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McMahon: Albany's got to grow the economy

Gov. Andrew M. Cuomo.

Gov. Andrew M. Cuomo. Photo Credit: Newsday/J. Conrad Williams Jr.

With two weeks left in the state fiscal year, Albany's annual budget adoption process has been overshadowed by the once-a-decade imperative of reapportionment. Late Wednesday, Gov. Andrew M. Cuomo and legislative leaders were close to a deal on new Assembly, Senate and congressional district lines, linked in some way to the otherwise unrelated issue of pension reform.

When the smoke clears from the cooking of Cuomo's redistricting-pension sausage, attention will turn to the budget itself. All signs suggest a new spending plan will be passed by the legislature before the 2012-13 fiscal year dawns on April 1, and perhaps even a week ahead of time.

But an early budget adoption should not be taken as a sign that the process has gotten better, or that New York's worst problems are behind it. It hasn't -- and they aren't.

To an increasing degree over the past two decades, budgeting on the state level in New York has been a large-scale exercise in wealth redistribution. After all, the budget consists largely of local assistance, including Medicaid reimbursements and school aid, driven by formulas based on need. Meanwhile, the largest state revenue source is the personal income tax, which hits households with six-figure incomes more heavily than those earning less than $100,000. The result: a substantial net subsidy for upstate, where incomes are lower, at the expense of downstate.

As documented in a recent report by the Rockefeller Institute, residents of the lower Hudson Valley and Long Island get back 72 cents per capita for every dollar they pay in state taxes. When revenues are traced to point of origin by place of work, the downstate suburbs' return on each dollar improves only slightly, to 78 cents per capita. New York City breaks even on the exchange when taxes are traced to place of residence, but gets back only 86 cents per capita for every dollar in taxes generated by those who work within its borders.

The Capital Region unsurprisingly is a big gainer from the rest of the state, the Rockefeller Institute found, taking in $2 for each dollar in taxes paid by place of residence, or $1.82 per capita for every dollar generated by those who work in the region. And the rest of upstate gets a net subsidy of $1.65 per capita for every dollar paid by residents, or $1.54 on a place-of-work basis.

This explains, among other things, why self-styled "conservative" Republican legislators from upstate New York can sound like urban Democrats on some spending and tax issues.

In the wake of the Great Recession, this arrangement is not sustainable. Downstaters are still wealthier than upstaters, on average, but many of them feel more economic stress in the wake of the 2007-08 financial crisis and recession. House prices have dropped much more on Long Island and in the Hudson Valley than in upstate communities.

Meanwhile, declining upstate cities struggle under the burden of their budgetary legacy costs -- upkeep on aging infrastructure and labor contracts settled back when their economies were healthier and populations were larger. That's why they desperately need both pension reform (which the governor may be on the verge of delivering) and mandate relief (still nowhere in sight).

Cuomo has brought cost containment if not structural balance to the state budget, but he also has extended higher income-tax rates on very high-income earners, which will ultimately hurt New York's competitiveness. What all regions of New York still need most is an economic growth strategy built around private enterprise rather than public largesse.

E.J. McMahon is senior fellow at the Manhattan Institute's Empire Center for New York State Policy.