General Fund disbursements for the enacted State Fiscal Year (SFY) 2002-03 Budget are estimated at $40.21 billion, a net decrease of $1.01 billion or 2.4 percent from SFY 2001-02. This net year-to-year decline is primarily attributable to the utilization of non-General Fund sources of funding to support ongoing programs. Additional disbursements, both above the Executive proposed budget and year-to-year related to education, higher education, and health and human services are included in the enacted SFY 2002-03 Budget.

Disbursements on an All Funds basis are projected at approximately $89.56 billion, a net increase of $5.08 billion or 6.0 percent over the previous fiscal year. This increase in spending reflects anticipated additional federal Medicaid and Child Health Plus funding and the use of Temporary Assistance for Needy Families (TANF) reserves.

Highlights of the enacted SFY 2002-03 Budget include the following:

• $440 million increase in school aid on a school year basis over last year, including restoration of funding for BOCES, special education, and minor maintenance and repair of school buildings;

• $212 million to restore the Tuition Assistance Program (TAP) to a completely grant-based program rather than a mixed grant and loan program;

• $27 million to increase funding for community colleges, provide for additional full-time faculty at four-year colleges, and restore higher education opportunity programs;

• $80 million on a full annual basis for health and human services workforce recruitment and retention;

• $75 million on a full annual basis to exempt Medicare revenues from the six percent nursing home assessment; and

• $20 million to assist localities in implementing the enhanced 911 wireless emergency system.

The enacted budget also provides for $1.2 billion in additional capital appropriation authority for a broad range of capital projects across the State, including high-technology, bio-technology, economic development, transportation, and community development and revitalization.

Included in the enacted SFY 2002-03 Budget is a series of revenue actions, mainly enhancements, totaling $584 million. These revenue enhancements became necessary in light of the post-September 11 decline in revenue that manifested itself in a shortfall of approximately $1.4 billion in April 2002.

ANALYSIS OF NEW YORK STATE TAX EXPENDITURE REPORT

Definition

Tax expenditures refer to the indirect financing of certain governmental programs through tax relief. Tax expenditures reduce the tax liability of certain taxpayers in particular circumstances and encourage certain activities in order to achieve a public purpose. For instance, to help low-income families with children and encourage the creation of jobs in economically deprived areas, New York State instituted a child care credit on December 31, 1976 and an Economic Development Zone Tax Credit on January 1, 1986.

Tax expenditures take the form of exclusions, exemptions, deductions, allowances, credits, deferrals, preferential rates, and other statutory devices designed to influence the economic behavior of certain taxpayers. As such, tax expenditures involve foregone or deferred tax revenues and are thus comparable to programs financed by direct appropriation. Since programs financed through tax relief are comparable to those financed by direct appropriation, they should be subject to a review process similar to the one received by the appropriation budget.

New York State Tax Expenditure Programs

As part of the budget review process, the Division of the Budget and the Department of Taxation and Finance are jointly required to prepare an annual New York State Tax Expenditure Report. The report currently offers a summary of the tax expenditures affecting eight taxes from which the State derives about 92 percent of its General Fund Tax Revenues. The taxes covered by the report are: the Personal Income Tax (Article 22), the Franchise Tax on Business Corporations (Article 9-A), the Sales and Compensating Use Tax (Article 28), the Corporation and Utility Tax (Article 9), the Bank Tax (Article 32), the Insurance Tax (Article 33), the Petroleum Business Tax (Article 13-A), and the Real Estate Transfer Tax (Article 31). The report no longer covers the Real Property Gains Tax (Article 31-B), which was repealed in 1996.

The report provides revenue estimates for each tax expenditure, as defined by the Department of Taxation and Finance. In addition, it describes tax proposals contained in the Executive Budget that modify, add or repeal specific tax expenditures. The report does not provide an evaluation of the incidence of each tax expenditure.

For Fiscal Year 2002, the Tax Expenditure report itemizes over 300 distinct tax expenditures. The costs associated with the tax expenditures vary widely, ranging from $2 billion for the exclusion of employer contributions for medical insurance and care and long term care insurance under the Personal Income Tax to a minimal credit for Eligible Business Facilities granted to insurance companies that create or retain jobs in certain areas.

Technical measurement problems prevent the summing of tax expenditures and the drawing of any precise conclusions about their aggregate value. The estimation process cannot always accurately capture these problems, which include the interaction of different tax provisions or how the elimination of a tax provision might alter taxpayer behavior. Given these caveats, it is estimated that tax expenditures will account for $22.8 billion in foregone tax revenue in Fiscal Year 2002 ($12.4 billion in Personal Income Tax, $7.1 billion in Sales Tax, $2.6 billion in Corporate Franchise, Bank and Insurance Taxes, $0.2 billion in Corporation and Utility Tax and $0.5 billion in Petroleum Business and Real Estate Transfer Taxes).

Legislative Action

The Governor's Executive Budget contained three new tax expenditure proposals which included a Brownfields Tax Credit, a Low Income Housing Tax Credit, and the extension of favorable tax treatment under the Real Estate Transfer Tax for Real Estate Investment Trusts (REITs). In addition, the Executive proposed a Real Property Tax Exemption for railroad infrastructure investments.

The Legislature did not act upon the Executive's proposals for a Brownfields Tax Credit and Railroad Real Property Tax Exemptions. The Legislature accepted the proposals regarding the Low-Income Housing Tax Credit and REITs.

The new tax expenditures created by the Executive and the Legislature are listed on the following tables.

TABLE 1
2002-2003 EXECUTIVE BUDGET TAX EXPENDITURE PROPOSALS
($ Millions)

TABLE 2
2002-2003 LEGISLATIVE TAX EXPENDITURE
($ Millions)

The Enacted Budget contains a series of revenue actions totaling $584 million, which are necessary for implementing the State's 2002-03 Budget. The budget contains one-time and recurring revenue enhancements totaling $621 million in State fiscal year (SFY) 2002-03 and limited tax reductions totaling $37 million in SFY 2002-03.

Revenue Reductions

Low Income Housing Tax Credit

Provides an additional allocation of $2 million for the State Low-Income Housing Tax Credit. The allocation is made on an annual basis for a period of ten years. This proposal will reduce revenues by $2 million in SFY 2002-03, and in each year thereafter for a total of ten years.

World Trade Center Victims Tax Relief

Provides a Personal Income Tax exemption for 2000 and 2001 to the victims who perished in the terrorist attack of September 11, 2001. These provisions conform to certain provisions provided in the federal Victims of Terrorism Relief Act of 2001. This proposal will reduce revenues by $25 million in SFY 2002-03.

Lower Manhattan Sales Tax Holidays

Provides for three different Sales Tax free periods for the Liberty and Resurgence Zones in Lower Manhattan for the periods of June 9 through June 11, July 9 through July 11 and August 20 through August 22. Items, meals and hotel occupancy costing less than $500 will generally be exempt from the State Sales Tax during those periods. New York City will have the option to exempt the local portion of the Sales Tax during the same periods. This proposal will reduce revenues by $10 million in SFY 2002-03.

Real Estate Transfer Tax Extender

Extends special provisions in the Real Estate Transfer Tax applicable to transfers to and from Real Estate Investment Trusts (REITs). This proposal will reduce revenues by $0.4 million in SFY 2002-03, and $0.8 million fully implemented.

Technical Amendments

Empire Zones

Makes various technical changes related to the Empire Zones program to ensure continued eligibility of intended tax benefits regardless of boundary changes, relocation from incubator facilities or expiration of the general program.

Establishes additional provisions designed to prevent abuse of the program, including the establishment of a "new business" definition and other provisions to prevent the shifting of employees from one location to another in order to receive tax benefits. Imposes a cap for the Real Property Tax Credit going forward, which is the greater of an employment increase limitation or a capital investment limitation.

Investment Tax Credit

Provides taxpayers that had equipment destroyed in the terrorist attack of September 11, 2001 an exemption from recapture provisions related to the Investment Tax Credit. To qualify, taxpayers must retain a significant percentage of average total employment in the State for the three previous taxable years. Alternatively, taxpayers may choose to pay any applicable recapture, and forgo any required basis reduction for replacement equipment for purposes of the ITC. Also extends certain ITC provisions currently set to expire on September 30, 2003, for a period of five years.

College Tuition Tax Deduction/Credit

Makes technical amendments in relation to the Personal Income Tax credit or deduction for college tuition expenses. Clarifies that the dollar limitation on tuition expenses of $10,000 applies to each student. Clarifies that students claimed as a dependent on another taxpayer's return are not eligible for the tax deduction or credit.

Petroleum Storage Tank Credit

Clarifies that the petroleum storage tank income tax credit applies to only those taxpayers that remove or permanently close a fuel oil storage tank and replace it with another one. Also extends the credit for an additional year, through 2003.

Utilities Using the Single Retailer Model

Clarifies that the phase-out of the Sales Tax on the transmission and distribution of electricity or gas applies to areas of the State where the Public Service Commission has approved a single retailer model for utilities operating in those areas.

Corporate Tax Credit Ordering

Changes the order in which tax credits are applied so that the same order is used for all articles of the Tax Law. Under these provisions, credits which cannot be carried over and which are not refundable will be applied first; credits which can be carried over and any corresponding carryovers from previous tax years will be applied next (those of limited duration before those of unlimited duration); and refundable credits will be applied last.

Receipts Allocation for Securities Dealers

Clarifies that OTC derivatives dealers are eligible for the allocation of receipts rule used by brokers and dealers. Also allows securities dealers to choose between customer location and sales location in determining where to source receipts from principal transactions.

Qualified Gas Transportation Contracts

Allows certain qualified gas contracts to deem Article 9-A of the Tax Law to be Article 9 of the Tax Law in order to maintain the current pass through of taxes based on existing contracts.

Mobile Telecommunications Sourcing

Conforms State and local tax treatment of mobile telecommunications services and products to the federal Mobile Telecommunications Sourcing Act.

Excise Tax on Telecommunication Services. Requires sourcing of mobile telecommunication services to the customer's place of primary use, regardless of where the call originates, terminates or passes through. Place of primary use is generally a customer's home address or place of business. For products and services bundled together and sold for a fixed periodic charge, allows the service provider to estimate the proportion of the fixed charge that is attributable to non-taxable items.

Sales and Compensating Use Tax. Requires sourcing of mobile telecommunication services to the customer's place of primary use. Codifies the existing practice of taxing the entire charge for voice services that are sold for a fixed periodic charge. For products and non-voice services that are bundled together and sold for a fixed periodic charge, allows the service provider to estimate the proportion of the fixed charge that is attributable to non-taxable items.

Video Lottery Extends the current sunset provisions authorizing the operation of Video Lottery Terminals (VLTs) at certain racetracks to December 31, 2007 from the current three years from the first date of operation. Provides for the subordination of debt for the New York Racing Association (NYRA) based on certain capital improvements at the Aqueduct racetrack for the purpose of installing VLTs, and for capital improvements at other NYRA racetracks. Provides for the extension of the NYRA franchise, which is currently set to expire December 31, 2007, for a period of five years, contingent upon certification by the Lottery Division that VLTs are operational at the Aqueduct racetrack as of April 1, 2003.

Prepaid Sales Tax on Cigarettes

Provides for the use of a new index to adjust the base retail price of cigarettes for inflation when calculating the amount of Sales and Compensating Use Tax that must be prepaid. Requires that the prepaid Sales Tax on cigarettes, computed by multiplying the base retail price by seven percent, be rounded to the nearest whole cent per package.

Quick Draw Extender

Extends authorization for the Quick Draw Lottery Program until May 31, 2004, which was set to expire on May 31, 2002.

Revenue Enhancements

Tax Amnesty Establishes a broad-based Tax Amnesty Program for taxpayers with outstanding liabilities through December 31, 2000. Any applicable penalty and two-percentage points of interest will be waived for qualified taxpayers. The Tax Amnesty Program is expected to generate $175 million in SFY 2002-03.

Tobacco Tax Increase

Increases the tax rate on non-cigarette tobacco products from 20 percent of the wholesale price to 37 percent of the wholesale price. Provides an additional $15 million in SFY 2002-03.

Electronic Funds Transfer

Electronic Funds Transfer Threshold for Withholding. Reduces to $100,000 from $400,000 the aggregate annual withholding tax liability that triggers required participation in the Electronic Funds Transfer (EFT) program. Provides a one-time revenue increase of $25 million in SFY 2002-03.

Electronic Funds Transfer Threshold for Sales Tax. Reduces to $500,000 from $1 million the amount of annual State and local sales tax liability that triggers required participation in the Electronic Funds Transfer (EFT) program. Provides a one-time revenue increase of $32.5 million in SFY 2002-03.

Alcoholic Beverage License Fees

Increases certain alcoholic beverage license fees by 28 percent or 10 percent, depending on the type of license. Provides a revenue increase of $8 million in SFY 2002-03.

Instant Games Prize Payout

Provides authorization to the Lottery Division to offer up to three instant games with a prize payout equal to seventy-five percent of sales in any fiscal year. Provides an increase in revenues dedicated to education of $15 million in SFY 2002-03.

Cell Phone Surcharge

Increases the State surcharge imposed on wireless devices by 50 cents to $1.20. A portion of the revenue resulting from the surcharge will be dedicated to pay for enhanced E911 services. Also changes the administration of the funds from the State Police to the Tax Department. Provides an increase in revenues of $38 million in SFY 2002-03.

Corporate Tax Prepayment

Increases the amount to be paid as a first installment from 25 percent to 30 percent of the previous year's tax liability for taxpayers with more than $100,000 in tax liability. Provisions sunset for taxable years beginning after December 31, 2005. Provides a one-time increase in revenue of $100 million in SFY 2002-03.

Cigarette Tax Enforcement

Provides $5.5 million in additional resources to the State Police and to the Tax Department to be used for cigarette tax enforcement. These measures are expected to generate $20 million in SFY 2002-03.

SFY 2002-03 TAX PROVISIONS
($ Millions)