Blame New York Democrats — not Washington — for new state budget crisis

The federal tax and spending changes signed by President Donald Trump on July 4 will have significant implications for New York. The most immediate: to reveal Albany’s short-sighted fiscal decisions and long-ignored abuses — something criticisms of the changes conceal.

The state spending deal reached in May by Gov. Kathy Hochul and legislative Democrats hiked outlays by 9.3%, three times faster than inflation.

A big part of that growth was in Medicaid, the joint state-federal program ostensibly for the poor and disabled whose enrollment has roughly tripled since 2000.

Today it and related programs cover a majority of New York City residents.

In the last budget, Hochul and the Legislature hiked Medicaid spending by $6.2 billion (16%).

That helped the state juice more federal money from the program, but it also painted a bulls-eye for DC fiscal hawks concerned about the $36 trillion national debt.

Federal aid and borrowing aside, New York state government this year will spend $18 billion more than it would have if it had kept pace with the consumer price index since 2018.

This profligacy was built on assumptions that New York’s tax receipts would keep going up.

That’s more of a gamble than ever, because the state is more reliant than ever on a relatively small group of high earners who pay significantly higher state income-tax rates — and could pay no state income tax if they moved to a growing number of places outside New York.

And it requires ignoring the signs of tax-base erosion that New York has already suffered since its 2021 tax hikes made the top combined state-local income-tax rates in New York City the nation’s highest.

Albany’s bet that the good times would continue culminated in rosy revenue forecasts issued in February.

But those outlooks stopped being worth the paper they were written on in April, after Trump’s tariffs doused markets in uncertainty.

Albany nonetheless marched ahead. The state’s lethargic Republicans, fearful of upsetting various special interests, didn’t much rock the boat.

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The first dose of reality came in June, after state budget officials slashed their economic growth forecasts.

They estimated that tax receipts will be about $4 billion, starting next year, lower than previously expected.

That, along with newly agreed-upon spending increases, means Hochul must address a $7 billion mismatch between revenues and faster-growing expenses in the budget she presents in January (a gap that gets wider each year).

While turbulence in federal trade policy jostled markets, that overreliance on volatile tax receipts meant the state was facing a fiscal crunch even before Congress acted.

This was the first of two bad bets by Albany.

The second was that Congress would keep ignoring the bloat and distortions in New York’s health-care apparatus.

As the Empire Center’s Bill Hammond has diligently chronicled, New York for a decade used a little-known provision in the Affordable Care Act to get federal taxpayers to pick up virtually the entire cost of a no-premium health-care system known as the Essential Plan.

Originally created in part to cover immigrants who were ineligible for Medicaid, it now covers about 1.4 million New Yorkers, many of whom are well above the traditional Medicaid eligibility level.

The eligibility threshold is so high that one health-care union appears to have jettisoned some of its lower-paid members from their union health coverage to sign up on the taxpayer-funded Essential Plan instead.

The federal rules were so generous that the state wound up accumulating almost $10 billion in Essential Plan reserves because Washington sent Albany more than it could spend.

Congress, under both parties, failed to do anything about it. Albany officials ultimately used a portion of the windfall to boost payment rates, subsidizing other parts of the health-care system.

The GOP bill has cut off some, but not all, of that federal money. That will force the state to consider long-prevented reforms that address the high cost of both care and insurance coverage in the Empire State.

New York in many respects is getting off easy: Its generation-long scam of taxing hospitals and health-care providers, then overpaying them to compensate and pulling down extra federal Medicaid cash in the process, will largely continue.

Calls for a special legislative session, and demands for higher taxes, are inevitable. But the reasonably good health of the state’s reserve funds (which Hochul has diligently guarded) means there’s no real need for immediate action.

Instead, Hochul needs to start making the case for the overdue structural reforms that would help Albany live within its means — and worry less about Washington.

Ken Girardin is a fellow at the Manhattan Institute.