Gov. Andrew M. Cuomo on Tuesday warned that New York State was facing an enormous $15 billion deficit as he unveiled a 2022 budget proposal that raised the possibility of increasing the state income tax for top earners.
The governor pleaded with leaders in Washington to deliver $15 billion in emergency pandemic relief, but the precariousness of the situation led Mr. Cuomo to lay out two different budget possibilities: one assuming a federal aid package of $6 billion, and another with the full $15 billion.
If the state were to receive $6 billion, a doomsday plan would include a temporary wealth tax that would apply to taxable income above $5 million, under the governor’s proposal. The state would tax that income at 10.82 percent rate, up from 8.82 percent.
Mr. Cuomo said that in this scenario, the state would also have to cut about $2 billion in school funding, $600 million in Medicaid funding and $900 million in other across-the-board reductions.
Embracing a tax increase, even if only in a contingency plan, represented a significant shift for Mr. Cuomo, a third-term fiscally moderate Democrat who has been resistant to increasing taxes on the wealthy, despite support from legislative leaders and his party’s left flank.
“This budget is really the economic reconciliation of the Covid crisis, the cost of the Covid crisis,” Mr. Cuomo said during a virtual address from the State Capitol’s Red Room in Albany. “This year, it’s going to be about reconciling the responsibility of the battle and completing the battle.”
There were other question marks in the governor’s budget proposal, primarily a lack of clarity about how much money the state would have on hand because of diminished tax revenues, which Mr. Cuomo said were expected to drop by $39 billion over the next four years.
In crafting a budget for the next fiscal year, which begins April 1, state officials face similar challenges as last year, when the pandemic devastated the economy and upended one of the nation’s largest budgets.
But the political climate in Washington is certainly different: Senator Chuck Schumer, who will take over as majority leader in Washington this week, has promised “better days ahead out of Washington for New York,” though he has stopped short of promising a complete bailout.
Still, his influence is already being felt: Last week, Mr. Schumer announced that the city and state would receive $2 billion in emergency funding related to expenses incurred as part of the coronavirus response.
While Mr. Cuomo has criticized the lack of direct financial aid to the state, the stimulus deal passed in December did include a variety of big-dollar payments for transportation and education, as well as vaccination efforts and rent relief.
Even with the potential economic peril, the state’s total spending for the year is projected to be $193 billion, including federal funding, an increase of less than 1 percent compared with the previous year, according to budget documents.
Mr. Cuomo’s assertion of a $15 billion shortfall has been questioned by some conservative economists, and the bleak outlook was seemingly softened by news last week from the state comptroller that December tax receipts had come in $1.4 billion above projections.
Indeed, Robert Mujica, the governor’s budget director, said on Tuesday that the $15 billion represented the sum of the current fiscal year’s deficit of nearly $5 billion and the projected gap of about $10 billion in the next fiscal year.
The incoming Biden administration is promising $350 billion in direct aid to states and local municipalities, as part of a $1.9 trillion Covid response plan. Even so, Mr. Cuomo maintained that without a substantial infusion of cash from Washington, the state would need to resort to a mix of tax increases, spending cuts and borrowing.
“We don’t know what level of aid we will get,” Mr. Cuomo said on Tuesday, adding, “New Yorkers deserve and demand fairness.”
The governor went as far as threatening to pursue litigation if Congress did not grant his request for $15 billion, although his office later said that the governor was referring to continuing legal efforts to overturn the cap on state and local income tax deductions. The state’s lawsuit has already been rejected by federal courts and is on appeal.
The governor also proposed up to $50 million in tax credits for restaurants and $25 million for theatrical productions, industries that have both been devastated by coronavirus.
The governor has proposed some popular revenue-raising measures, including the legalization of recreational marijuana and mobile sports betting, but the projected tax dollars from those proposals could take years to materialize and would not dig the state out of its gargantuan budget hole. Mr. Cuomo’s budget would also subject short-term rentals, like Airbnb bookings, to state and local sales taxes.
Mr. Cuomo said on Tuesday that mobile sports betting could generate about $500 million annually once implemented. Legalizing marijuana, state officials said, could raise about $350 million a year once the program is implemented in about three or four years. He proposed steering about $100 million annually to a “social equity fund.”
Legalization efforts have fallen apart since 2019 because of disagreements between Mr. Cuomo and the Legislature over how to allocate tax proceeds from pot sales, with many lawmakers calling for the money to be reinvested in communities disproportionately affected by the unequal enforcement of drug laws.
The state’s budgetary woes have bolstered calls from progressive coalitions and left-wing lawmakers who support increasing taxes on the rich and passing an array of new levies to tax their wealth.
Mr. Cuomo on Tuesday threw his support behind a version of one of their proposals — raising the state income tax on certain millionaires — even while cautioning that doing so would not produce enough money to offset budget cuts.
The governor’s proposal would increase the combined state and local income tax to 14.7 percent in New York City, the highest rate in the nation, he said. His budget would also temporarily pause the phase-in of a middle-class tax cut which began in 2018.
Mr. Mujica dismissed other tax ideas floated by progressives, like a so-called capital gains tax, as unconstitutional. He said the administration would not need to pursue tax increases if Washington provided sufficient aid, arguing that they could force many high-income residents to flee, eroding a crucial part of the state’s tax base.
In the coming weeks, the Legislature, which is controlled by Democrats, is expected to review and present its own budget proposal, with tax increases bound to become a lightning rod issue.
“The wealthy have gotten wealthier during this crisis even as the middle class has shrunk and millions of New Yorkers have struggled to make ends meet,” Senator Andrea Stewart-Cousins, the Democratic majority leader, said in a statement after the governor’s speech. “We must be ready to act as a state to advance efforts to raise revenues, including having the hyper-wealthy share this burden.”
The governor holds enormous sway over the budget process, which typically includes negotiations over a raft of nonfiscal measures unrelated to the budget. The governor’s budget needs to be passed by April 1.
Regardless of the federal aid New York receives to bridge its short-term deficit, state officials will still have to grapple with how to address profound revenue losses in the coming years.
“No matter the level of federal aid, the state should be pursuing structural spending reforms to ensure that its finances are stable coming out of the recession,” said Andrew Rein, the president of the Citizens Budget Commission, a fiscally conservative watchdog.