified to reflect a market state approach that sources the income of a company to where the company is located.

Green Building Tax Credits ($6 million)
The Green Building program is designed to encourage the construction of buildings that have minimal adverse impacts on the environment. Green building credits are allocated each year based upon a statutory schedule: $1 million in tax year 2001; $2 million in tax year 2002; $3 million in tax year 2003; $4 million in tax year 2004; and $5 million in tax yeat 2005.

Consumption and Use Taxes $5.1 million

Sales Tax on the Transmission and Distribution of Electricity and Gas ($2.8 million)
The remaining one percent of the Sales Tax will be eliminated on September 1, 2003.

Beer 1.5 Cent Reduction ($2.3 million)
Currently, the beer tax is 12.5 cents per gallon. Effective September 1, 2003, the beer tax will be reduced by 1.5 cents to 11 cents per gallon.

National economic conditions, combined with impact of the terrorist attack of September 11th, 2001 have put tremendous pressure on the State's revenue base. As a result, the Governor did not propose a comprehensive tax cut program as part of the 2003-04 Executive Budget. However, the Governor has pledged not to delay any of the previously enacted tax cuts. The Budget did propose a variety of measures that impact the State's revenues. The following section summarizes the proposed changes to taxes and other revenue streams made as part of the 2003-04 Executive Budget proposal.

Exemption On Clothing
+$363.4 million
Changes the year round exemption on State and local sales and compensating use tax on clothing and footwear to an exemption during four, seven-day periods annually. The seven-day periods are as follows: the week preceding Martin Luther King Jr. Day; the first Saturday in April and the six following days; the second Saturday in June and the six following days; Labor Day and the six following days. The limit of which clothing is eligible for the exemption is raised from $110 to $500 per item. The original clothing exemption was first implemented in March, 2000. The new exemption on clothing will take effect on June 1, 2003.

Insurance Tax Reform
+$158 million
Reforms the Insurance Franchise Tax to eliminate the current tax on entire net income (ENI) and replaces it with a one and three quarters percent tax on gross premiums for accident and health insurance contracts, and two percent on all other premiums. A minimum tax of $250 would remain in effect. However, life insurance corporations will continue to tax under the current method of taxation, with their total tax liability capped at one and one half percent. The Metropolitan Commuter Transportation District Surcharge would also be changed to be based on the new tax calculation.

Under the current tax structure, an insurance company must calculate its tax liability under several different bases, and then pay the tax based on the highest calculated tax liability. These bases include entire net income, entire net income plus compensation of certain officers, allocated capital, and a minimum tax of $250. Additional taxes are imposed on gross premiums and on subsidiary capital.

Bank Tax Reform Permanent Extension
Makes permanent the provisions of the 1985 Bank Reform Act and the 1987 Business Tax Reform and Rate Reduction Act regarding commercial bank taxation by the State and New York City. These provisions expired on December 31, 2002. The 1985 Bank Reform Act substantially revised the franchise tax on banking corporations to make the tax analogous to the franchise tax on general business corporations. This legislation included significant rate reductions and other reforms. The 1987 Business Tax Reform and Reduction Act was enacted to avert unintentional increases in State tax liabilities resulting from Federal tax reform.

Bank Tax Glass-Steagall Extender
Extends for an additional year the Glass-Steagall Transitional provision to remain in effect for taxable years beginning in 2003. The Glass-Steagall Transition allows a "Financial Holding Company" to elect to continue to be taxed under Article 9-A for the taxable year if it was taxed under Article 9-A during the previous taxable year. For taxable years beginning on or after January 1, 2004, Financial Holding Companies will be taxed under Article 32 (Bank Franchise tax). This provision helps these businesses during the transition to an integrated financial services corporate structure which is now allowed as a result of the Federal Gramm-Leach-Bliley Act of 1999.

Venture Capital Tax Credit
-$12.5 million
Creates a forth venture capital tax credit. The credit is offered to certain insurance companies for their investments in a certified capital company which is defined as a for-profit partnership, corporation, trust or limited liability company that has as its primary business activity the investment of cash in qualified businesses. In addition to the current requirements to qualify as a "qualified business" that a certified capital company may invest in, qualified businesses in the forth credit program must have a minimum relationship with a research center receiving financial support from New York State through (a) the Centers of Excellence program; (b) the Gen*NY*sis program; or (c) conducting high technology or biotechnology projects authorized by the Rebuilding the Empire State Through Opportunities in Regional Economies (RESTORE) New York Program.

The credit for the fourth program is equal to 50 percent of the total investment. However, the maximum credit that can be taken per year is 10 percent (10 percent over 10 years). The maximum amount of the total capital eligible for the credit is capped at $250 million. The first year that the credit can be claimed is 2005. However, insurance companies may start investing immediately.

Increase of Limited Liability Company Fees
+$25 million
Increases the filing fees that a LLC (Limited Liability Company) or partnership must pay from $50 to $100 per member. The minimum and maximum filing fees are also raised from $325 to $500 and $10,000 to $25,000 respectively. LLC fees are collected from any LLC which have income derived from New York sources regardless of how many members live in the State. The new rate will be effective for tax years beginning on or after January 1, 2003.

SUV Expensing
+$2 million
Amends the Corporate Franchise Tax and the Personal Income Tax to disallow, on the State level, the expensing option on SUVs weighing over 6,000 pounds. The Federal Tax Code allows for the deduction of up to $25,000 of the cost of these vehicles as a business expense.

Historical Homes Rehabilitation Tax Credit
-$10 million
Provides taxpayers who own a designated historical home which is a place of residence, a tax credit equal to up to 25 percent of, but not to exceed $50,000, spent on rehabilitating the historical home. In order to claim the credit, at least $5,000 must be spent on the project. The home must be within a targeted area of residence, either a census track in which 70 percent of the people earn less than 80 percent of the statewide median income or be within a designated area of chronic economic distress. The credit also applies to residences within an empire zone. The credit is equal to 15 percent of moneys spent for external work approved by a local landmarks commission, Office of Parks, Recreation and Historic Preservation. The credit is equal to 25 percent of all moneys spent on interior and exterior work approved by the Office of Parks, Recreation and Historic Preservation or by a local government certified pursuant to section 101(c)(I)of the National Historic Preservation Act (16 USCS § 470a). For the 25 percent credit it is necessary for both interior and exterior work to be done. If a developer renovates a historic home and sells it to an owner who makes the home a place of residence then the new owner can claim the credit. If the taxpayer's AGI (Adjusted Gross Income) is under $100,000 for the year then the credit may be refunded, if the taxpayer's AGI is over $100,000 then the credit may be carried over into subsequent years. The credit would only apply to work approved after January 1, 2003. This bill is effective immediately and shall apply to taxable years beginning on or after January 1, 2004.

Institution of Withholding Tax for Non-Resident Partnerships
+$15 million
Requires partnerships or C corporations with partners, who are not residents of New York State and who will have a tax liability of over $300, to remit to the State an estimated tax for those partners on a quarterly basis. The estimated tax will be derived by taking the pro rata share of the entity income and applying the tax at the highest tax rate of any of the partners who is an individual taxpayer. Any time the entity fails to pay the estimated tax on-time a $50 penalty per member will be assessed; if the company missed all four payments in a year for a given member the penalty would be $200 for that member. The entities are allowed a grace period until September 15, 2003 for all 2003 estimated taxes that would have been due before September 15th. The member is allowed a credit equal to the estimated tax, remitted by his partnership, on his taxes owed to the State. This change will take effect immediately and apply to all tax years beginning after December 31, 2002.

Tobacco Settlement Financing Corporation Act
Creates the Tobacco Settlement Financing Corporation as a subsidiary of the New York Municipal Bond Bank, and authorizes the State to sell all or a portion of the State's share of the annual payments under the 1998 "Master Settlement Agreement" between the major tobacco manufactures and most states, including New York. The sole purpose of the Tobacco Settlement Financing Corporation would be to purchase all or a portion of the State's share of the tobacco settlement payments, and the corporation would be authorized to issue bonds sufficient to provide the funds to meet this purpose (i.e. securitize the tobacco settlement payments).

Prior to entering into a sales agreement, the Director of the Division of the Budget must provide written notification to the Chairmen of the Senate Finance Committee and the Assembly Ways and Means Committee of any plan to sell tobacco settlement payments, and must also describe how the sales, combined with other recurring budget reductions and other ongoing or anticipated actions, supports a multi-year plan to achieve a balanced budget.

The proceeds of the sale of the tobacco settlement payments by the State would be required to be used for:

• any capital purpose or for any capital program;
• payment of debt service on any outstanding bonds, notes or other obligation of the State or of local governments, school districts or public benefit corporations for which State Aid is applicable or required to be paid or for which there is a State contract subject to appropriation, provided that these bonds or notes were issued for capital purposes;
• grants to local governments, school districts, or public benefit corporations; or
• to provide a revenue resource for other State expenditures.
• The State of New York Mortgage Agency would be authorized to proved "corporate credit support" (bond insurance) on debt issued by the Tobacco Settlement Financing Corporation. This credit enhancement would lower the debt service cost of issuing tobacco securitization bonds and would increase the revenue to the State from the sale of the tobacco settlement payments.

As part of the 2003-04 Executive Budget, the State Financial Plan anticipates the use of $1.5 billion in 2002-03, $2.3 billion in 2003-04 and $400 million in 2004-05 from the sale of tobacco settlement payments to help close the budget gaps in these years.

Video Lottery Terminals
Eliminates the December 31, 2007 sunset of the Division of the Lottery's authorization to operate video lottery terminals (VLTs). The bill creates a new schedule for the portion of the vendors fee (up to 25 percent of the receipts after pay-outs) that must go to purse enhancements and breeding funds. In addition, the hours of operation are expanded to allow VLTs to be operated for a maximum of 126 hours per week, but may not be operated between 2 AM and 12 PM on Sundays.