Pataki Calls for Income Tax Cuts in NY

Published March 1, 2006

New York Gov. George Pataki’s (R) proposed budget for 2006-07 calls for hefty spending increases, significant new personal and corporate income tax cuts, and a new state-funded property tax rebate for homeowners in school districts that agree to cap spending.

The governor has announced he will not seek a fourth term in office, so the nearly $111 billion state budget for the fiscal year that starts April 1 represents his last opportunity to secure a positive fiscal legacy before his term concludes at the end of 2006. The state will end the current fiscal year with a $2.7 billion surplus.

The “state funds” portion of the budget (excluding federal grants) would total just under $75 billion, a growth rate of 6.6 percent over the prior year. Even after adjusting for the state’s continuing takeover of locally funded Medicaid costs, the budget hike is the second-largest Pataki has proposed in his 12-year tenure as governor, according to E. J. McMahon, director of the Manhattan Institute’s Empire Center for New York State Policy.

$2.5 Billion Cuts Proposed

Pataki’s proposed state tax cuts would amount to $2.5 billion when fully implemented over the next three years. They include:

  • eliminating the marriage penalty by increasing the standard deduction for married taxpayers and doubling the threshold where the rate table recapture applies;
  • cutting the top income tax rate from 6.85 percent to 6.75 percent;
  • increasing the income threshold where the top income tax rate applies from $40,000 to $60,000 for married taxpayers and from $20,000 to $30,000 for single taxpayers;
  • providing an educational income tax credit of up to $500 for qualified family expenses for students in school districts with underperforming schools;
  • reforming the corporate and bank tax by eliminating the alternative minimum and capital bases;
  • reducing the top corporate tax rate from 7.5 percent to 6.75 percent; and
  • eliminating New York’s estate tax by increasing the exemption threshold and then eliminating the tax.

“This package is the natural sequel to the historic tax cuts enacted during the first half of Governor Pataki’s tenure,” McMahon said. “The governor has laid out a strong pro-growth, pro-investment tax policy agenda that could serve as a benchmark for his successor.”

GOP Lawmakers Praise Cuts

State Senate Majority Leader Joseph L. Bruno (R-Brunswick) said the governor’s proposed tax cuts “will help strengthen our economy and help provide new opportunities for job creation and retention so our children can have the career they want in New York State.

“Every dollar a business saves in taxes, especially small businesses, is a dollar that can be invested in a new employee or put back into the business to make it more successful,” Bruno said.

State Sen. Raymond A. Meier (R-Utica) said the governor had “rightly discerned” that the state’s current budget surplus belongs to taxpayers.

“We should return this money to them instead of spending it here in Albany,” Meier said.

However, McMahon noted only a portion of the tax cuts would become effective this year, and most of the budgetary costs won’t be felt until after Pataki leaves office. Thus, even if enacted, they will be vulnerable to repeal under his successor.

Some Taxes Would Climb

Moreover, Pataki has not taken a pure tax-cutting approach. The budget also calls for a $1 per-pack increase in the state’s existing $1.50 per-pack cigarette tax, and it would permanently derail the scheduled elimination next year of state sales taxes on clothing purchases under $110.

The tax cuts are based largely on the recommendations of a tax reform panel chaired by supply-side economist and CNBC host Lawrence Kudlow.

“While New York had been moving in a low-tax, pro-growth direction under Gov. George Pataki, a huge temporary tax hike in 2003 passed by the state legislature over the governor’s veto represented a body blow to current and future economic performance,” Kudlow said. “This is why across-the-board tax-rate relief is so vital to the economic future of the state.”

Education Credits, Charters Gain

Pataki also called for an expansion of the state’s school tax reduction (STAR) program for homeowners–essentially a state-funded homestead exemption–to give $400 rebates in school districts that limit budget increases. The existing STAR exemption for senior citizens would be indexed to inflation.

The governor made two other significant proposals regarding education:

  • an increase, from 100 to 250, in the existing statewide cap on the number of privately operated public charter schools; and
  • a $500-per-child education tax credit, which would apply to qualified education expenses incurred by parents of private and public school students in school districts that have a failing school as certified by the federal No Child Left Behind Act. (The credit would be phased out for parents with incomes above $75,000.)

Choice Advocates Hail Gains

The governor’s proposed charter school cap expansion and education tax credit were hailed by New York school choice advocates.

“Governor Pataki’s proposal to create an education tax credit is a valuable, exciting development in education reform,” said Tom Carroll, president of New York State’s Foundation for Education Reform & Accountability ( “Parents who are most in need of choices in education have a new door opened to them. Programs such as this in a half-dozen other states have spurred millions of dollars in private investment in education and have made a huge difference in the lives of many low-income families.”

Teachers Oppose Reforms

Both proposals–the charter school cap expansion and the education tax credit–appear to enjoy relatively strong support in the legislature, although they are by no means assured of approval in the face of strong opposition from teacher unions.

Pataki’s final budget proposal is $48.1 billion higher than the spending plan he inherited from former governor Mario Cuomo in 1995–a 76 percent increase during a period when the cost of living rose less than twice as fast. And that may be the best-case scenario, because the Republican-controlled Senate and Democrat-dominated Assembly customarily add significant spending to Pataki’s proposals.

“The ultimate viability of the tax cuts and other key priorities, such as the education tax credit and the new STAR rebate linked to a cap on school spending, will depend to a great extent on Pataki’s ability to hold the line on spending as a lame duck,” McMahon concluded.

David Pietrusza ([email protected]) is director of programs and communications for the Empire Center for New York State Policy.