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ASSEMBLY WAYS AND MEANS COMMITTEE
HERMAN D. FARRELL, JR.
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MAJORITY MEMBERS
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ARTHUR O. EVE
JOSEPH R. LENTOL ALEXANDER B. GRANNIS ALBERT VANN IVAN C. LAFAYETTE ROBIN L. SCHIMMINGER CLARENCE NORMAN, JR. WILLIAM L. PARMENT SAMUEL COLMAN RONALD J. CANESTRARI THOMAS P. DINAPOLI |
DAVID F. GANTT
HELENE E. WEINSTEIN RONALD C. TOCCI DEBORAH GLICK GLORIA DAVIS CATHERINE T. NOLAN BRIAN M. MCLAUGHLIN JAMES GARY PRETLOW ROGER L. GREEN ERIC N. VITALIANO PETER M. RIVERA ANN MARGARET E. CARROZZA |
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February 27, 2001
Dear Colleagues: I am pleased to provide you with the Ways and Means Committee New York State Revenue Report for State Fiscal Years 2000-2001 and 2001-2002. This report is part of our commitment to presenting clear and accurate information to the public. It provides an overview of the national and State economies, as well as an analysis of the Committee Staff revenue forecast for State Fiscal Years 2000-2001 and 2001-2002. The Committee Staff projects that General Fund and Lottery receipts will total $42,177 million in State Fiscal Year 2000-2001, which represents an increase of $3,378 million, or 8.7 percent, over State Fiscal Year 1999-2000. The Committee Staff estimate is $603 million higher than the Executive's estimate for State Fiscal Year 2000-2001. This difference is largely attributable to differences in economic projections and how this translates into receipts. In addition, strong revenue growth in the beginning of 2001 also contributes to this difference. The Committee Staff projects that General Fund and Lottery receipts will total $45,732 million in State Fiscal Year 2001-2002, an increase of $3,615 million, or 8.6 percent, over State Fiscal State Fiscal Year 2000-2001. The Committee Staff estimate is $1,549 million higher than the Executive's estimate for State Fiscal Year 2001-2002. The growth in tax revenues, however, has been reduced by tax reductions enacted by the State over the past few years. State Fiscal Year 2001-2002 receipts are reduced by over $1.8 billion in tax reductions that are scheduled to take effect next year. The Committee staff projections are reviewed by an independent panel of professional economists drawn from major financial corporations, prestigious universities, and private forecasters from across the State. Assembly Speaker Sheldon Silver and I would like to express our appreciation to all of the members of our Board of Economic Advisors. Their dedication and expert judgement have been invaluable in helping the Ways and Means Committee staff refine and improve this forecast. They have served to make the work of the staff the best in the State. Of course, they are not responsible for either the numbers or any of the views expressed in this document. I wish to acknowledge the fine work done by the talented Ways and Means Committee staff. Their forecasts are integral to the budget process. The Speaker and I look forward to working with each of you to achieve a budget fair for all New Yorkers.
Sincerely, |
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NEW YORK STATE REVENUE REPORT 2000-2001 & 2001-2002 February 2001
Sheldon Silver
Herman D. Farrell, Jr.
Prepared by the
Dean Fuleihan
Roman B. Hedges |
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Edward M. Cupoli Chief Economist/Director of Research |
Steven A. Pleydle Director of Tax & Fiscal Studies |
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Laura L. Anglin First Deputy Fiscal Director |
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The Economy
State Receipts Overview
Personal Income Tax Growth
Tax Reductions and Underlying Growth
Issues in Tax Policy
Multi-State Business Taxation has become a topic of recent focus as more states try to compel businesses to locate within their boarders. Another tax policy issue examined in this report is alternative methods of apportioning income and the implications of each method. |
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Introduction The Assembly Ways and Means staff projects that the Executive will over the two-year forecasting period, underestimate receipts by approximately $2.1 billion. Actual revenues in State Fiscal Year 2000-2001 are projected to be $2.4 billion over the revenue projections contained in the Executive's Budget proposal last year. This marks the fifth year in a row that the revenues projected by the Executive will be at least one billion dollars below actual receipts collected. The Committee Staff projects General Fund and Lottery receipts in State Fiscal Year 2000-2001 to be $42.117 billion representing growth of 8.7 percent. The Committee Staff estimate is $603 million greater than the Executive. For State Fiscal Year 2001-2002, the Committee Staff forecast receipts to be $45.732 billion, or 8.6 percent growth. The Committee Staff forecasts $1.549 billion in additional revenues from projections found within the Executive's proposed budget. |
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Table 1 
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Figure 1 displays the forecasting accuracy record for the Executive since State Fiscal Year 1995-96. During the last five years, the Executive has underforecasted receipts in a range from $1.1 billion to $2.4 billion. These significant errors are the result of conservative forecasting, which has resulted in missed opportunities.
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 Figure 1 |
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However, dominating the economic news over the past several months has been a fear of a national economic slowdown. This belief, as well as other considerations, provide the backdrop for forecasting revenues for State Fiscal Year 2001-2002. Any prolonged period of economic contraction could have negative effects on the financial health of New York State. Fortunately, the timing of the current economic slowdown still allowed New York State to benefit from strong revenue growth in early 2000. Although the economy did show signs of moderating in the latter half of the year, revenue collections in the first half of the year were growing at approximately twice the rate anticipated in the Enacted Financial Plan. Since receipt growth through December of 2000 continued to be substantially above that contained in the Enacted Financial Plan, the Division of Budget raised their revenue projections for State Fiscal Year 2000-2001 by $1.7 billion in the recently proposed Executive Budget. In the Thirty-Day Amendments to the Executive Budget, revenues were increased an additional $450 million. The Ways and Means Committee Staff believes that extra revenues will provide a total surplus and reserves of approximately $4.9 billion as detailed in Table 2.
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Table 2
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ECONOMIC OUTLOOK
The current economic expansion is the longest on record. Projected growth in the Gross Domestic Product of 5.0 percent in 2000 is the strongest growth in the last eight years, and has outpaced consensus projections made earlier in the year.
However, the Ways and Means Committee Staff projects slower growth of 2.4 percent for 2001. Several factors help to explain the economic slowdown for this year. First, and foremost, is the action taken by the Federal Reserve to contain inflationary fears by raising interest rates. The higher cost of borrowing money increases the cost of production, which acts to constrain corporate growth and stock market performance. Declining stock market indices appear to be dampening retail sales and eroding consumer confidence. Higher energy prices have also affected consumers, as money otherwise spent on consumer goods is diverted to the gas pump and home energy bills. As consumer demand decreases, inventories build up, resulting in production facilities and workers being less utilized. Eventually, there is a corresponding decrease in national output evidenced by a reduction in the rate of growth in GDP. Although not projected by Ways and Means Committee Staff, there are concerns that current economic conditions exist for a typical post-war recession to occur. Several major layoff announcements in the past few weeks have fueled these recessionary fears. It is increasingly likely that the "New Economy" - which has propelled the current expansion - coupled with a change to an easing monetary policy of the Federal Reserve, can orchestrate an economic "soft landing". In January, the Federal Reserve changed the monetary policy from the containment of inflation, to the prevention of a recession. In other words, lowering interest rates rather than raising them. The Ways and Means Committee staff believes a soft landing will be achieved and the economic consequences of a national recession will be averted. However, consistent with a moderate slowdown in the economy, national employment growth is forecast to fall from 2.1 percent in 2000 to 1.2 percent in 2001. |
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Table 3
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The New York State Economy
New York State's economy is dependent upon putting people to work. A resulting increase in State employment also provides additional State Personal Income and Sales Tax revenues. In New York, a substantial number of Wall Street jobs were created during this expansion. These jobs tend to pay employees salaries well above the average. The "New Economy" has also created a plethora of high tech, dot-coms and other service-based employment. In addition to changes in the employment trends from a manufacturing base to a service base, changes in productivity and variable pay have changed the character of employee compensation. The use of bonus income and stock options have accentuated the spikes usually found in the State's revenue collection patterns. The exercise of stock options, as can be seen in Figure 3, has become a major portion of executive compensation. More recently, the fact that an executive's salary constitutes only sixteen percent of compensation, challenges past forecasting models which are based on more traditional payment mechanisms.
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Employment Growth
The strong growth in the national economy has led to increasing rates of growth in employment at both the National and State level. With the decline in national economic growth, the Committee Staff projects New York's growth in employment will also moderate in the year 2000. There have been recent reports of corporate lay-offs in critical financial and technology industries, and the upstate manufacturing industry. Additionally, there have been layoffs in "Silicon Alley" since last summer, resulting in somewhat of a slowdown in the New York City economy. Still, the Committee Staff outlook for employment growth in New York indicates that the regional economy may weather the economic retrenchment better than others. The "New Economy" and the duration of the national expansion have invigorated the New York State economy. For most of the prior decade, employment growth in New York lagged that of the Nation. As can be seen in Figure 4, the New York economy has recently begun to match or at times outperformed that of the Nation in terms of overall employment growth.
The Ways and Means Committee Staff projects New York employment growth of 2.0 percent for 2000. Slightly slower growth of 1.4 percent is projected for 2001, consistent with a moderate slowdown of the national and State economies.
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State Income Growth
New York has always been a strong income state even when employment has been low. A major reason for the current growth in income is the strength of the equity markets, which has led to strong financial gains for many Wall Street firms. Although Wall Street jobs only make up 13.5 percent of the New York City workforce, they make up 31.7 percent of total payroll. In addition, the global nature of the New York City economy has also provided a suitable environment to exploit the workings of the "New Economy". The "New Economy" relies on information technology, regional business agglomeration, and communication technology found in abundance in New York City. Overall, the recent economic expansion has been characterized by increased worker productivity, which has led to rapid growth in personal income, as well as substantial growth in State revenues. As can be seen in Figure 5, real wages and salaries has grown at a rate significantly higher than inflation. This would lead consumers to increase consumption and investment over traditional savings.
State personal income is estimated to grow 7.8 percent in 2000. However, its largest component, wages and salaries, is estimated to grow 9.2 percent in 2000. For 2001, New York overall personal income is projected to grow 5.3 percent, with wages and salaries growing 5.7 percent.
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The current economic expansion, which is the longest on record, has benefited critical elements of New York's economy and, in turn, revenues used to finance government spending. For the third straight year, revenues have well outpaced projections. The Committee Staff estimates that General Fund and Lottery receipts will total $42.117 billion in State Fiscal Year 2000-2001, an increase of $3.378 billion or 8.7 percent growth. This estimate is $1.053 billion higher than the projections in the Executive Budget released in January. In the Executive's 30-Day Amendments released in February, projected revenues were increased by $450 million. As a result, the Committee Staff estimate now stands at $603 million above the Executive's current estimate. The strong revenue growth for this year is partially attributable to the transfer of surplus revenues from State Fiscal Year 1999-2000 into State Fiscal Year 2000-2001. This transfer worked to artificially deflate revenues last fiscal year and inflate the current fiscal year revenues by $1.666 billion. This report attempts to provide a better review of collections by separately stating reserve transactions. These transactions, primarily affecting the Personal Income Tax, distort actual collections and mask the true growth in receipts. The Committee Staff projects that receipts will continue to grow in State Fiscal Year 2001-2002. General Fund and Lottery receipts will total $45.732 billion in State Fiscal Year 2001-2002, representing growth of 8.6 percent over State Fiscal Year 2000-2001. The rate of growth is reduced by tax cuts totaling approximately $1.8 billion. The Accounting System in New York categorizes all revenues into four main Funds, the General Fund, Special Revenue Fund, Debt Service Fund and Capital Fund. The sum of these four funds encompasses the concept of All Funds. The General Fund contains the majority of taxes collected by the State. The Committee Staff analysis of the General Fund includes lottery receipts, because these revenues provide funding for Education which is a critical element of State spending. The General Fund also includes revenues that are originally deposited into other funds and returned through transfers to the General Fund. State budgeting is dependent on the amount of money generated in the form of taxes and fees imposed, which is generally dependent on the overall health of the surrounding economy. Since various taxes respond differently to changes in economic conditions, the structure of a tax system is important in order to promote revenue stability. In New York, the Personal Income Tax is vital to the health of the budget, since it consistently contributes more than one-half of all General Fund receipts, in any given fiscal year.
The State's resources are largely comprised of a variety of revenues generated as a result of the State's tax system. New York State's revenue collections are dominated by two major taxes; Personal Income Tax and the Sales Tax. Some states (Alaska, Montana, Delaware, New Hampshire, Oregon) impose no Sales Tax. Similarly, other States (such as Florida, Texas, Washington, Wyoming) do not impose a Personal Income Tax. Since New York imposes both of these broad-based taxes, this can act as a buffer against an economic decline which may affect one or the other. For example, States that rely heavily on a Sales Tax, which has experienced substantial growth over the past two years, have begun to see an erosion in their revenue base with the drop in retail sales . Figure 9 shows that since 1998, Personal Income Tax receipts, as a percent of total receipts, are expected to increase from 46 percent in State Fiscal Year 1999-98 to 57 percent by State Fiscal Year 2001-2002. The magnitude of this increase, in such a limited period of time, clearly shows the increasing dependence on Personal Income Tax revenues. Excluding reserve deposits, 50 percent of General Fund revenues in State Fiscal Year 1999-2000 were comprised of receipts from the Personal Income Tax. This share is expected grow to 55 percent in State Fiscal Year 2000-2001 and to 57 percent by State Fiscal Year 2001-2002.
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Overview Over the past three years, the Personal Income Tax has fueled the growth in New York State's General Fund. The main purpose of the General Fund is to pay for the day-to-day operations of State government and fund critical local programs such as education and health care. The persistent strength of the economy has caught many economic forecasters by surprise and has helped to create unprecedented surpluses in the State's General Fund. Certainly, part of the surplus story stems from the difficulty in estimating the growth in the economy which has led to an underestimation of tax receipts. Recent growth in the Personal Income Tax, as a result of this prolonged period of economic expansion, has allowed the Legislature to provide a host of tax reductions aimed at creating jobs and providing relief to working families. At the same time, the State has been able to provide substantial increase in funding for critical programs such as education and health care. To help provide some insight into the stability and long term prospects of future revenue growth, this section analyzes the composition of the State's largest revenue source, the Personal Income Tax. Personal Income Tax Liability by Income Class The structure of the Personal Income Tax in New York State is progressive in nature. That means that a relatively few number of filers at the top end of the income range incur a substantial share of income tax liability. Figure 10 shows that in 1998, taxpayers with Adjusted Gross Income (AGI) of more than $500,000 accounted for only two-thirds of one percent of all taxpayers in New York State, but they earned almost 25 percent of the aggregate AGI for the year. The greatest number of taxpayers are concentrated in the lowest income ranges. In fact, two-thirds of all taxpayers in New York State earned less than 25 percent of AGI in 1998, averaging less than $40,000 per capita.
Figure 11 shows the effective tax rates in New York State by income class for 1998. A taxpayer's effective tax rate is the actual amount of tax owed as a percentage of that taxpayer's AGI. As can be seen, the effective tax rate in New York State increases as income rises. This is because of the progressive nature of the tax structure in New York State.
At the lower end of the income class spectrum, the effective tax rate is negative. The reason for this is that New York State provides assistance to low-income taxpayers through tax credits that are refundable. The most significant refundable tax credits are the Earned Income Tax Credit (EITC) and the Child and Dependent Care Credit. Table 4 provides a summary of the composition of Adjusted Gross Income (AGI) from 1992 through 1998. The following key elements are worth noting:
 Growth in Income Tax Liability
As can be seen in Figure 12, New York State benefited from a rapid increase in income tax liability, adjusted for tax reductions, since 1992. The strong growth exhibited in 1992 reflects New York's delay in coming out of the national recession and the imposition of a supplemental tax on taxpayers earning over $100,000.
There are three main reasons for the exceptional growth in Personal Income Tax liability over the past few years.
Since 1997, growth in wages and salaries has been exceptional. Preliminary statistics for 1999 and projections for 2000 show that this high level of growth will continue. This growth is based on increased productivity, employment and the success of the Wall Street financial community. The strong national economy has also benefited New York City. Employment growth in New York City is enhanced by the growth in employment in the well-paid financial industry and the related cluster of firms associated with the FIRE industry. Bonus income, especially in the financial industry, is also a large part of the growth in wages and salaries. Over the past four years, growth in bonus income has averaged approximately 20 percent. Such high level of growth came from strong corporate earnings fueled by the strong national economy. Shift in Income Tax Liability The various components of income have grown at different rates. This, in turn, has provided significant growth in Personal Income Tax receipts.
As Figure 13 shows, the share of income tax liability for taxpayers with New York AGI of more than $100,000 has grown from approximately 46 percent in 1992 to roughly 62 percent in 1998. As a result, a larger proportion of taxpayers are not only moving into a higher tax bracket, they are moving into the category in which the rate recapture applies. This basically acts to create a higher effective tax rate and growth in Personal Income Tax receipts. Growth in Capital Gains As illustrated in Figure 14, much of the shift in income tax liability stems from substantial increases in capital gains. Growth in capital gains reached nearly 60 percent in 1996, followed by growth of 41 percent in 1997 and growth of 23 percent in 1998. Taxpayers having AGI of more than $100,000 have generated the bulk of capital gains income since 1992, generally totaling more than 80 percent, as can be seen in Figure 15. As stated previously, capital gains as a percent of total AGI is higher (8.9 percent in 1998) than it was in 1992 (3.1 percent). This is a main reason why there has been such a shift in income tax liability during the expansion period.
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General Fund and Lottery receipts are projected to total $42.117 billion, which represents growth of 8.7 percent, or $3.378 billion over State Fiscal Year 1999-2000. This estimate is $603 million higher than the Executive. However, the growth in General Fund taxes, excluding the Refund Reserve transactions, is a moderate 6.1 percent. The Refund Reserve is a fund containing revenues for the purpose of paying refunds. This fund is often used to transfer surplus money, when the books are closed at the end of each fiscal year. In other words, funds set aside in March of any given fiscal year can be used to pay refunds in April of the next fiscal year. Since these funds are set aside for the purpose of paying refunds, current tax revenues become available for other spending purposes. In State Fiscal Year 1999-2000, deposits to the Refund Reserve artificially deflated receipts by $1.661 billion. Withdrawals, in turn, inflate growth for State Fiscal Year 2000-2001. After deposits and withdrawals from the Refund Reserve, General Fund receipts will benefit by $1.666 billion in State Fiscal Year 2000-2001. Over the past several years, the State has provided taxpayers significant tax reductions. This current fiscal year is no different. In State Fiscal Year 2000-2001 additional tax reductions will reduce the amount of General Fund revenues by $2.2 billion. In addition, dedication of traditional General Fund money for specific spending purposes to Special Revenue Funds will take effect. Over the past few years, the Executive has not been able to capture the transitional relationship between the economy and revenues. In fact, their recent actions would lead one to believe that there is no relationship between the two. In State fiscal Year 1999-2000, the growth in the economy led to greater than anticipated revenue growth. In October 1999, the Executive released its Mid-Year Update, as required by the State Finance Law. While the economy continued to grow at a healthy pace and revenue growth for the first six months of the fiscal year was equally strong, the Executive only raised its revenue projections by $14 million. With the release of the Executive Budget, the Executive increased its revenue projections in excess of $300 million. In State Fiscal Year 2000-2001, this same pattern occurred. With the release of the Mid-Year Update in October 2000, the Executive did not make any revisions to the revenue projections contained within the Financial Plan. However, substantial upward revisions were made to the economic assumptions underlying the Plan. Absent law changes or administrative changes to the Tax Law, increases in income will result in increased revenues. The Executive waited until the release of the 2001-2002 Executive Budget before increasing receipts by $1.7 billion. Considering the substantial upward revisions to the economic assumptions underlying the Financial Plan, one has to question why the Executive did not make any upward revisions to revenues, masking the true amount of revenues available for spending purposes. These substantial errors in forecasting policy makes it difficult to properly evaluate the status of the State's finances. Personal Income Tax The majority of the growth in the Committee Staff forecast once again lies within the Personal Income Tax. Through the first three-quarters of the fiscal year, Personal Income Tax receipts grew at a rate of almost 12.0 percent. This growth far outpaces the Enacted Financial Plan projections. It is also greater than the recent growth projections of 8.5 percent for the current fiscal year, which are contained in the Executive's proposed budget. The Committee Staff estimates that Personal Income Tax receipts will grow by $2.813 billion, or 12.1 percent over State Fiscal Year 1999-2000. Over the last two years, the Personal Income Tax has been the main engine of growth for New York's revenue base. Growth in Personal Income Tax receipts is closely correlated to the strong growth experienced in New York wages and capital gains.
The largest component of the Personal Income Tax collections is withholding. These collections account for nearly 80 percent of all Personal Income Tax revenues, and are closely correlated with growth in New York wages. Figure 16 highlights historical growth rates in withholding. Withholding growth over the past few years has been strong, since there were no additional tax reductions (ie; rate reduction) impacting collections. Since 1999, it is clear that strong wage growth in New York has bolstered revenues. Withholding collections through the first ten months of the current fiscal year are 15.5 percent higher than last year. However, Figure 16 also displays how the 1995 Personal Income Tax Reduction Plan dramatically reduced the growth in withholding. The Committee Staff estimates that bonus payments will experience a year-over-year increase of 27.6 percent in State Fiscal Year 2000-2001, compared to a similar growth of 28.1 percent in State Fiscal Year 1999-2000. As can be seen in Figure 17, growth in withholding collections and bonus payments are highly correlated.
Preliminary withholding collections data for the month of January 2001, shows growth of 38.8 percent over January 2000. A significant amount of the additional collections came in the first week of this year. Part of this extraordinary growth could be related to the timing of remittance of withholding payments. For example, employees who received "year end" compensation actually received the income in 2000. Employers, on the other hand, did not have to remit withholding on this income until the first week in January 2001. A more intriguing reason as to why January 2001 collections were extraordinary stems from the notion that individuals are deferring income until 2001 in anticipation of the enactment of tax reductions from the Bush administration. The month of January also saw tremendous growth in estimated tax payments. Estimated payments are made quarterly generally based on non-wage income, such as capital gains. The past few years of increases in the equity and real estate markets have contributed to significant growth in capital gains and thus estimated payments. However, despite reductions in the stock market indices, along with an apparent easing of the real estate market, estimated payments in January showed an amazing growth of 48.7 percent. This outstanding growth has provided a year-to-date growth of 17.7 percent. The Committee Staff projects estimated payments will total $6.858 billion, or growth of 17.5 percent over last year. User Taxes User Taxes and Fees are estimated to decline by 2.2 percent, or $169 million, over the previous fiscal year. While the largest component of User Taxes, the Sales Tax, is projected to increase by $154 million, or 2.5 percent, other factors are working to offset this increase. Sales Tax Sales Tax collections through January 2001 increased by 2.4 percent over the same period last year despite the implementation of the exemption from the Sales Tax on articles of clothing and footwear costing less than $110. This exemption, which took effect March 1, 2000, is expected to decrease revenues in excess of $500 million in State Fiscal Year 2000-2001. Although Sales Tax collections have been relatively strong through the first three quarters of the fiscal year, consumer confidence dropped sharply in January and February of 2001, where it now stands at its lowest level in the last four years. Additionally, growth in retail sales for the remainder of the year is expected to be sluggish, resulting in flat growth in Sales Tax collections for the remainder of the fiscal year. These factors result in the Committee Staff estimate of 2.5 percent growth in Sales Tax collections for the full fiscal year. Motor Fuel Tax and Motor Vehicle Fees Beginning in April 2000, several General Fund revenues were dedicated to transportation related funds. The dedication of revenues from both the Motor Fuel Tax and Motor Vehicle fees will be further increased beginning in April 2001. This has the result of lowering General Fund revenues, but does not affect revenues in total. Cigarette Tax Another factor contributing to the decline in User Taxes is the increase in the Cigarette Tax rate, which took effect on March 1, 2000. The revenues associated with this increase are being used to finance Health Care Reforms. As one would expect, given traditional economic theory, there is an inverse relationship between price and quantity of cigarettes sold. As a result of an almost doubling of the tax rate, General Fund revenues are projected to decline by 17.6 percent. This decline stems from factors such as; decreased smoking, increased evasion and legal avoidance of the law (i.e.; purchasing cigarettes out of state), as a result of the increased price of cigarettes. Business Taxes The Committee Staff estimates a 2.4 percent decline in total Business Tax revenues. While revenues under some of the Business Taxes are forecast to increase, large decreases in other Business Taxes over-shadow these increases, resulting in an overall decrease in Business Tax revenues. This decline is attributable to several factors, including various tax reductions being phased-in. Corporate Franchise Tax Corporate Franchise Tax collections will experience an increase of 24.5 percent as a result of the implementation of tax reform for utility companies. These companies, formerly subject to the Gross Receipts Tax under Article 9 are being shifted to a net income Corporate Franchise Tax under Article 9-A. This change is expected to increase Corporate Franchise Tax collections by $256 million in State Fiscal Year 2000-2001. This is partially offset by a number of tax reductions being phased-in, including an Entire Net Income rate reduction from 9.0 to 8.0 percent. This tax reduction is expected to reduce revenues by $80 million in State Fiscal Year 2000-2001. However, the Committee Staff also believes that corporate profits, which experienced negative growth in 1998, will achieve growth of 12.8 percent in 2000, surpassing the high levels of profits achieved in 1999. Corporations and Utility Tax The largest reduction in revenues will occur within the Corporations and Utility Tax. As mentioned above, the State Fiscal Year 2000-2001 Budget shifted utility taxpayers from the Corporations and Utility Tax to the Corporate Franchise Tax, thus reducing revenues by an estimated $256 million this year. In 1997, a substantial rate reduction was enacted which will act to reduce revenues in excess of $300 million this fiscal year. However, partially offsetting this reduction is a sharp upward turn in energy prices. Since utility providers are taxed on a gross receipts basis, any increase in price or consumption will increase revenues. Insurance Tax The under performance of the insurance industry in the first half of the year is also contributing to the decline in Business Taxes. According to the Insurance Information Institute, net income plunged by one-third for the first six months of 2000, compared to 1999. In addition, investment income for insurance companies has grown just 0.1 percent during the first half of 2000. Further, while catastrophe losses for 2000 may also be lower than usual, non-catastrophe losses are up 11.2 percent over a similar period last year. However, annualized premiums growth based on the first half of 2000 is 4.2 percent, much better than last year's meager growth rate of 1.0 percent. In addition, third-quarter results for the industry indicate that the financial performance of the industry is gradually improving. Bank Tax Bank Tax revenues are expected to rebound and increase by 1.7 percent this fiscal year. As a result of intense competition in the banking industry in recent years, banks have been making riskier loans outside of their historical target markets. However, evaluations show that banks have tightened lending standards lately, a practice that is expected to improve the overall condition of the industry. The Committee Staff estimates that collection patterns will return to a more normal basis and the financial losses claimed in 1999 will not be of the same magnitude in 2000. According to the Federal Deposit Insurance Corporation, net income for commercial banks through the first three quarters of 2000, is up by over 30 percent compared with the same period in 1999. Other Taxes Estate and Gift Tax collections comprise the largest component of Other Taxes representing roughly 95 percent of the total. As a result, any major swings in Estate and Gift Tax collections will drive growth in Other Taxes. The Committee Staff estimates that Other Taxes will decline by 29.0 percent. This decline is attributable to reduced payments on Estate Tax liabilities resulting from the increase in the threshold for taxable estates which occurred in 1998. The threshold was further increased in February 2000 and now matches the Federal threshold of $675,000. Lottery Lottery receipts are expected to increase by 3.6 percent over last fiscal year due to a full year of revenues from Quick Draw and a significantly larger administrative surplus because of higher Instant Games sales. Legislative authorization to increase the prize payout for Instant Games has resulted in a 37.2 percent rise in sales through week 41 of this fiscal year, which has a direct positive effect on the administrative surplus. Legislative authorization for Quick Draw was not re-instated until August 1, 1999 four months into State Fiscal Year 1999-2000. Reserve Funds In State Fiscal Year 1999-2000, General Fund and Lottery receipts are significantly understated as the result of General Fund revenues being dedicated to finance the School Tax Relief (STAR) Program. In 1997, the Legislature enacted the State-funded STAR Program aimed at reducing property tax burdens for all homeowners. This Program will be phased in over a 4-year period. In 1998, the Legislature created a separate STAR Fund in the Special Revenue Fund, and dedicated General Fund Personal Income Tax revenues into this Fund, to finance the program. In 2000, the Legislature created a STAR Reserve Fund, to set aside money for future payments to school districts for lost revenues relating to the STAR Program. Approximately $1.2 billion in additional Personal Income Tax revenues will be deposited into this reserve. In total, General Fund receipts will be reduced by $3.077 billion in State Fiscal Year 2000-2001 as a result of the STAR Program.
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State Fiscal Year 2001-2002
The Committee Staff forecasts that receipt growth for State Fiscal Year 2001-2002 will moderate compared to State Fiscal Year 2000-2001. General Fund and Lottery receipts are projected to increase to $45.732 billion, projecting growth of 8.6 percent over State Fiscal Year 2000-2001. This forecast reflects the Committee Staff belief that national economic growth will slow somewhat, but recover during the second half of the fiscal year. Tax reductions will continue to be implemented in State Fiscal Year 2001-2002, reducing revenues by an additional $1.8 billion. Personal Income Tax The majority of the growth in State Fiscal Year 2001-2002 revenues lies within the Personal Income Tax. The Committee Staff forecasts that Personal Income Tax receipts will total $28.054 billion, which is $2.047 billion, or 7.9 percent higher than State Fiscal Year 2000-2001. While this growth is somewhat slower than the growth achieved in State Fiscal Year 2000, the Committee Staff projects healthy growth to continue. There are various factors driving this slower growth. The Committee Staff estimates that wages will grow at the slower rate of 5.5 percent in State Fiscal Year 2001-2002 versus 7.2 percent growth in State Fiscal Year 2000-2001. A slowdown in the growth of bonus payments stems from the Committee Staff belief that corporate profits will not attain the high levels achieved in 2000, but will still continue to grow. User Taxes The Committee Staff forecasts growth in the User Taxes to increase by $25 million or 0.3 percent next fiscal year. Sales Tax The largest component of User Taxes, the Sales Tax, is forecast to increase by $253 million, or 4.0 percent. This growth rate is higher than the estimated 2.5 percent growth in receipts in State Fiscal Year 2000?2001. This increased growth is mainly the result of large tax reductions being fully effective. The largest tax reduction is the permanent Sales Tax exemption on clothing and footwear costing less than $110, which took effect in March 2000. The other components of User Taxes are forecast to remain stagnant, with the exception of Motor Vehicle Fees. These revenues are projected to decline by $143 million as a result of the proposed dedication of an additional $169 million in General Fund Revenues to earmarked transportation funds. Business Taxes The Committee Staff projects a significant reduction in Business Taxes for State Fiscal Year 2001-2002. Business Tax revenues are forecast to decline by 6.0 percent, or $268 million, over State Fiscal Year 2000-2001. The decline is mainly the result of various tax reductions and additional dedication of General Fund revenues to dedicated revenue funds. However, modest growth in corporate profits will help to somewhat offset the effects of scheduled tax reductions. Corporate Franchise Tax Corporate Franchise Tax revenues are forecast to decrease by 6.9 percent in State Fiscal Year 2001-2002. Legislation enacted in 1998 will provide a rate reduction for both small and large businesses operating in New York. The rate reduction is scheduled to be phased in over three years and began on July 1, 1999. Effective July 1, 2001, the rate will be reduced from 8.0 to 7.5 percent for large businesses, matching the current rate for small businesses. This rate reduction will reduce revenues by an additional $85 million in State Fiscal Year 2001?2002. Corporation and Utilities Tax The Corporation and Utilities Tax is forecast to increase by 3.7 percent, or $32 million in State Fiscal Year 2001-2002. The Committee Staff believes that this year's dramatic growth in energy prices will slow somewhat next year. In addition, the effects of the original Power for Jobs Program, enacted in 1997, will begin to phase-out next fiscal year. This will act to increase revenues by $35 million. Bank Tax Other Business Taxes are also forecast to show negative growth in State Fiscal Year 2001-2002. Bank Tax revenues are forecast to decline 3.9 percent. As part of the State Fiscal Year 1999-2000 Budget, the Entire Net Income tax rate for banks was reduced from 9.0 percent prior to July 2000 to 7.5 percent as of July 2002. This rate reduction is expected to save banks $45 million in State Fiscal Year 2001-2002, and $100 million when fully effective. Insurance Tax Insurance Tax collections are expected to decline during State Fiscal Year 2001-2002. Even though, the Committee Staff believes that the industry will return to normal patterns of premiums growth, investment income and catastrophic losses. Rate reductions enacted for insurance companies concurrently with the bank tax reductions are expected to reduce insurance tax collections by over $30 million in 2001-2002. Other Taxes Other taxes are forecast to decline slightly by 0.4 percent over State Fiscal Year 2000-2001. Estate and Gift Tax receipts will show no growth in State Fiscal Year 2001-2002. This tax has experienced significant declines over the past few years as a result of New York increasing the threshold for taxable estates and decreasing the tax rates by adopting a death tax based on the Federal credit for State death taxes paid (a "SOP" tax). Beginning on February 1, 2000, New York's threshold for taxable estates was increased to match the Federal threshold of $675,000. Since this reduction is fully implemented, this will act to stabilize this revenue source. Lottery The Committee Staff is projecting Lottery receipts to increase by $157 million, or 11.3 percent over State Fiscal Year 2000-2001. The majority of Lottery games will have reached their maturity. However, this forecast takes into account the Executive proposal to authorize the Lottery Division to enter into a multi-jurisdictional game such as Powerball. The Executive estimates that this will increase lottery revenues by $125 million in State Fiscal Year 2001-2002. Reserve Funds In State Fiscal Year 2001-2002, the STAR Program will be fully implemented. The total cost of the program is estimated to increase by $694 million, for a total of $2.571 billion. However, the reserve of $1.2 billion, which was established in 2000, will be used to partially offset the cost of the program. |
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The concept of All Governmental Funds, which is the basis for the majority of the Executive's Financial Plan, consists of four major fund types: the General Fund, Special Revenue Funds, Capital Project Funds, and Debt Service Funds. The General Fund is used to pay the majority of the State's day-to-day operations and its disbursements to local governments. Debt Service, Capital Projects, and Special Revenue Funds are used to earmark funds for specific purposes. In addition to these four funds, All Governmental Funds includes Federal Funds. In 1996, the Legislature established an annual revenue consensus forecasting process. The Executive and the Legislature agreed that the process would include an analysis based on All Funds taxes. This broader definition of tax collections enables the reader to analyze receipts without separately analyzing each decision to earmark tax receipts separately. It excludes from the analysis all non-tax receipts outside of the General Fund (e.g. Federal Grant, State University tuition, fishing licenses, etc.). For the purposes of this document, All Funds only includes tax revenues and Lottery receipts deposited into four funds: the General Fund, Special Revenue Funds, Capital Projects Funds and Debt Service Funds. This concept can also be referred to as State Funds taxes. This section of the report fulfills the statutory requirement enacted in 1996. On an All Funds basis, the Committee Staff projects State Fiscal Year 2000-2001 tax receipts will grow by 13.3 percent, totaling $48.406 billion. The Committee Staff estimate is $633 million higher than the Executive. In State Fiscal Year 2000-2001, additional tax revenues were dedicated for specific spending purposes. The main addition is the dedication of Personal Income Tax revenues to fund the STAR Program. In State Fiscal Year 2000-2001, $3.077 billion was diverted to finance the program.
In State Fiscal Year 2001-2002, the Committee Staff forecasts All Funds taxes to total $50.801 billion, which is $2.395 billion higher than State Fiscal Year 2000-2001. In the next fiscal year, $1.371 billion in Personal Income Tax revenues will be dedicated to finance the STAR Program.
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 * These estimates include a Refund Reserve Transaction of $1.666 billion.
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The downside risk to the Ways and Mean's Committee staff revenue forecast lies mainly in the outlook for the economy. The Committee staff forecasts a soft landing to occur in the middle of 2001, leading to increasing economic growth during the second half of the year. The apparent stability in the state's revenue collection has come from the growth in the Personal Income Tax. As previously discussed most of the growth in the Personal Income Tax is attributable to higher income individuals, with significant capital gains, stock options and bonus income. As depicted in Figure 17, capital gains and estimated payments have been traveling upwards. A reversal of the economic and financial fortunes being amassed on Wall Street could have negative rippling effects through the downstate regional economy as well as State revenues.
The past two years has also seen record growth in the Sales Tax, with underlying growth twice the average Sales Tax growth rate. However, Sales Tax revenues are also sensitive to economic cycles. Figure 18 shows February consumer confidence at its lowest point in four years. This raises concerns as to the consumer's willingness to return to previous purchasing levels of goods and services. Still, the Committee Staff forecast is for modest growth in the Sales Tax.
The upside potential for the forecast is in the translation of the economy to receipts. The responsiveness of the Personal Income Tax, or elasticity, has increased since much of growth in income is generated by high-income taxpayers. The elasticity used in the forecast reflects the historical average of 1.2. Additional revenues would be projected if an elasticity of 1.3 to 1.4 was applied. This would more accurately reflect the recent relationship between wages and withholding.
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EXECUTIVE REVENUE PROPOSALS
FOR STATE FISCAL YEAR 2001-2002 Multi-State Lottery $125.0 million Authorize the Division of the Lottery to enter into a multi-state lottery agreement. This proposal would enable New York State to enter into a multi?state lottery game such as Powerball, which would provide an estimated $125 million in lottery aid for education in State Fiscal Year 2001-200, and $145 million when fully implemented. Change Taxation of Chewing Tobacco $.2 million Alter the method of taxing moist snuff from 20 percent of the wholesale price to 39 cents per ounce. REVENUE PRESERVATION PROPOSALS MTA Regional Business Surcharge - 4-Yr Extension $527.5 million Extend the temporary Metropolitan Transportation Authority (MTA) tax surcharge of 17 percent for four years. The temporary MTA surcharge is imposed on business activity in the New York Metropolitan Commuter Transportation District. Currently, the surcharge expired on December 31, 2000. Bank Tax - One Year Extension $505 million Extend the current Bank Tax provisions for a one-year period. The current provisions expired on ending on December 31, 2000. Eliminate Quick Draw Sunset $151.8 million Permanently extend Quick Draw, which is set to expire on March 31, 2001.
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FEE INCREASES
Department of Environmental Conservation Hunting and Fishing Licenses $5.3 million Increase fees for resident and non-resident hunting and fishing licenses, on average, by 25 percent. The increase for individual licenses will vary depending on the type of license. (Statutorily) Gas Leasing Fees $5.3 million Redirect current gas leasing fees from the General Fund to the Environmental Protection Fund and impose new gas leasing fees. (Statutorily) Pesticide Fees $2.4 million Increase pesticide applicator and other pesticide-related fees. (Statutorily) Fees for Bulk Petroleum Storage $1.3 million Double current registration fees on petroleum bulk storage. (Statutorily) Surcharge on Hazardous Waste Generators $18.1 million Impose a surcharge on generators of 15 or more tons of hazardous waste. (Statutorily) Restructure Camping Fees $0.8 million Increase the Department of Environmental Conservation campground fees by $2. (Administratively) Division of Military and Naval Affairs Videoconferencing Equipment Lease Fees $0.2 million Impose fees for leasing videoconferencing equipment. (Administratively) Department of Motor Vehicles Mandatory Surcharges $25.0 million Make permanent the provisions pertaining to the payment of mandatory surcharges pursuant to sections 1809 of the Vehicle and Traffic Law (traffic infractions) and 1809-a (parking, stopping, and standing violations in cities having populations of one hundred thousand or more). (Statutorily) New Regional License Plates $0.5 million Impose a fee on new regional license plates which showcase scenic regions of the State, such as Long Island or the Adirondacks. These plates will have a one-time cost of $10 per plate. (Statutorily) Eight-year License Renewals $9.6 million Implement eight-year license renewals for commercial driver's license. The annual charge (Class E: $120, other, $15) will remain the same. (Administratively) Parks, Recreation and Historic Preservation Boat Registration Fees $0.7 million Double boat registration fees. Current triennial fees range from $9 to $30. The proposal would increase fees from $18 to $60. (Statutorily) Snowmobile Registration $1.0 million Increase snowmobile registration fees by $10, to $25 for residents and $35 for non-residents. (Statutorily) Fees for Camping and Off-season Vehicle Use $1.0 million Increase fees for camping at prime sites and collect fees for vehicle use in certain parks during off-season. (Administratively) Department of State Various Regulatory Fees $2.6 million Increase license fees for a number of occupations regulated by the Department of State. The occupations include barbers, non?barbershop stylists, notaries public, security guards, appraisers, real estate brokers or salespersons, private investigator, watch, guard and patrol agency. The additional revenue will be used to make improvements in the Department of State's automation and computer capacities and enable certain licensed applications to be filed via the Internet. (Statutorily) Uniform Commercial Code Fees $3.1 million Support adoption of Article 9 (Secured Transactions) of the Uniform Commercial Code and the corresponding fee changes. (Statutorily) Lake George Park Commission Fees $0.3 million Increase boat and dock fees on Lake George. The current fee structure, set in 1987 to support the costs of the Commission, is now insufficient. (Statutorily)
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The Executive has proposed various tax reductions that will have a modest impact on State Fiscal Year 2001-200 receipts, but will reduce receipts by approximately $528 million when fully implemented. These proposals include:
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Tax Actions and Underlying Growth
Following the recession of the early 1990s, the U.S. economy began a period of expansion. The continued and steady growth in the national economy translated into similar growth in New York's economy. This allowed the State to enact numerous tax reductions. This program of tax reductions began in 1994 and has expanded for every year thereafter. Figure 20 displays recent tax actions enacted over the last 6 years. When the tax reductions enacted since 1994 are fully implemented in 2005, State receipts will be reduced in excess of an estimated $15.5 billion. As these reductions phase-in and the magnitude increases, this may make it difficult to sustain healthy receipts growth.
To date, New York, has been able to overcome the loss of these receipts in part due to a strong national economy. Over the past several years, the State has benefited from strong performances on Wall Street and exuberant growth in the stock market. Once again, the strength of the economy has led to positive receipts growth in State Fiscal Years 2000-2001 and 2001-2002, despite large reductions becoming effective. Receipts in the current Fiscal Year as well as next year will be negatively offset by additional tax reductions of $2.2 billion and $1.8 billion, respectively. There are several significant tax law changes impacting collections for State Fiscal Year 2000-2001. Taxpayers will save an additional $400 million this year as a result of the elimination of state Sales Tax on clothing and footwear costing up to $110. Since the State has modified its Estate Tax to conform more closely with Federal law, taxpayers will also save an estimated $290 million when property passes from one generation to the next. Furthermore, recent reductions in the Entire Net Income rates for banks, insurance companies, and other corporations will save businesses more than $80 million. For banks and insurance companies, rates were reduced from 9 percent to 8.5 percent beginning July 1, 2000. For other businesses, rates dropped from 8.5 percent to 8 percent at that time. These tax law changes will continue to impact collections for State Fiscal Year 2001-2002 as well. As the full impact of the clothing and footwear sales tax exemption is realized, consumers in New York will save in excess of $500 million every year. Businesses will also continue to benefit from the rate reductions - with an additional $148 million in savings compared to State Fiscal Year 2000-2001. The Entire Net Income rate for banks and insurance companies will drop again to 8 percent next July and to 7.5 percent the following year. To provide assistance in understanding the magnitude of recently enacted tax reductions, Figure 20 compares actual receipts growth to what this growth would have been absent these tax reductions. The concept of adjusting actual receipt growth to account for Tax Law changes and other administrative actions is known as "underlying growth". This allows forecasters and policymakers to examine the true relationship between the economy and revenues. This is an important tool, since the process of estimating General Fund tax receipts begins with the concept that there is a strong correlation between the economy and revenues. The Committee Staff forecast for New York's economy is one of continued but moderating growth. Growth in New York employment is estimated to equal 1.9 percent in State Fiscal Year 2000-2001. This growth is expected to moderate in State Fiscal Year 2001-2002, to a rate of 1.3 percent. Similarly, growth in Personal Income will slow from its estimated rate of 6.7 percent in State Fiscal Year 2000-2001 to 5.0 percent next Fiscal Year. However, tax reductions enacted over the past few years will act to mask the true growth in revenues, as well as the true relationship between revenues and the economy. The Committee Staff is forecasting growth in General Fund taxes of 6.1 percent and 4.7 percent respectively for State Fiscal Year 2000-2001 and State Fiscal Year 2001-2002. As displayed in Figure 21, absent tax reductions, additional earmarking of General Fund revenues and other administrative actions, General Fund Tax revenues would have grown by a stronger 8.3 and 6.9 percent, respectively. These growth rates more accurately reflect the economic environment of the State and national economies.
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Tax Reductions Effective in State Fiscal Year 2001-200
Over the past several years, the New York State Legislature has enacted various tax reductions that have been aimed at creating jobs and helping working families. Some of the major tax initiatives that are continued within the 2001-2002 Executive Budget are listed below. Energy Tax Reform Effective January 1, 2000, the gross receipts tax was eliminated. This repeal will save New York's manufacturers and industrial energy consumers, as well as residential consumers, $4 million during State Fiscal Year 2001-2002 and $330 million when fully effective. Sales Tax on Energy On September 1, 2000, the sales tax on the transportation, transmission or distribution of gas or electricity was reduced by 25 percent. Annual reductions will occur in 25 percent increments until the tax is fully phased-out on September 1, 2003. Savings from this tax reduction will total $26.2 million for State Fiscal Year 2001-2002 and $148 million when fully implemented. Power for Jobs Program Allocations for 300 megawatts of discounted power were made available beginning on January 1, 2001. This program will provide three year contracts for businesses in New York State that create or protect jobs. Savings from this tax rate reduction will total $33.6 million for State Fiscal Year 2001-2002 and have no cost to the State when fully implemented. Corporate Franchise Tax Rate Effective for tax years beginning on or after July 1, 2001, the corporate franchise tax rate for large corporations will be reduced from 8 percent to 7.5 percent. In addition, the corporate franchise tax rate for small businesses was reduced from 8 percent to 7.5 percent effective for tax years beginning on or after June 30, 1999. This new rate applies to small businesses with Entire Net Income of not more than $200,000. A further rate reduction to 6.85 percent for such businesses will take effect for tax years beginning on or after June 30, 2003. Combined tax savings for these tax rate reductions total $85 million for State Fiscal Year 2001-2002 and $280 million when fully implemented. Bank Tax Rate Effective for tax years beginning after June 30, 2001, the bank tax rate will be reduced from 8.5 percent to 8 percent. A further rate reduction to 7.5 percent, will take effect for tax years beginning on or after July 1, 2002. Savings from this tax rate reduction will total $43 million for State Fiscal Year 2001-2002 and $100 million when fully implemented. Insurance Tax Rate Effective for tax years beginning on or after June 30, 2001, the insurance tax rate will be reduced from 8.5 percent to 8 percent. A further rate reduction to 7.5 percent, will take effect for tax years beginning on or after July 1, 2002. Savings from this tax rate reduction will total $25 million for State Fiscal Year 2001-2002 and $50 million when fully implemented. Green Buildings Tax Credits This program provides tax credits for construction of environmentally friendly buildings in New York State. These credits can be applied to construction costs incurred on or after June 1, 1999 for property that has met various requirements in tax years beginning on or after January 1, 2001. Savings from this tax credit will total $1 million for State Fiscal Year 2001-2002 and $5 million when fully implemented. School Tax Relief (STAR) State Fiscal Year 2001-2002 marks the last scheduled phase-in for the STAR Program. Senior homeowners will be able to exempt $50,000 from the taxable full value of their primary residence and all other homeowners will receive a $30,000 exemption. In addition, New York City non-senior residents will also benefit from a reduced tax rate and an increase in the New York City personal income tax credit. Savings from the STAR Program will total $694 million for State Fiscal Year 2001-2002 and $2.6 billion when fully implemented. Earned Income Tax Credit (EITC) Effective January 1, 2001, the EITC was raised from 22.5 percent to 25 percent of the Federal credit. Another increase will take effect on January 1, 2002 raising the EITC to 27.5 percent. Savings from this tax credit will total $56 million for State Fiscal Year 2001-2002 and $127 million when fully implemented. Marriage Penalty Reduction Effective January 1, 2001, the standard deduction for married filing joint taxpayers was increased from $13,000 to $13,400. Another increase will take effect on January 1, 2002, raising the standard deduction to $14,200. Savings from the change of the standard deduction will total $12 million for State Fiscal Year 2001-2002 and $200 million when fully implemented. College Tuition Deduction/Credit Effective January 1, 2001, taxpayers will be able to claim an itemized deduction or a 4 percent credit for up to $2,500 of undergraduate tuition costs. Beginning January 1, 2002, the allowable tuition amount will be increased to $5,000. Savings from this deduction/credit will total $12 million for State Fiscal Year 2001-2002 and $200 million when fully implemented. |
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Alcoholic Beverage Fees Distillers, brewers, retailers, wholesalers, and others who sell alcoholic beverages in New York State are required by Articles 4, 4-A, 5, and 6 of the Alcoholic Beverage Control Law to be licensed by the State Liquor Authority. Currently, 2,500 retail outlets and 25,000 bars and restaurants are licensed. General Fund The Committee Staff estimates receipts will total $31 million in State Fiscal Year 2000-2001, a 34.8 percent increase. This estimate is $1 million more than that of the Executive. Despite a sharp decline in receipts last year due to a law change that was effective December 1, 1998, receipts have rebounded. This law change allowed bars and restaurants (licensees) to purchase licenses on an annual or biennial basis, rather than a three-year basis as previously required. This change had the effect of "spinning down" revenues by $9.0 million in State Fiscal Year 1999-2000. The Committee Staff forecasts receipts to total $32 million in State Fiscal Year 2001-2002, representing a 3.2 percent increase. The Committee Staff anticipates that the Fiscal Year 2001-2002 payment patterns will return to a more normal cash flow. Recent Legislative History In 1997, the credit period offered to beer and wine retailers was decreased from 30 days to 15 days. Also, the payment period for license renewal relating to liquor licenses for on-premise consumption, special on-premise consumption, and bottle club liquor licenses was changed from a mandatory 3-year license to an optimal annual, biennial, or triennial license, effective December 1, 1998. These actions were expected to reduce revenues by $14 million in State Fiscal Year 1999-2000, and $4 million in State Fiscal Year 2000-2001.
Alcoholic Beverage Tax New York State, through Article 18 of the Tax Law, currently imposes a tax on various Alcoholic Beverages, including beer, wine, and other spirits. The tax rate varies depending on the alcohol content. All of the receipts are deposited in the General Fund. General Fund Alcohol consumption has been decreasing at a slow but steady rate every year as a result of increased health concerns tied to alcohol consumption and increased enforcement of DWI laws. However, year-to-date receipts as of January 2001, total $158 million, an increase of 2.1 percent over January 2000. The Committee Staff estimate for State Fiscal Year 2000-2001 is $180 million, representing a 1.7 percent increase over State Fiscal Year 1999-2000. The Committee Staff estimate is the same as that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is $178 million, a decline of 1.1 percent. Recent Legislative History In the 2000 legislative session, the Executive accelerated the effective date of the expansion of the Small Brewers exemption under the beer tax retroactively to January 1, 2000 from the original effective date of March 1, 2001. In addition, the Alcoholic Beverage Tax (ABT) was reduced from 12.5 cents to 11 cents per gallon. This change will be effective September 1, 2003 and builds upon the one cent reduction that was passed within the State Fiscal Year 1999-2000 budget. In 1999, the Small Brewers exemption was increased to the first 200,000 barrels of beer (31 gallons/barrel) from 100,000 barrels effective March 1, 2001. This reduction will reduce revenues by $3 million when fully implemented. In addition, the ABT was reduced one cent from 13.5 cents to 12.5 cents effective April 1, 2001. In 1999, legislation was enacted which will reduce the tax rate on beer from 13.5 cents per gallon to 12.5 cents per gallon effective January 1, 2001. This reduction will reduce revenues by $3.0 million when fully implemented. In 1998, legislation was enacted which reduced the tax rate on beer from 16 cents-per-gallon to 13.5 cents-per-gallon. This became effective on January 1, 1999, and will reduce State Fiscal Year 1999-2000 revenues by $8 million. In 1997, legislation was enacted that repealed 1996 legislation, which required payment by Electronic Funds Transfer (EFT). The Alcoholic Beverage Enforcement provisions, which were due to expire on October 31, 1997, were extended until October 1, 2002. In 1996, legislation was enacted to require alcohol distributors with an annual tax liability of more than $5 million to remit payment by means of EFT. On January 1, 1996, the State excise tax on beer was reduced from 21 cents to 16 cents per gallon.
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Auto Rental Tax
The Auto Rental Tax, imposed by Article 28-A of the Tax Law, applies to the rental of any passenger car with a gross vehicle weight of 9,000 pounds or less that can seat up to a maximum of nine passengers. The tax is imposed at a rate of 5 percent on the charges incurred for any rental for use in New York State. The tax does not apply to leases of one year or more. All of the receipts are deposited in the General Fund. General Fund Based on historical collection patterns, the Committee Staff estimates that State Fiscal Year 2000-2001 receipts will total $39 million, representing zero growth. This estimate is $2 million higher than that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is $41 million, for a growth rate of 5.1 percent. This forecast is $3 million higher than that of the Executive.
Bank Tax
Article 32 of the Tax Law, imposes a tax on banking corporations for the privilege of operating a banking business in a corporate manner, employing capital, owning or leasing property, or maintaining an office in New York State. The tax has been assessed at a rate of 9 percent of Entire Net Income, but is currently being phased down to 7.5 percent. One of the three alternative bases, allocated capital, alternative minimum income, or fixed dollar minimum, must be used if it results in a greater amount of tax owed. All of the receipts are deposited into the General Fund. General Fund The Committee Staff estimates that State Fiscal Year 2000-2001 receipts will total $535 million, representing an increase of 1.7 percent. Year-to-date collections through January 2001 are experiencing a slight decline of 2.5 percent from last fiscal year. This is mainly the result of unusually high audit collections last year and the paying of a larger amount of refunds this year. This estimate is $14 million higher than that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is $514 million, a decrease of 3.9 percent. This lower forecast reflects the impact of recently enacted tax cuts, which will reduce revenues by approximately $40 million. The Committee Staff forecast is $9 million higher than that of the Executive. Recent Legislative History The State Fiscal Year 2000-2001 State Budget changed the allocation rules for Bank Mutual funds to match the corresponding rules for Mutual Funds operated by non-banking corporations. This method sources receipts to the location of the customer. In addition financial services companies are being held under their current article of taxation while the State studies the implications of the Federal Financial Services Modernization Act from 1999. The 1999-2000 State Budget reduced the Entire Net Income (ENI) tax rate on banks from 9 percent to 7.5 percent over three years. This will have no significant effect on State Fiscal Year 2000-2001, and will reduce bank tax revenues by $45 million in State Fiscal Year 2001-2002. In 1998, the Investment Tax Credit, currently available to manufacturing corporations, was extended to banks that are brokers or dealers in securities. The credit can be taken for equipment used in broker/dealer activity. To be eligible for the credit, employees using the eligible equipment must be located within New York. In 1997, two measures were enacted affecting the Bank Tax. First, the tax was extended for 4 years, with an expiration date of December 31, 2001. In addition, banks, beginning in the year 2001, will be allowed a Net Operating Loss deduction, similar to that afforded to other corporations.
Cigarette Tax The Cigarette Tax, Article 20 of the Tax Law, is levied at a rate of $1.11 per package of 20 cigarettes on the sale of cigarettes within the State. Of the total Cigarette Tax levied, 56 cents of the receipts are deposited into the General Fund and the remaining 55 cents are dedicated to fund the HCRA program. The State levies a tax on all other tobacco products equal to 20 percent of the wholesale price of such products. In addition, there is an annual license fee of $100 for all retail establishments and $25 for every vending machine that sells cigarette and/or tobacco products. General Fund The Committee Staff estimates that Cigarette Tax receipts in State Fiscal Year 2000-2001 will total $530 million, a decline of 17.6 percent. This is attributable to the continuous decline in cigarette consumption as a result of the 1999 tax increase, in addition to the increasing health concerns related to the use of tobacco products. The Committee Staff estimate is $8 million more than that of the Executive. The Committee Staff forecasts revenues of $463 million in State Fiscal Year 2001-2002, which represents a 12.6 percent decline. Further State and Federal restrictions on cigarette advertising and expanded public health laws will aid in the decline. Legislation submitted with the Executive Budget would change the tax imposed on moist snuff from a twenty percent tax on the wholesaler's price to a tax of 39 cents per ounce. This legislation is expected to have a minimal revenue gain of $100,000 for State Fiscal Year 2001-02, and $200,000 thereafter. The Committee Staff proposed law forecast, therefore, remains at $463 million. Recent Legislative History Chapter 1 of the Laws of 1999 enacted broad health care legislation known as HCRA 2000. A key component is a 55 cents per pack of cigarette increase with all proceeds of the increase devoted to health care programs. Since the entire 55 cents is devoted to HCRA programs, General Fund revenue will not increase due to the higher rate. Rather, it is expected that cigarette tax revenue will decrease significantly due to this legislation. Chapter 629 of the Laws of 1996 enacted strict Cigarette and Tobacco Tax enforcement measures, which were aimed at curbing the sale of bootlegged cigarettes in New York State. The increased enforcement provisions were estimated to increase State Fiscal Year 1997-98 revenues by $13 million.
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Corporate Franchise Tax
The Corporation Franchise Tax is comprised of Articles 9-A and 13 of the Tax Law. Article 9-A imposes a tax on corporations for the privilege of operating a business in a corporate form in New York State. The tax has been assessed at a rate of 9 percent of Entire Net Income (ENI), but is currently being phased-down for tax years starting between June 1999 and July 2000, the rate was 8.5 percent. For tax years starting between June 2000 and July 2001, the rate is 8 percent. For tax years starting after July 2001, the rate will be 7.5 percent. One of the three alternative bases (allocated capital, alternative minimum income, or fixed dollar minimum) must be used if any of the three results in a greater amount of tax owed. Article 13 authorizes the tax on unrelated business income. This is a tax on the unrelated business income of not-for-profit corporations and other organizations whose activities are otherwise tax-exempt. All of the receipts are deposited in the General Fund. General Fund The Committee Staff estimates that receipts for State Fiscal Year 2000-2001 will total $2,414 million. This estimate represents a growth of 24.5 percent. The growth is mainly the result of recently enacted tax reductions, which changed the method of taxation of utility companies from a gross receipts tax to a net income tax. This estimate is $32 million higher than that of the Executive. The Committee Staff proposed law forecast for State Fiscal Year 2001-2002 is $2,247 million, representing negative growth of 6.9 percent. The main reasons for this decline is the implementation of additional tax reductions, which will reduce revenues in excess of $250 million. The Committee Staff forecast is $25 million higher than that of the Executive. Legislation submitted with the Executive Budget would provide various tax reductions to corporations. These actions include eliminating the Alternative Minimum Tax (AMT), and changing to a single sales apportionment formula. Additionally, the Executive has proposed creating a Brownfields Redevelopment Tax Credit, expanding the Low Income Housing Tax Credit and making the Investment Tax Credit (ITC) refundable for biotechnology companies. These actions are estimated to reduce State Fiscal Year revenues by $25 million. Recent Legislative History Since 1994, the Legislature has enacted numerous tax reductions under the Corporate Franchise Tax. When fully implemented, these actions will reduce Corporate Franchise Tax revenues by over $1.0 billion. In addition to legislation that moved utility companies to Article 9-A, a number of other measures were enacted in the 2000-2001 State Budget:
The 1999-2000 State Budget lowered the Alternative Minimum Tax (AMT) rate from 3.0 percent to 2.5 percent. This will save taxpayers an additional $12 million per year, when fully implemented. Legislation enacted in 1999 created a credit for the manufacture of alternative fuel vehicles made within the State. The credit is available for such vehicles regardless of where they are placed in service, provided that the vehicles are owned or leased by a government entity. The amount of the credit is half the incremental cost of manufacturing the vehicle, up to $5,000 and is expected to reduce receipts by $2.5 million in State Fiscal Year 2000-2001. For taxable years beginning on or after January 1, 2001, the credits available to Qualified Emerging Technology Corporations will be extended to include companies engaging in the remanufacture of certain commodities. This is expected to have no impact on revenues for State Fiscal Year 1999-2000, and is estimated to reduce receipts by $2 million in State Fiscal Year 2000-2001. Beginning in 2000, the Subsidiary Capital Tax will not apply for subsidiaries paying taxes under Articles 32 of 33 of the Tax Law. This is expected to have no impact on collections for State Fiscal Year 1999-2000, and will reduce receipts by $5 million in State Fiscal Year 2000-2001. In 1998, the Legislature enacted measures that will have an impact on Corporate Franchise Tax revenues. Among these measures were the following:
In 1997, various tax reductions were enacted, which will affect Corporate Franchise Tax collections when fully implemented. Among these measures were an extension of the Investment Tax Credit carry-forward period from 10 to 15 years, a tax credit for employers that hire workers with disabilities, and a new credit for companies that purchase alternative fuel vehicles.
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Estate & Gift Tax
Articles 26 and 26-A of the Tax Law impose taxes on the transfer of property among individuals. Transfers of property upon death are taxed under the Estate Tax Law (Article 26), and transfers of property during an individual's lifetime are taxed under the Gift Tax Law (Article 26-A). All of the receipts are deposited into the General Fund. General Fund The Committee Staff estimates that State Fiscal Year 2000-2001 receipts will total $748 million, which represents a decline of 29.1 percent. Of this, $720 million is derived from the Estate Tax and $28 million from the Gift Tax. The large decline in receipts is the result of two factors. Effective February 1, 2000, the threshold for taxable estates increased from $300,000 to match the Federal threshold of $675,000. In addition, the time required to make an estimated payment of State estate liability was extended from 7 months to 9 months after death. This change effectively moved two months of collections from State Fiscal Year 2000-2001 into State Fiscal Year 2001-2002. The Committee Staff estimate is $3 million higher than that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is $748 million, which represents no growth in overall Estate and Gift Tax receipts. The forecast for Gift Tax receipts in State Fiscal Year 2001-2002 is $2 million as a result of the tax being repealed as of January 2000. The forecast for the Estate Tax is $746 million for State Fiscal Year 2000-2001, representing an increase of 3.6 percent. This increase is mainly the result of the shifting of tax collections from the previous fiscal year. The Committee Staff forecast is $12 million higher than that of the Executive. Recent Legislative History In 1999, legislation was enacted that conforms the New York State Estate and Gift Tax Law to Federal law providing a qualified family-owned business interest deduction. This allows heirs to exempt a total of $1.3 million from the New York State Estate Tax. This change is expected to reduce revenues by $1.0 million in State Fiscal Year 1999-2000, and $80 million when fully implemented. In 1998, legislation was enacted that conforms the Estate Tax to the effective Federal exemption of $1.3 million if the value of a family-owned farm or business constitutes 50 percent of the gross value of the estate. In 1997, legislation was enacted which phases-in a reduction of the Estate and Gift Tax. As of October 1, 1998, estates valued under $300,000 will be exempt from Estate Taxes. This threshold will continue until February 1, 2000, when the exemption will increase to the Federal exemption of $600,000. Should the Federal government increase its exemption threshold above $600,000, the State will automatically conform as long as the exemption does not exceed $1 million. In addition, as of January 1, 2000, the Gift Tax will be repealed. In 1995, legislation was adopted that provided a new deduction equal to a maximum of $250,000 of assets that represent equity in the decedent's principal residence. By reducing the tax on such assets, this legislation facilitates the transfer of homes from decedents to their heirs. In effect, when combined with the unified credit, as much as $365,000 of assets are now exempt from tax. In 1994, legislation was enacted that increased the maximum unified credit from $2,750 to $2,950, thereby effectively increasing the exemption equivalent from $108,333 to $115,000. This legislation also established a new credit equal to five percent of the first $15 million of assets in a closely-held business (for estates where such assets constitute 35 percent or more of the estate), up to a maximum credit of $750,000. This reduces the tax burden on the transfer of small businesses to heirs upon an owner's death.
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Highway Use Tax
Article 21 of the Tax Law imposes a Highway Use Tax for the privilege of operating any vehicle on the highways of New York State. Three component taxes are imposed upon the operation of trucks, tractors, trailers and semi?trailers for their use of the highways:
All Highway Use Tax receipts are dedicated to the Highway and Bridge Trust Fund. All Funds The Committee Staff estimates that receipts in State Fiscal Year 2000-2001 would total $158 million, an increase of $8 million. This increase is mainly attributable to a higher demand for transportation of goods. This estimate is $3 million higher than that of the Executive. The Committee staff forecast for Highway Use Tax receipts is $151 million for State Fiscal Year 2001-2002. A rate reduction on the supplemental tax accounts for this decline. Recent Legislative History Last legislative session the supplemental tax portion of the truck mileage tax was reduced by 20 percent. This rate reduction is effective April 1, 2001. In 1998, the supplemental portion of the Truck Mileage Tax was reduced by 50 percent, effective January 1, 1999. This resulted in a 25 percent overall rate reduction in the Truck Mileage Tax. This legislation also transferred revenues from General Fund Motor Vehicle Fees to hold the dedicated transportation funds harmless. New York complied with federal legislation requiring conformity with the International Fuel Tax Agreement (IFTA) with respect to reporting and collection of taxes relating to fuel use by a single base state and proportional sharing of revenue among the states where a commercial motor vehicle is operated. The truck mileage tax was reduced by one-half for miles traveled on the Thruway in 1995 and eliminated in 1996. Taxpayers were authorized to claim refunds or credits for fuel use taxes paid (including the sales tax portion). The diesel motor fuel rate was reduced two cents from 10 to 8 cents per gallon.
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Insurance Tax
The Insurance Taxes are contained in Articles 33 and 33-a of the Tax Law, and Articles 11 and 12 of the Insurance Law. Article 33 of the Tax Law imposes an income and premiums tax on insurance companies. Article 33-a imposes a tax on independently procured insurance. Articles 11 and 12 impose retaliatory taxes and a tax on excess line brokers (brokers authorized to procure insurance from out-of-state carriers not authorized to do business in New York). The Franchise Tax on insurance corporations consists of a tax measured by allocated Entire Net Income (or one of three alternative bases, if a higher tax would result), plus a tax on subsidiary capital and an additional Franchise Tax based on gross premiums less certain deductions. All of the receipts are deposited into the General Fund. General Fund The Committee Staff estimates receipts in State Fiscal Year 2000-2001 will total $561 million, a decrease of 4.8 percent. This estimate reflects weak financial activity through the first part of the calendar year, which has resulted in a decline in insurance company portfolios. In addition, higher interest rates slowed sales of certain goods such as motor vehicles and homes. Higher rates also tend to deflate capital gains in the industry's bond portfolio. Catastrophic losses claimed in 2000 are substantially lower than last year, when a higher than usual amount of insured losses were claimed. The estimate also assumes improved growth in Property and Casualty premiums. This estimate is $6 million lower than that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is $537 million, representing a decline of 4.3 percent. This forecast incorporates a return to more normal growth in premiums, however, the effects of approximately $40 million in additional tax cuts will depress revenues. The Committee Staff forecast is $3 million lower than that of the Executive. Recent Legislative History In 2000, legislation authorizing an additional $150 million in tax credits for the CAPCO program was enacted. CAPCOs (Certified Capital Corporations) are small New York based companies that are certified by the Insurance Department as meeting certain investment requirements, to encourage insurance companies to invest in them. Insurance companies that invest in CAPCOs will be able to claim a credit for 100 percent of their investments. In addition, the Investment Tax Credit (ITC) was extended to insurance companies engaged in securities trading. In 1999, legislation was enacted to reduce the Entire Net Income (ENI) rate from 9 percent to 7.5 percent over a three-year period. In addition, the cap of tax as a percentage of premiums was reduced from 2.6 percent to 2.0 percent for property and casualty insurers. These changes will reduce insurance tax revenues by $50 million, when fully implemented. In 1997, three Insurance Tax measures were instituted to help maintain the competitiveness of this industry in New York State. First, beginning in 1998, life insurance companies will receive a reduction in their premiums tax rate from 0.8 percent to 0.7 percent, and an increase in their March estimated payment from 25 percent to 40 percent. In addition, two other provisions enacted will allow for the formation of captive insurance companies and allow for investment in Certified Capital Corporations (CAPCOs). A captive insurance company is a company that primarily insures the risks of a parent or its parents' affiliated companies. Captive insurers will be subject to a special premiums tax in lieu of the premiums and "income-base" tax that applies to other insurance companies.
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Lottery
The New York State Lottery is currently comprised of the Instant, Daily Numbers, Win 4, Pick 10, Take 5, Quick Draw, and Lotto games. A percentage of the revenue derived from the sale of each game, ranging from 25 to 45 percent depending on the game, is dedicated to fund education. In addition, 15 percent of Lottery sales are placed into a Special Revenue account to cover the administrative expenses of the Lottery. The remaining revenues from each game's sales are the prize payouts to Lottery players. The administrative expenses are appropriated by the Legislature each year as part of the State Operating Budget. Any revenue remaining, after paying the administrative costs of the Lottery, is then transferred back to the Lottery receipts account and dedicated to education. General Fund Both the Committee Staff and the Executive expect State Fiscal Year 2000-2001 revenues to exceed the Lottery Aid Guarantee of $1,393 million. However, since this Guarantee represents the maximum amount of lottery revenues that can be used to fund education, this is the revenue estimate chosen by the Committee Staff and the Executive. The remainder must be carried forward to the next fiscal year. The Committee Staff estimates that actual lottery revenues will total $1,434 million, representing revenue growth of 6.2 percent. The Executive believes that actual revenues for this fiscal year will total $1,430 million, which is $4 million lower than the Committee Staff estimate, and represents growth of 5.9 percent. This translates to an expected carry-over of $45 million to State Fiscal Year 2001-2002 based on the Committee Staff estimate, and $41 million based on the Executive estimate. Through Week 46 of State Fiscal Year 2000-2001, there has been an increase in the growth of Lottery receipts of 5.0 percent over the previous fiscal year. A large part of this increase is due to the temporary sunset of Quick Draw, from April 1, 1999 through August 1, 1999. Extracting Quick Draw revenues for the two fiscal years yields an increase in growth of only 0.9 percent. The re-introduction of the promotional game, Millenium Millions, in October 2000 also provided an additional $54.5 million in revenues dedicated to education excluding the administrative surplus. Growth in revenues for most other Lottery games has been relatively flat for the year with the exception of Lotto, which is down 10.8 percent year-to-date, and Take 5, which is up 14.5 percent for the year. Instant Games revenues are expected to continue to rise as a result of an increase in the prize payout. The Committee Staff current law forecast for State Fiscal Year 2001-2002 is $1,281 million, which represents a decline in growth of 8.0 percent. This forecast reflects the fact that authorization for Quick Draw is scheduled to expire on March 31, 2001, and the expectation that Lotto sales will continue to decline. It also assumes that the Lottery will not run any promotional games during the fiscal year. Factors positively affecting the forecast include the expectation that Instant Games revenues will continue to rise due to the recent changes in the prize payout structure, and that Take 5 revenues will continue to grow based on the administrative changes that increased the drawings to seven days per week. Legislation submitted with the Executive Budget would authorize the Lottery Division to enter into a multi-jurisdictional game such as Powerball. The Executive estimates that this proposal will increase revenues by $125 million in State Fiscal Year 2001-02. Also submitted with the Executive Budget is a request for the permanent extension of Quick Draw. In 1999, the game expired for a four-month period until authorization was granted through March 31, 2001. Quick Draw was originally introduced in 1995. The Executive estimates that the permanent extension of Quick Draw will preserve $151.8 million in revenues annually. The Committee Staff proposed law forecast is $1,550 million, an increase of 11.3 percent. This estimate is $25 million higher than that of the Executive. Recent Administrative History In September 2000, the Lottery added two Take Five drawings per week to the existing five drawing per week in order to boost sales. This has resulted in increased sales of approximately 38.5 percent over the same period last year since implementation. In addition to the recent legislative authorization to increase the prize payout for Instant Games to 65 percent, sales for these games have increased in recent weeks due to the implementation of a Retailer Management Plan. Under the plan, the Lottery sends representatives every two weeks to most retailers that sell Instant Games tickets in order to help them manage their inventory of tickets. Because the necessary legislation authorizing a multi-state lottery game like Powerball was not enacted 2000, the Lottery announced the re-introduction of a promotional Millennium Millions game, tickets for which were sold starting in October 2000. The jackpot for this game rolled twice, producing revenues of $54.5 million, excluding the unused administrative surplus. In March 1999, the Lottery offered a new Regional Lotto game to combat the perception that winners are always from another part of the State. This game ended in November 1999, and was replaced by a special Millenium Millions Lotto game. Excluding the administrative surplus, the Regional Lotto game produced $17.6 million in revenues dedicated to education, and the Millenium Millions game contributed $29.2 million for SFY 1999-2000. The Lottery made major administrative changes to the Lotto game effective at the end of February 1999. With Lotto sales tapering off dramatically, the Lottery's hope was to reinvigorate player interest. First, the field of numbers from which to choose was reduced from 54 to 51, with an increase the number of prize levels and additional prize money apportioned to lower-tier prize levels. Second, an even more dramatic change, the price of a Lotto ticket was increased from 2 plays for $1 to 1 play for $1. These changes were designed to increase revenue, increase the odds of winning any given prize, and increase the overall prize levels available. However, sales for the Lotto game have continued to decline since that time, and are expected to fall even further over the next fiscal year.
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Miscellaneous Receipts
Miscellaneous Receipts are different from the Other Taxes in that they are not collected pursuant to any specific Article in the New York State Tax Law. Miscellaneous Receipts are derived from a wide range of revenue sources. There are currently six categories comprising the collections of these receipts: Abandoned Property, Federal Grants, General Fund Refunds and Reimbursements, Investment Income, Licenses and Fees, and Other Transactions. All of the receipts are deposited in the General Fund. General Fund The Committee Staff estimates that Miscellaneous Receipts will total $1.538 billion in State Fiscal Year 2000-2001, which represents a decline of $109 million, or 6.6 percent, over State Fiscal Year 1999-2000. This decline can be mainly attributed to the phase-out of assessments levied on health care providers, in addition to a one-time reclassification of health care related funds that artificially inflated State Fiscal Year 1999-2000 receipts. The Committee Staff estimate is $13 million higher than the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is $1.452 billion, which represents a decrease in overall Miscellaneous Receipts of 5.6 percent, or $86 million, over State Fiscal Year 2000-2001. This reduction is mainly attributable to an expected decline in investment income, resulting from lower balances in the Short Term Investment Pool (STIP), and lower interest rates. Recent Legislative History Legislation in 1999 accelerated the scheduled elimination of assessments imposed on hospitals, nursing homes and home care providers by one quarter, from April 1, 2000 to January 1, 2000. This measure will reduce revenues by $41.2 million in State Fiscal Year 1999-2000. Legislation in 1997 enacted a five-year phase-out of the Health Care Provider Assessments. The assessments levied on hospitals and nursing homes will begin phasing-out during State Fiscal Year 1997-98 and will be completely phased-out in State Fiscal Year 2001-2002. The estimated impact is $540 million when fully implemented.
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Motor Fuel Tax
Currently, article 12?A of the Tax Law imposes a tax upon motor fuel sold within New York State. It applies to motor fuel imported, manufactured or sold within the State by a distributor. For diesel, however, the tax applies to the first sale or use. The tax rate is 8 cents per gallon for both motor fuel and diesel. General Fund The Committee Staff estimates that Motor Fuel receipts will total $19 million in State Fiscal Year 2000-2001. This estimate is the same as the one of the Executive. Receipts for State Fiscal Year 2001-2002 will be entirely earmarked to the dedicated transportation related funds. All Funds For State Fiscal Year 2000-2001 all funds receipts are estimated to total $510 million, while for State Fiscal Year 2001-2002 all receipts from this tax would total $515 million. Recent Legislative History Beginning April 1, 2001 the last portion of General Fund receipts from these taxes go to the Emergency Highway Fund Accounts. Receipts from gasoline taxes are dedicated as follows: 68 percent to the Dedicated Highway and Bridge Trust Fund, 22 percent to the Emergency Highway Fund Accounts and 10 percent to the Dedicated Mass Transportation Trust Fund. Receipts from the tax on diesel are dedicated as follows: 49 percent to the Dedicated Highway and Bridge Trust Fund, 22 percent to the Emergency Highway Fund Accounts and 29 percent to the Dedicated Mass Transportation Trust Fund. The tax on diesel motor fuel was reduced by 2 cents per gallon, effective January 1, 1996.
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Motor Vehicle Fees
Revenue from Motor Vehicle Fees comes from over 50 different license, registration, service, and penalty receipts. Passenger and commercial vehicle registrations, and licensing fees are the largest components. General Fund The Committee Staff estimates Motor Vehicle Fees to total $341 million in State Fiscal Year 2000-2001, representing a 15.2 percent decrease. This estimate is $3 million above that of the Executive. Increased dedication of Motor Vehicles Fees to the Dedicated Transportation Funds explain the expected decline in receipts. The Committee Staff proposed law forecast for State Fiscal Year 2001-2002 is $198 million, which includes a proposed transfer of $169 million to the Dedicated Funds Accounts. Moreover, due to legislation passed in 2000 an additional 23.5 percent of registration fees is earmarked to the Dedicated Highway and Bridge Trust Fund. All Funds All Funds receipts are expected to total $491 million in State Fiscal Year 2000-2001. This estimate reflects the effects of administrative changes made in 1996 which modified the length of the licenses renewal period from four to five years. In State Fiscal Year 2001-2002, the Committee Staff proposed law forecast of receipts is $605 million. This forecast reflects a full year of licenses renewals. Legislation submitted with the Executive Budget would earmark additional Motor Vehicle Fees to the Dedicated Highway and Bridge Trust Fund. Also, special license plates with New York background images would be available for an additional $10. The budget also includes a proposal to double boat registration fees and to increase commercial driver licenses renewals from 5 to 8 years. Recent Legislative Changes Due to legislation passed in 2000, an additional 23.5 percent of registration fees will be dedicated. The Dedicated Highway and Bridge Trust Fund and the dedicated Mass Transportation Trust Fund will receive a total of 60.3 percent and 8.7 percent of registration fees respectively. During last year's budget negotiations, the Department of Motor Vehicles was authorized to reissue license plates and renew licenses for a period of 8 years. In 1998, auto registration fees were reduced by 25 percent and the percentage earmarked to the dedicated transportation fund was increased to hold this fund harmless from the fee reduction.
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Other Taxes
Article 19 of the Tax Law imposes a 3 percent tax on gross receipts from boxing and wrestling exhibitions, including receipts from broadcasting rights. Article 2 of the Racing, Pari-Mutuel Wagering and Breeding Law levies a State tax of 4 percent on admissions charges to racetracks and simulcast theaters. All of the receipts are deposited in the General Fund. General Fund The Committee Staff estimates that receipts from Other Taxes in State Fiscal Year 2000-2001 will total $1 million. This estimate is the same as that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is also $1 million. Recent Legislative History Legislation enacted in the 1999 State Budget reduced the rate of the gross receipts tax for boxing and wrestling exhibitions to 3 percent from 5.5 percent effective October 1, 1999. This legislation also imposed a cap on the total tax at $50,000 per match for gross receipts from ticket sales, and $50,000 per match for gross receipts from broadcasting rights.
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Pari-Mutuel
The Racing, Pari-Mutuel Wagering and Breeding Law imposes a Pari-Mutuel Tax on bets placed at racetracks, simulcast theaters and Off-Track Betting (OTB) facilities. For-profit and not-for-profit racing associations, as well as OTB Corporations, are taxed a percentage of their total betting pools for the privilege of conducting pari-mutuel wagering. All of the receipts are deposited in the General Fund. General Fund The Committee Staff estimates that receipts will total $31 million in State Fiscal Year 2000-2001, representing a decline of 13.9 percent over last fiscal year. This estimate is $1 million lower than that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is $31 million, representing no change over State Fiscal Year 2000-2001. Recent Legislative History In 2000, the Pari-Mutuel Tax was eliminated on races taking place at NYRA racetracks for 3 days surrounding the Breeder's Cup event. This provision sunsets in December 31, 2002. In 1999, the budget legislation reduced the tax on "on track" wagering at New York Racing Association (NYRA) facilities from 3.7 to 2.6 percent effective September 10, 1999, and provided for a further reduction to 1.6 percent effective April 1, 2001. These rate reductions expire on December 31, 2007. The provisions also direct money to NYRA purses and the NYS Thoroughbred Breeding and Development Fund. In 1998, the Legislature extended for four years provisions affecting various statutes relating to takeouts, tax rates, and the purse payments of non-profit racing, as well as authorizations for on-track and off-track simulcast wagering. In 1997, NYRA was authorized to conduct racing at Belmont, Aqueduct, and Saratoga through December 31, 2007. Furthermore, various simulcasting provisions were extended for an additional one year, including in-home experiment, telephone wagering and out-of-state harness simulcasting. NYRA was also required to use the first $2 million in annual profits for increasing purses. Any additional profits are to be used to reduce debt obligations.
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Personal Income Tax 
Article 22 of the Tax Law imposes a Personal Income Tax on the income of New York State individuals, estates, and trusts. Tax collections are received through employee withholding, estimated tax payments, payments accompanying tax returns, late payments, and assessments. General Description Personal Income Tax (PIT) receipts contribute over one-half of all receipts to the General Fund. Withholding is the single largest component, comprising roughly 80 percent of Personal Income Tax receipts. New York State's definition of income closely mirrors federal rules, which include wages, salaries, capital gains, unemployment compensation, and interest and dividend income. The sum of these sources is Federal Adjusted Gross Income (FAGI). New York Adjusted Gross Income (NYAGI) is calculated starting with Federal Adjusted Gross Income, from which certain income is added or subtracted to arrive at New York Adjusted Gross Income. The New York standard deduction or itemized deductions, and a dependent exemption are subtracted from NYAGI, which yields New York State Taxable Income. Taxes are calculated based on this amount. Certain credits are then subtracted from the calculated tax to determine total tax liability. General Fund The Committee Staff estimates that State Fiscal Year 2000-2001 receipts will total $24.346 billion, which reflects an increase of 19.7 percent from State Fiscal Year 1999-2000. This includes a $1.666 billion Refund Reserve transaction, which is an administrative adjustment used to transfer General Fund surpluses from one fiscal year to the next, and a deposit of $250 million into the Debt Reduction Reserve Fund. This estimate is $495 million higher than that of the Executive. The largest component of the Personal Income Tax is withholding. Employers withhold tax from wages based on the estimated liability of each employee. Receipts from withholding also include taxes withheld on bonus payments paid to employees. Withholding receipts are projected to total $20.624 billion in State Fiscal Year 2000-2001. This represents an increase of $2.163 billion, or 11.7 percent over State Fiscal Year 1999-2000. This increase is attributable to several factors, such as falling unemployment rates and rising wages. Estimated payment collections are projected to total $6.858 billion. This represents an increase of $1.023 million, or 17.5 percent over last fiscal year. Estimated payments consist of quarterly payments made by certain taxpayers on their estimated tax liability. These taxpayers historically have consisted of high income earners, or people who realize significant capital gains. The relatively volatile performance of the financial markets in 2000 is expected to generate capital gains realizations of approximately 18.0 percent over 1999. This is the primary reason for the strong expected increase in estimated payments. The Committee Staff forecast for Personal Income Tax collections is $28.134 billion in State Fiscal Year 2001-2002. Withholding receipts are projected to increase to $21.985 billion in State Fiscal Year 2001-2002. This represents growth of $1.361 billion or 6.6 percent over State Fiscal Year 2000-2001. The Committee Staff wage growth forecast of 5.5 percent, coupled with no new additional tax cuts, will allow withholding to increase by 6.6 percent. The Committee Staff forecasts that estimated payments will total $7.122 billion representing growth of $264 million or 3.8 percent over State Fiscal Year 2000-2001. Over the last few years, strong capital gains growth has led to double-digit growth in estimated payments. The Committee Staff forecasts that capital gains will remain flat in 2001, after growing by an estimated 18.0 percent in 2000. This will contribute to a lower rate of growth in estimated payments of 3.8 percent in State Fiscal Year 2001-2002. Legislation submitted with the Executive Budget include Personal Income Tax provisions which would:
All Funds In 1998, the Legislature created the School Tax Relief (STAR) Fund to help finance school tax reductions under the STAR program. Every fiscal year, revenues from the Personal Income Tax are diverted to finance this State-funded program. As a result, $3.077 billion in General Fund revenues will be dedicated in State Fiscal Year 2000-2001. The Committee Staff All Funds estimate for State Fiscal Year 2000-2001 is $27.673 billion, which represents a growth rate of 28.5 percent. In State Fiscal Year 2001-2002, $1.371 billion will be diverted to fund the Program. The Committee Staff All Funds forecast for State Fiscal Year 2001-2002 is $29.755 billion, representing a growth rate of 7.5 percent. Recent Legislative History In 2000, the Legislature enacted Personal Income Tax provisions, which:
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Petroleum Business Taxes
Article 13-A of the Tax Law imposes the Petroleum Businesses Tax (PBT) for the privilege of extracting, producing, refining, manufacturing or importing petroleum in New York State. Imposition of the tax occurs at different points in the distribution chain, depending upon the type of petroleum product. General Fund The Committee Staff projects receipts in State Fiscal Year 2000-2001 to total $88 million, a decline of 1.1 percent. A reduction in Petroleum Business Tax rates due to a downward revision of the index last January explains this decline. This estimate is the same as the Executive. All receipts from this tax will be dedicated to the Dedicated Transportation Funds in State Fiscal Year 2001-2002. The dedication will be as follows: 19.7 percent to the Mass transportation Operating Assistance Fund and 80.3 percent to the Dedicated Mass Transportation Trust Fund and the Dedicated Highway and Bridge Trust Fund . All Funds In State Fiscal Year 2000-2001, All Funds receipts are estimated to total $962 million, a 4.3 percent decrease. Receipts for State Fiscal Year 2001-2002 are projected to total $998 million, a 3.7 percent increase, explained in part due to an estimated upward revision of the Petroleum Business Tax ratio scheduled to occur next January. Legislation submitted with the Executive Budget would change the imposition of the tax on aviation fuel business to tax only the fuel consumed during take-off. Recent Legislative History In 2000, legislation reduced by 33 percent the tax rate for commercial heating oil, effective September 1, 2002. Also, the PBT minimum tax was repealed effective March 1, 2001. In 1997, additional refunds and credits were created for the Petroleum Business Tax and Motor Fuel Taxes for commercial vessels where the purchases of fuel exceed consumption of fuel in the State. In 1996, legislation was enacted that: reduced the tax on "railroad diesel" by 7 cents per gallon; eliminated the Petroleum Business Tax on non-automotive diesel motor fuel and residual used in manufacturing; increased the basic credit or reimbursement on residual petroleum products or diesel fuel for utility companies by 0.5 cents per gallon; reduced the automotive diesel motor fuel component by 1.75 cents per gallon; and changed the distribution of revenues from the Petroleum Business Tax to hold the transportation funds and MTOAF harmless from these reductions. Furthermore, other provisions included: the reimbursement of the Petroleum Business Tax on aviation and kero-jet fuel purchased in-state but consumed out-of-state; expanded the time for which taxpayers may claim a refund for taxes paid on fuel purchased in-state but consumed out-of-state; and allowed taxpayers to file for refunds for taxes paid up to four years after the tax was paid.
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Real Estate Gains Tax
The Real Estate Gains Tax is imposed, pursuant to Article 31-B of the Tax Law, at a rate of 10 percent. This tax is placed on the gains from certain large realty transfers, where the consideration is $1 million or more. All of the receipts are deposited into the General Fund. General Fund The Committee Staff estimates that Real Estate Gains Tax collections will exceed refunds by $6 million in State Fiscal Year 2000-2001. This estimate reflects the repeal of this tax effective for transfers that occurred after June 15, 1996. Collections totaled approximately $3 million for the first three quarters of this fiscal year, and $3 million for the month of January. Receipts primarily reflect collections from transactions that occurred prior to June 15, 1996. The Committee Staff forecasts net receipts of $3 million for State Fiscal Year 2001-2002. Revenues from this tax will diminish as taxpayers begin to complete payments on existing installment agreements. Recent Legislative History Chapter 309 of the Laws of 1996 repealed the Gains Tax, retroactive to all conveyances of property that took place after June 15, 1996.
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Real Estate Transfer Tax
The Real Estate Transfer Tax, Article 31 of the Tax Law, is levied on real property transfers where the value of the interest in the property exceeds $500. The rate is $2 for each $500, or a fraction thereof, of net consideration. An additional tax of 1 percent is levied on residential transfers where the consideration is over $1 million. The party that sells the property pays the tax. General Fund Real Estate Transfer Tax revenues are entirely dedicated to fund environmental programs. All Funds The Committee Staff estimates Real Estate Transfer Tax receipts of $380 million in State Fiscal Year 2000-2001. This represents an increase of $40 million, or 10.5 percent, which was mainly the result of home buyers anticipating gradual increases in interest rates. In State Fiscal Year 2000-2001, collections were bolstered from several large real estate transactions. Under current law, $112 million in Real Estate Transfer Tax revenue is dedicated to the Environmental Protection Fund, and all remaining revenue is dedicated to pay debt service on the Clean Air/Clean Water Bond Act. The Committee Staff forecast for State Fiscal Year 2001-2002 is $360 million. This forecast is based on projections of an economic slowdown within the New York City real estate market. Specifically, the current decline in asking rents and increase in vacancy rates in Manhattan is expected to continue into the 2001-02 State Fiscal Year. Legislation submitted with the Executive Budget would increase the statutory amount deposited into the Environmental Protection Fund from $112 million to $132 million. This proposal would not affect the forecasted 2001-02 All Funds net collections. The Committee Staff proposed law forecast, therefore, remains $360 million. Recent Legislative History Legislation enacted in 1999 extended the reduced rate for the State and New York City Transfer Taxes for Real Estate Investment Trusts (REITS) through September 1, 2002. The current rates are reduced for these transfers from $2 to $1 per $500 of conveyance under the New York State Real Estate Transfer Tax Rate and it is estimated that it will cost the State $1.3 million in State Fiscal Year 1999-200. In 1996, legislation was enacted that extended the current New York State Real Estate Transfer and New York City Real Estate Transfer Tax reductions for Real Estate Investment Trusts. Further, it temporarily expanded the application of the REIT provisions to transfers to existing REITs, and changed the 40 percent interest requirement to 50 percent for existing REITs. It also eliminated the "seventy?five percent" rule for existing REITs until September 1, 1998. On the expiration date, the present REIT provisions again become effective permanently. This change is expected to have a minimal effect on overall collections. Also in 1996, voters approved the Clean Air/Clean Water Bond Act. As part of the Act, revenues in excess of the $112 million already dedicated to the Environmental Protection Fund will be used to pay debt service on the Bond Act. Any funds in excess of that which is necessary to make debt service payments will be transferred back to the General Fund and show up as transfers to the General Fund.
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Regional Business Tax Surcharge
The Regional Business Tax Surcharge is comprised of a 17 percent surcharge applied on the portion of Article 9-A (Corporate Franchise), Article 9 (Corporations and Utilities), Article 33 (Insurance), and Article 32 (Bank) taxes attributable to business activity carried on within the Metropolitan Commuter Transportation District (MCTD). This district consists of seven counties (Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester) and the City of New York. All Funds Collections from the surcharge are deposited into the Mass Transportation Operating Assistance Fund, associated with the Metropolitan Transportation Authority. The Committee Staff estimates that State Fiscal Year 2000-2001 revenues will total $529 million, representing a 9.9 percent decline over State Fiscal Year 1999-2000. This estimate is based on earnings for businesses, especially for the financial sector, which is a very significant element within the MCTD. This estimate is $6 million higher than that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 totals $529 million. The Committee Staff estimate is $6 million higher than that of the Executive. Recent Legislative History In 1997, the State extended the surcharge for an additional 4 years to December 31, 2001. Additionally, recent rate reductions under Articles 9-A, 32 and 33 have been made at the State level, but the MTOAF is still to be computed using the old tax rates, thus holding MTOAF harmless. Recent tax reductions under Article 9 also hold MTOAF harmless, with the exception of collections under Section 186-a. Reductions under this section reduce the MTOAF collections proportionally.
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Sales Tax
The Sales and Compensating Use Tax, imposed by Article 28 of the Tax Law, is a broad-based consumption tax levied on the sale of tangible personal property, excluding items such as food and products used in manufacturing, and including a limited number of services such as trash removal and interior design services. The State Sales Tax rate is 4.0 percent. General Fund The Committee Staff estimate for State Fiscal Year 2000-2001 is $6,295 million. This represents a growth of $154 million, or 2.5 percent, over State Fiscal Year 1999-2000. Through January 2001, year-to-date collections have risen by 2.9 percent in spite of the fact that the State portion of the Sales Tax on articles of clothing and footwear costing less than $110 was eliminated beginning March 1, 2000. However, collections are expected to slow down for the remainder of the fiscal year due to a significant drop in consumer confidence, which is currently at its lowest point in four years. This estimate is $18 million higher than that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is $6,548 million, which represents a growth of $253 million, or 4.0 percent. This forecast is based on the expectation that retail sales will remain relatively weak during the first part of 2001, but will pick up during the second half of the year. This forecast also accounts for the implementation of some new tax provisions scheduled to begin in State Fiscal Year 2001-2002. Legislation submitted with the Executive Budget would double the size of certain Upstate Empire Zones from the current two square miles to four square miles. Zones would be doubled based on certain criteria, including population, per capita income and unemployment. Businesses located in the new portion of the Zone would be eligible for the sales tax exemption. All Funds The All Funds category is comprised of the General Fund, the Local Government Assistance Tax Fund, and the Mass Transportation Operating Assistance Fund (MTOAF). The Committee Staff estimates that All Funds receipts in State Fiscal Year 2000-2001 will total $8,758 million. All Funds receipts in State Fiscal Year 2001-2002 are projected to total $9,106 million. One quarter of the receipts generated from the State Sales Tax are dedicated to pay for the debt service of the Local Government Assistance Corporation (LGAC), which was created in 1990 to eliminate the annual Spring Borrowing. Once the debt service obligations are paid, any remaining excess revenue is then transferred back to the General Fund. In State Fiscal Year 2000-2001, $2,098 million will be dedicated to LGAC. The forecast for State Fiscal Year 2001-2002 is expected to yield an LGAC dedication of $2,183 million. In 1981, MTOAF was created to help finance the State's public transportation system. A portion of the revenue is derived from the 0.25 percent Sales Tax that is imposed in the Metropolitan Commuter Transportation District (MCTD). In State Fiscal Year 2000-2001, the Committee Staff estimates that $365 million will be deposited in MTOAF. Revenues dedicated to MTOAF are expected to rise to $375 million in State Fiscal Year 2001-2002. Recent Legislative History The permanent exemption for articles of clothing and footwear costing less than $110 began on March 1, 2000. This exemption is the main reason for the expected slow growth in Sales Tax revenues for State Fiscal Year 2000-2001. Other provisions enacted in 2000 involving the Sales Tax include the following:
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Utility Tax
The Corporations and Utilities Tax, Article 9 of the Tax Law, imposes a gross receipts and franchise tax on regulated utilities and industries. The major industries subject to this tax are utilities (gas, electric, water and steam), telecommunications (telephone and telegraph), and transportation industries (trucking and railroad). The majority of revenue from Article 9 is deposited into the General Fund. However, a portion of the tax imposed on the capital stock of telecommunications and transportation companies is dedicated to the Mass Transportation Operating Assistance Fund (MTOAF). General Fund The Committee Staff estimates receipts for State Fiscal Year 2000-01 to total $855 million, a decline of 39.7 percent. The primary contributing factors to this decline are shifting of some taxpayers from this Article of the Tax Law to the Corporate Franchise Tax. In addition, rate reductions enacted in 1997 are fully effective in the current fiscal year. This estimate is $10 million higher than that of the Executive. The Committee Staff forecast for State Fiscal Year 2001-2002 is $887 million, representing an increase of 3.7 percent. This increase is mainly the result of the committee staff forecast for continued increases in the price of energy. The Committee Staff forecast is $12 million higher than the Executive. All Funds Through a special revenue fund, the Metropolitan Transportation Authority (MTA) receives a dedicated share of collections from Sections 183 and 184 of the Tax Law. In Calendar Year 2000, 64 percent of these revenues will be dedicated. Thereafter, 80 percent will be dedicated. The amount deposited to the dedicated fund is estimated to total $83 million in State Fiscal Year 2000-01 and $98 million next fiscal year. Recent Legislative History The most significant change to Article 9 was the elimination of Gross Receipts Taxes on utility companies. Such companies will now be subjected to the Corporate Franchise Tax instead, reducing Article 9 revenues by approximately $300 million in State Fiscal Year 2000-2001. The Budget also eliminates the GRT on energy used in manufacturing and phases down other portions of the tax. Additionally, 300 more megawatts were made available under the Power for Jobs program. In 1999, two measures were enacted. First, independent power producers who import natural gas for the production of electricity will be exempt from the gas import tax, effective January 1, 2001. This measure will reduce revenues by $5 million when fully implemented. In addition, local telecommunications companies with fewer than one million access lines will be exempt from the excess dividends base under Section 183 of the Tax Law effective January 1, 2002. This exemption is expected to reduce revenues by $2 million when fully implemented. In 1997, legislation that was enacted included:
In 1995, Telecommunications Tax reform was enacted in response to a Court of Appeals decision. The major implications involved the moving of the access charge deduction from long distance companies to local telephone companies, updating the computation of the tax (Goldberg methodology) for providing telecommunication service, and the agreement that long distance companies would forgo refunds due to them. In 1994, the dedicated portion of receipts to the MTA was temporarily reduced for two years. The "undedicated" revenues were deposited in the General Fund.
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Introduction The financial services industry is changing rapidly. Each of its three parts - banking, insurance and the securities industry - sell now many of the same goods and services. In addition, common ownership and affiliation among the parts is increasingly common. These changes have been taking place for over twenty years with the pace of change increasing recently. The New York State Tax Law treats the financial services industry as if its parts are as separate and distinct as they were in the past. The State has a separate Tax Article for Bank (Article 32) and another separate Tax Article for insurance companies (Article 32). Securities firms are taxed under a third Tax Article (Article 9A) which is the tax on business corporations not taxed elsewhere in the Tax Law. The federal enactment of Gramm-Leach-Bliley Act (GLBA) in 1999, which is discussed in some detail below, means some change in State Tax Law affecting the financial services industry will occur. Should that change be the minimal necessary to respond to GLBA or be as major in scope as the changes that have and will take place in the financial services industry itself? The complexity of the Tax Law in this area interacts with the size of the industry to make even the most minor change have the potential for large impact for the industry involved. The rapid changes in the industry, as well as the normal upturns and downturns, make any forecasting of the impact of Tax Law changes difficult whether on a State basis or an individual company basis. The financial services industry makes important direct contributions of tax revenues to the State as shown by the following table:
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New York State is fortunate to serve as the center of the world's financial system. Since its very beginning and through its most recent years, the State has created a proper environment, including efficient tax laws, for the businesses making up what we now call the financial services industry. The State has been rewarded with jobs for its citizens and tax revenues for its programs of general welfare and benefit. A true partnership of State and industry has existed to the mutual benefit of both parties. Background This country's financial institutions have developed quite differently than those in Europe with whom they now compete. Control by government has been one reason. One way this control has been exercised is the setting of limits. For example, banks at one time were limited to doing business in only one state at a time. More than geographic limits were set, however. Most famously, the Glass-Steagall Act, which is actually sections of the Banking Act of 1933, set strict boundary lines between banking, the securities industry and the insurance business. These boundary lines were strengthened by federal amendments in 1956 and 1970. States, including New York, followed suit and enacted laws similar to Glass-Steagall. These boundaries began to fall in the mid-1980s. The Federal Reserve and the Office of the Comptroller of the Currency (OCC) began loosening restrictions on banks through interpretation of existing law. Table 2 summarizes this deregulation process. Banks began expanding into new areas of business. New investment vehicles, such as money market funds, allowed the securities and insurance industries to move into direct competition with banks by offering products and services traditionally only found at a bank. By 1998, bank subsidiaries had captured 25 percent of the securities industry's total revenues. Bank annuity sales have risen rapidly and now account for approximately 15 percent of the annuity sales nationwide. Bank insurance sales, however, are not yet as significant. At the same time that the business of the financial services industry was changing, its structure was changing and becoming more economically efficient. Several hundred bank mergers and acquisitions have taken place each year for the last 20 years. In the past 10 years, so-called "mega-mergers" involving financial entities with assets of $1 billion or more have, if not become commonplace, became less worthy of note. Between 1989 and 1999, the number of banks and bank holding companies each fell by about 40 percent. During the same period, the percentage of assets held by the eight largest banks increased from 21.3 percent to 41.5 percent.
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TABLE 2
Summary Of Important Dates
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Gramm-Leach-Bliley Act
In order to modernize comprehensively the financial services industry, the Congress enacted the Gramm-Leach-Bliley Act of 1999 (GLBA). GLBA eliminated various prohibitions on combining banking, securities and insurance activities and streamlined the regulation of companies operating such combinations. GLBA expanded the securities and insurance activities permitted to qualified bank holding companies and subsidiaries of qualified national banks. In addition, GLBA authorizes new "merchant banking" or equity investment power which will allow banks to make "controlling" investments in any kind of company, including non-financial companies. GLBA also limited the ability of states to prohibit insurance companies from expanding into banking activities. It requires certain securities activities currently conducted by banks to be conducted now by registered broker-dealer affiliates and constructed certain "privacy" rules governing the sharing of customer information. New York State last year passed legislation conforming State banking law with the GLBA While the GLBA is clearly a major step that allows general consolidations across the financial service industries by making affiliations vastly simpler, it is in many ways a recognition of changes that having been taking place in the financial services industry for decades. As noted above, the Federal Reserve, the Comptroller of the Currency and many states had previously authorized banks to sell many types of financial products and engage in more and more financial activities. Financial Holding Companies GLBA creates a new type of financial holding company - the Financial Holding Company (FHC) - as the vehicle for allowing the combination of banking, insurance and securities firms. To become an FHC, a company must show that it is: 1) well-capitalized; 2) well-managed; and 3) has a satisfactory Community Reinvestment Act rating for all its subsidiary banks and thrifts. Since all FHCs must be bank holding companies (BHCs) under GLBA, all FHCs become subject to the Bank Tax.
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TABLE 3
Financial Services Industry
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State Taxes
Financial institutions - securities firms, banks and insurance companies - are subject respectively to Article 9A, Article 32 and Article 33 of the New York Tax Law. Article 9A is the franchise tax on general business corporations and is effectively the default Article of taxation for business corporations; that is, if a business corporation is not specifically subject to tax by another Article of the Tax Law, it is subject to tax by Article 9A. Article 32 is the franchise tax on banking corporations and Article 33 is the franchise tax on insurance corporations. Table 3 highlights recent tax law changes that have effected the financial securities industry. Analysis The enactment of GLBA was quickly followed by the creation of a number of FHCs. As of December 15, 2000, 476 FHCs were effective. Many FHCs are former securities firm holding companies which were previously subject to Article 9A and, absent action by the State, would be subject now to the Article 32 (the Bank Tax) as a result of becoming a FHC. Becoming an FHC results in taxation under the Bank Tax because, as noted earlier, in order to be an FHC, it is necessary to be a bank holding company. And, a bank holding company that owns a bank subject to the Bank Tax is itself subject to the Bank Tax through operation of the Bank Tax's mandatory combination rules. But, not only is the FHC drawn into the Bank Tax, any of its subsidiaries in which it has more than a 65 percent ownership interest may also be subject to the Bank Tax depending on whether their businesses are related to banking under regulations for the Banking Act of 1993. The Bank Tax was constructed to tax banks. For example, its formula for allocating income to New York includes a Deposits factor in place of the Article 9A Property factor. To the securities firms, it is an unknown world without various provisions of Article 9A that were enacted to fit their special industry. The Bank Tax is also an uncertain world in that subsidiaries may not know until the end of the tax year whether are not they had been "primarily engaged in banking", i.e. more than 50 percent of their receipts derive from activities that were financial in nature. The enactment of GLBA has put into stark relief the possible inequities of taxing taxpayers engaged in similar businesses and in competition with one another under different Articles of the Tax Law. Suggestion has been made that the State tax all financial institutions under Article 9A. There is an equitable argument in favor of such approach as the different types of financial institutions sell similar products and provide similar services but yet are subject to separate tax regimens with possibly unequal levels of taxation. Significant differences between Article 9A, the Bank Tax and the Insurance Tax make difficult the revenue-neutral creation of a single tax with no significant winners or losers. Further, in light of the vast amounts involved, even small differences between the taxes may mean millions to a firm and thus make the task even more difficult. Some of these significant differences are as follows: Income in the Bank Tax is defined using various "special" deductions for 22 1/2 percent of interest income from government obligations, 17 1/2 percent of interest income from subsidiary capital and 60 percent of dividends and gains and losses from subsidiary capital. These "special" deductions were enacted to make the 1985 Bank Tax revenue-neutral with the prior Bank Tax. By contrast, Article 9A generally does not tax income from subsidiary capital. Income in the Bank Tax does not include income allocated to International Banking Facilities (IBF) which is an accounting device designed to retain banking employment in New York City. The formulas apportioning income to the State are different. Article 9A uses Property, Payroll and Receipts (double-weighted) while the Bank Tax uses Wages (80 percent), Receipts (double-weighted) and Deposits. Article 9A taxes dividend income to the extent that the company paying the dividend does business in New York; other investment income is taxed under Article 9A in the same manner. The Bank Tax has no similar rule for investment income. The rules governing combined tax returns also vary. In 2000, the State responded to those concerns by enacting a one-year "moratorium" preventing changes in New York Tax Article from occurring as a result of taking advantage of GLBA. In essence, corporations stay subject to the Tax Article to which they had been subject or would have been subject if they had existed previously. The Executive, this year as part of his 2001-02 Budget submission has proposed a one-year extender of this moratorium (A.2001, Part J, Section 4). Conclusion The financial services industry has changed dramatically. The New York State Tax law has not. The recent enactment of the Gramm-Leach-Bliley Act has led to discussion of change in the Tax Law. Any changes made should be made cautiously as they will effect one of New York's most important industry.
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In the past, high shipping costs and poor infrastructure dictated that most businesses needed to be relatively close to the location of their final customers. Today, however, goods are made all over the world since business can choose to locate anywhere in the global economy based on relative production cost such as labor. The cost of shipping goods has lessened, so business can produce goods virtually anywhere. Businesses that operate in more than one state must determine how much income should be taxable in each state. At the Federal level, this is done by separate accounting - income and expenses for activities in the United States are tracked separately from income and expenses in the rest of the world. However, at the state level, separate accounting for fifty states would be impractical. Instead, individual states use "apportionment formulas" which approximate the amount of income that should be taxable in each state. The formulas use easily measurable factors to make tax compliance less burdensome to businesses. Essentially, the factors of the formula seek to measure a company's governmental benefit by calculating their economic presence using property, payroll and sales. The vast majority of businesses in New York State operate only within this state. Such businesses do not need to apportion income, since all of their income is taxable in New York. Apportionment formula issues are only of interest to businesses that have at least some presence in another state. There are a number of different formulas in use by different states, the interplay of which may have dramatic effects on the amount of taxes a business is required to pay. However, the predominant formula in use by states today is the three-factor formula. The average of the state shares of a company's property, payroll and sales are used to determine the amount of business income would be subject to tax. The higher the average the more income subjected to tax. New York's Apportionment Formula When New York's first modern franchise tax was initiated in 1917, no distinction was made between business income and investment income. All income was sourced based on the location where manufactured goods were made. This meant that income earned by a company making goods in New York could simply be invested in a company making goods elsewhere, thereby having virtually all of the company's profits avoid taxation. New York adopted the double-weighted sales formula to promote a business-friendly environment, especially for manufacturing. Some believe that New York's apportionment formula acted as a deterrent for companies to expand its business practices in New York. After all, if a company were to expand its production facility or create jobs in New York, the amount of income required to be allocated to New York would increase, leading to an increase in tax liability. In 1945, this system was changed, and New York adopted the three-factor "Massachusetts Formula" of apportionment. Under this system, a business determines the amount of property, payroll, and sales located within a particular state, as a proportion of the total amount nationwide. For example, if employees in a state account for 20 percent of a company's total payroll, then the payroll factor would be 20 percent. After similar calculations are done for property and sales, a simple average of the three factors is taken. The result is then applied against income to determine the amount subject to tax in that particular state. Beginning in 1976, the apportionment formula used in New York was a double weighted formula currently used today and described below. The apportionment formula used by New York and a number of other states is a modified version of the three factor formula and is known as the Double-Weighted Sales (DWS) formula. Under this formula, the three factors are determined as before, but when they are averaged together the sales factor is counted twice. This reduces the relative importance of the property and payroll factors. As a result of these changes in the economy, businesses have more freedom than ever to choose the location from which they should operate. This three-factor formula has come under criticism because the use of property and payroll increase the tax liability of companies based in New York. Improvements in information and distribution technology have decreased transportation cost and allows for more distance marketing and sales. Companies, therefore, seek to move where the factors of production are cheapest and state taxes are part of that calculation. Small differences between apportionment formulas may now have significant impacts on decisions of business location. Executive Proposal - Single Factor Sales Formula for Manufacturing The Executive has proposed that New York move away from a three factor formula to a single Factor Sales formula for manufacturing companies only. This would reduce the amount of taxes collected from manufacturing businesses. The Executive estimates that this would reduce taxes by $38.5 million. A single factor sales formula would be phased in over five years. Under this system, the property and payroll factors are dropped entirely, and the amount of business income attributable and ultimately taxed in New York would be solely a function of the proportion of sales made within that state. In other words, a business located in New York will only be taxed in New York based on the amount of sales made within the State. If a business makes no sales within New York, none of the income of this business will be taxed in New York. There are approximately 9,900 manufacturing companies or 10 percent of all businesses that pay under the Corporate Franchise Tax, excluding those who pay fix dollar minimums. This legislation would affect only 60 percent or approximately 5,900 of those manufacturers. Issues with Formula Choice There are concerns about making changes to a state's apportionment formula. Businesses have already made location and expansion decisions based upon the current status of the tax structures in various states, and changing these structures may make it more or less beneficial for a business to adhere to it's current plan of action. There are essentially two areas of concern regarding the Single Factor Sales Formula; legal and economic. They raise fundamental issues of tax equity and are addressed below. Legal In 1978, the issue of Constitutionality of Single Factor Sales Formula apportionment came before the U.S. Supreme Court in Moorman Manufacturing Co., Inc. v. Bair (437 U.S. 267). In this case, the Court upheld the right of Iowa to apportion income based only on a sales factor, saying essentially that other states could avoid having their companies subjected to double taxation by changing their own apportionment formulas to match the one used by Iowa. In a dissenting opinion, however, Justice Powell said that the "use of the single-factor sales formula necessarily discriminates against out-of-state manufacturers." He noted that since the majority of other states used formulas based on three factors, Iowa's should be conformed. Cases such as Moorman demonstrate that while using a single sales factor apportionment formula may be legal under the Constitution, the tremendous advantage that it provides to businesses solely operating in one state, may make it seem somewhat unfair. However, since some states already use Single Factor Sales Formula, it would be unfair to prevent other states from converting to that system to eliminate the disparity for their businesses. Economic There are various opinions, as to the benefits of changing to a single sales factor, and whether it is a good tax policy decision. Those in favor of the Single Factor Sale Formula argue the following:
Two different companies that are predominantly located in different states may face very different state tax burdens based on differences in the apportionment formulas. For example, company A has 90% of its property and payroll in New York State, with half its sales located in Massachusetts and half in New York. Similarly, company B has 90% of its property and payroll in Massachusetts and its sales are evenly divided between the two states. Neither company has any sales, property, or payroll located outside of those two states. These two businesses would be taxed very differently. For New York purposes, company A would have to apportion its income based on the double-weighted sales, making 70% of its income taxable in New York. Company B would do similar calculations, resulting in 30% of its income being taxable in New York. For Massachusetts purposes (which apportions business income based on sales-only), both company A and company B would have 50% of their income taxed. Adding up the state tax burdens for both companies, it becomes clear that company A ends up getting taxed based on 120% of its income while company B is only taxed on 80% of its income. This essentially allows Massachusetts to transfer part of the business tax responsibility to out-of-state businesses. This creates a dramatic inequity between companies that may otherwise be very similar.
 Certain companies could see their tax liability increase more under SFSF. These are companies with a smaller percent of property and payroll in New York than sales in New York. While relatively smaller, the amount of property and payroll could be significant, especially at the local level. Assume a national manufacturer with 20,000 employees nationwide that has 500 employees, a small factory and 20 percent of its sales in New York. Its taxes would go up with the change to SFSF. Rather than pay increased taxes, it could decide to pay no taxes at all to New York by shutting down its operations in the State. Without either employees or property in the State, New York would be unable to tax the company on its sales in the State.
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STATE ALLOCATION METHODS
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