Opinion

PATERSON’S CHALLENGES: ECONOMIC WOES

WHEN Eliot Spitzer‘s entanglement with a high-priced prostitution ring was first revealed Monday afternoon, stock indexes were getting pummeled in the latest manifestation of credit market turmoil. On Tuesday, as the market was enjoying a Fed-induced bounce, The Wall Street Journal reported that “big, painful firings are coming” at investment banks – with as many as 40,000 New York-based jobs potentially on the chopping block.

These were just the two latest signs of economic trouble in the wealth-generating heart of the state economy as David Paterson prepared to succeed the disgraced Spitzer in the governor’s office.

New York is now as dependent as ever on revenues generated by capital gains, business profits, salaries and bonuses collected by its wealthiest residents. In 2007, the highest-earning 1 percent of New Yorkers generated nearly 40 percent of state income-tax receipts – accounting for fully half the growth in this tax over the past five years. But these taxpayers include many of the same newly rich investment bankers who are now losing their shirts – if not their jobs.

Spitzer campaigned as an agent of change, but his first budget actually added to the spending baseline that he inherited from Gov. George Pataki.

In fact, despite the budgetary blowout during his last term (when state spending rose 30 percent), Pataki also managed to leave behind a cash surplus of more than $2 billion – which the Spitzer administration had begun to methodically deplete in the face of declining revenue growth.

The Spitzer scandal and resignation hit during a pivotal week in the Albany budget-making process, with both the Senate and Assembly preparing to adopt separate “one-house” budgets as a prelude to the start of serious negotiations with each other – and, ultimately, with the governor.

Of course, that will now mean David Paterson.

The new governor is free to disown all or part of the 5 percent to 6 percent spending hike (depending who was counting) in Spitzer’s second and last budget – an increase that contrasted strikingly with efforts by governors in New Jersey, California and other states to reduce spending.

An obvious starting point for any effort to rein in spending would be to reduce the state payroll, which Spitzer was in the process of increasing by more than 5,000 positions. Paterson’s successor as Senate minority leader, Malcolm Smith, has suggested moving in the opposite direction and eliminating thousands of jobs through attrition. This is the least Paterson can do if he wants to demonstrate he can be fiscally tougher than Spitzer.

Another immediate test will come in the area of taxes. Spitzer’s budget included $1.3 billion in tax and fee hikes – as well as delays and reductions in previously scheduled state-subsidized “STAR” property tax rebates for homeowners.

Assembly Democrats, meanwhile, have proposed raising another $1.5 billion via a hike in personal income taxes targeted at households with incomes above $1 million. While Spitzer had essentially ruled out the personal income-tax hike, Assembly Democrats may take a run at Paterson.

But if he accedes to more tax hikes, the new governor would send economic decision-makers the worst possible signal at the worst possible time. It would also invite a bigger budget battle with Senate Republicans, who now insist they’ll flatly reject any tax increase.

A crucial issue for local taxpayers will also require Paterson’s attention. Spitzer had recently embraced the concept of a cap on school property taxes, appointing Nassau County Executive Thomas Suozzi to chair a special commission to flesh out the details of a permanent property-tax-relief program. Suozzi and his fellow commissioners – including the new governor’s father, Basil Paterson – have begun holding hearings around the state. They’re due to present a report on May 15.

Will Paterson turn his back on the state’s overburdened property taxpayers? This much is certain: The clamor for real property-tax relief is not going to disappear with Eliot Spitzer.

As a member of Albany’s overlooked legislative minorities, Paterson could specialize in postures rather than positions. As lieutenant governor, he was stuck in his boss’s shadow.

Now, on scores of issues affecting millions of New Yorkers, he’ll be making decisions that actually count.

E.J. McMahon is director of the Manhattan Institute’s Empire Center for New York State Policy.ejm@empirecenter.org