Introduction and Overview: The Impact of the Federal Budget ...

Introduction and Overview: The Impact of the Federal Budget ...

The Impact of the Federal Budget on New York State, New York local governments and New Yorkers Fiscal Policy Institute May 25, 2006 Federal budget and tax policies pass down to affect state and local governments and the services they provide in significant ways NYS relies on federal grants for one third its revenues. $36.2 billion of $107.973 billion or 33% in 2005-2006 $35.607 billion of $111.179 billion or 32% in 2006-2007 enacted budget Compared to other states this is a much greater share. Other states rely on the federal government for only 25% of revenues. Entitlement caps would particularly hurt New York Federal Funds as a Percent of Total State Revenues 40%

35% 30% 25% 1995 1996 1997 1998 1999 2000 2001 2002 2003

2004 2005 2006 2007 2008 2009 New York State's Use of Federal Funds: 2004-2005 Family Assistance 15% Emergency Management and Security Services 4% Education

10% All other 5% Health 66% States, unlike the federal government, must balance their budgets. If federal government support for health, education and social services are reduced, New York must find the revenues to maintain services or cut back services Medicaid Child care LIHEAP Medicare Part D

Historically, federal funding acted as an automatic stabilizer, increasing in bad times, shrinking in good times. Block grants have reduced the importance of automatic stabilizers. Federal government decision to increase the FMAP was an important element in reducing state fiscal distress in the latest economic downturn. Sound state budget policy relies on sound federal budget policy. Policy failures at the federal level can lead to state revenue shortfalls and service cuts not only due to fluctuations in direct grants-in-aid, but from policy measures that have notable downstream effects on state and local budgets. 1. Federal budget cuts directly reduce funding for state programs. 2. Federal budget policies inevitably affect state budgets in future years. 3. Federal policies that make structural changes to federal-state programs often lead to significant decreases in funding to states.

4. Base-narrowing and other changes to federal tax law can significantly reduce state revenue 5. Federal pre-emption of state taxing authority makes it more difficult states to collect revenues. 6. Current federal proposals to repeal the income tax deduction for state and local taxes would reduce states' and localities' ability to raise revenues. 7. Unfunded federal mandates can place additional pressure on statebudgets. Presidents 2007 budget Domestic discretionary spending $16 billion below OMB baseline - $7.5 billion in cuts to grants in aid For the $4.2 billion in programs for which detailed data is available, New York would lose $313 million in 2007 growing to $885 million in 2011 for a five year shortfall in excess of $3 billion.

Entitlements reduced by $47 billion over five years Senate budget resolution Restores domestic discretionary spending above the CBO baseline Entitlement cuts of $14 billion but not through a reconciliation process Tax cuts below the President does not include tax cuts associated with Health Savings Accounts House budget resolution Domestic discretionary funding cuts similar to the Presidents Tax cuts similar to the Senate budget resolution Entitlement net cuts of $5.1 billion Not consistent with targets sent to appropriation committees targets add about $7 billion to DDF for next year Tax cuts 2007-2011

$300 $250 Billions $200 $282 $150 $228 $218 Senate House $100 $50 $0 President

Billions Domestic discretionary spending cuts: 2007 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 -$2 -$4 $16.0 $10.3 $3.3 President

-$1.6 Senate House Targets All three underestimate impact on the deficit Assume a single year fix for the AMT would expand from 4 million to 34 million in 2011 Do not include $156 billion in emergency funding Assume no funds for Iraq or Afghanistan after FFY 07 and only $50 billion for Iraq in FFY07 (vs $120 billion current spending) Process what to expect: House has deemed its resolution so it can proceed without a conference with the Senate

Senate budget resolution not deemed but analysts do not think a joint budget resolution is possible given the differences House beginning to work on appropriation bills Budget not expected to be complete until after the November elections The Tax Cuts Enacted since January 2001 account for almost half the current budget deficit. 48% Tax Cuts Defense, 36% Homeland Security and International 8% Entitlements 8%

8% 48% 36% 8% Domestic Discretionary (except CBPP calculations from Congressional Budget Office data. Reflects costs in 2005 above a CBO January 2001 Homeland current services baseline projection for 2005. May not add to 100% due to rounding. Security) 70 percent of the deterioration in the budget in 2005 has resulted from legislation enacted by Congress and the President. And 85 percent of the cost of that legislation stems from tax cuts or Average Value of Tax Cuts, 2006 $125,000 $111,549 $100,000 $75,000

$50,000 $39,020 $25,000 $0 $23 $748 Lowest 20 Percent Middle 20 Percent Source: Tax Policy Center nter on Budget and Policy Priorities; last revised Feb. 14, 2006 $5,406 Top 20

Percent Top 1 Percent Millionaires Tax Cuts Cost More Than Most Agency Budgets 2005 Agency Budgets, Tax Cuts if Fully in Effect in 2005 Billions of dollars $300 All tax cuts $250 $200 $150 $100 Tax cuts for

the top 1% Education Veterans $50 $0 Source: CBPP calculations from Congressional Budget Office data nter on Budget and Policy Priorities; last revised February 14, 2006. Housing & Urban Development Environmental Protection WHAT WOULD IT TAKE TO BALANCE THE BUDGET WHILE PRESERVING THE TAX CUTS? To balance the budget by 2016 while making the tax cuts permanent, policy makers would have to: Cut Social Security benefits

by.................................. 41 % Cut defense spending by ............................................ 61 % Cut Medicare by..... .... 53 % To balance the budget in the next decade while extending the tax cuts enacted since 2001 Cut every other program

except Social would require cutting Social Security benefits by nearly half, cutting Medicare or the Pentagon by roughly two-thirds, or cutting practically everything else by nearly Security, nter on Budget and Policy Priorities; last revised February 14, 2006. 29 MAKING THE TAX CUTS AND AMT RELIEF PERMANENT WOULD COST TRILLIONS Cost of tax cuts with interest, adjusted for inflation $1,000 $900 $800

billions $700 $600 $500 cost of making the tax cuts permanent $400 $300 $200 $100 cost of already enacted tax cuts $0 2001 2006 2011

Source: CBPP calculations from Congressional Budget Office data nter on Budget and Policy Priorities; last revised February 14, 2006. 2016 2021 2026 THE TAX CUTS AND SOCIAL SECURITY Costs through the next 75 years 3.0% Percent of GDP 2.5% 2.0% Tax cuts if

made permanent 1.5% 1.0% 75-year shortfall in Social Security 0.5% 0.0% Note: The figure for the tax cuts represents the costs of the 2001 (EGTRRA) and 2003 (JGTRRA) tax bills. Estimates of the tax cuts assume that the tax cuts are extended as proposed by the Administration and include the additional cost of Alternative Minimum Tax relief attributable to the 2001 and 2003 tax bills. The cost of the tax cuts is assumed to grow only with the economy after 2016. The Social Security estimate comes from the 2005 Trustees Report. All figures are net present values of costs from inception through 2079. ter on Budget and Policy Priorities; last revised February 14, 2006.. STUDIES FIND RECENT TAX CUTS AS LIKELY TO REDUCE ECONOMIC GROWTH AS TO

INCREASE IT tax legislation will probably have a net negative effect on saving, investment, and capital accumulation over the next 10 years. -- Congressional Budget Office making the 2001 and 2003 tax cuts permanent would raise the cost of capital for new investments, reduce long-term investment, and reduce economic growth. -- Brookings Institution economists

Studies by Federal Reserve economists, the Joint Committee on Taxation, and other noted experts have Sources: Congressional Budget Office, The Budget and Economic Outlook: An Update, Aug. 2003, p. 45; Gale & Orszag, "Budget Deficits, produced similar National Saving, and Interest Rates," prepared for findings. the Brookings Panel on Economic Activity, September 2004, p. 34; Elmendorf & Reischneider (Federal Reserve economists), Short-Run Effects of Fiscal Policy with Forward-Looking Financial Markets, National Tax Journal, Sept. 2002, pp. 357-86; Joint Committee on Taxation, Macroeconomic Analysis of HR 2, Congressional Record, May 8, 2003, pp. H3829-32. nter on Budget and Policy Priorities; last revised Nov. 2, 2004 Federal tax issues affecting New York and New Yorkers BAT/Nexus Bill

Legislation overriding the Cuno decision 2001 Estate Tax legislation Federal legislation aimed at reversing the Zelinsky decision (the convenience of the employer decision) Internet Tax Freedom Act (up for renewal in 2007) AMTs treatment of the deduction for state and local taxes paid an an item of tax preference Streamlined Sales Tax Agreement

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