When Kathy Hochul became New York’s governor in August 2021, she inherited a state budget primed to overflow with tens of billions of dollars in federal pandemic aid and Wall Street–generated tax receipts. Revenues were further goosed by a sizable, if temporary, millionaire-earner tax hike imposed by her predecessor Andrew Cuomo, amid Covid-19 and the accelerated outmigration from the Empire State.
The governor proceeded to put spending effectively on autopilot, allowing the state operating budget to swell about 20 percent over her first three fiscal years in office, with enough left over to cover $3 billion in one-shot splurges on property tax “rebates,” supplemental child tax credits, and a temporary suspension of the state motor-fuel excise tax—all conveniently timed to impress voters in advance of her election to a full term in 2022.
The post-pandemic boom is over, but Hochul’s “Money in Your Pockets” campaign continues. For New York’s 2026 fiscal year, the governor proposed a $252 billion all-funds budget, which she described as “balanced,” with “record reserves” and “no income tax increases.”
A closer look at the plan tells a different story. The state-funded portion of the operating budget ($144 billion) is balanced only on paper, propped up by $7 billion in accumulated surpluses from prior years; beyond 2026, the governor’s budget forecasts deficits through fiscal year 2029. And while Hochul isn’t raising income taxes right away, she is proposing a five-year extension of one of New York’s largest income-tax increases since the 1960s—enacted under Cuomo, totaling nearly $5 billion, and set to expire at the end of 2027. The $20 billion in reserve funds accumulated under Hochul is, indeed, a record high for the Empire State, but it’s still not enough to cover the $27 billion in total budget gaps she projected for fiscal years 2027 through 2029.
Adjusted for accounting gimmicks, Hochul wants to boost state operating expenditures nearly $12 billion, or 8.5 percent—the largest such increase sought by a New York governor in 40 years. More than half the proposed rise is directed to the state-funded share of Medicaid, which would go up $6.4 billion, or 17 percent. That is “the latest in a string of unusually steep hikes” in outlays to what is already the nation’s most expensive Medicaid program per-capita, the Empire Center’s Bill Hammond notes.
The governor has similar designs for the budget’s next-biggest item: New York’s school districts, already the nation’s best-funded. The pre-K system spends nearly twice the national per-pupil baseline, while producing unimpressive student performance on average. While public school enrollment across the Empire State has been falling for years—a drop that accelerated sharply with the pandemic—and now stands at its lowest level since the early 1950s, state education aid has risen 34 percent since 2019.
Last year, Hochul tried unsuccessfully to repeal a “hold harmless” provision that prevents a school’s state funding from decreasing when its pupil count falls. The state legislature rebuffed her, and school aid rose 7 percent. This year, she isn’t even attempting such restraint. Preemptively surrendering on the hold-harmless issue, the governor has proposed 4.2 percent more, or $1.5 billion, for school aid, including a guaranteed 2 percent minimum increase for the many school districts with plummeting enrollments. Hochul’s school-funding package also devotes $340 million for free school meals for all pupils, regardless of income.
Generous as it seems, the governor’s proposed aid increase is the opening bid in a negotiation with the state legislature, which will inevitably push the figure even higher. The legislatively appointed state Board Of Regents, for example, wants the governor to spend at least $300 million more, which will likely serve as a baseline for what the legislature will insist on adding to the budget before it gets passed.
Hochul has focused her budget-promotion campaign less on spending and more on items that affect state revenues. That list includes her proposals for a one-time-only “inflation refund” giveaway of $3 billion, in $300 to $500 chunks, to more than 8 million households with incomes below $150,000 and $300,000, respectively; a recurring “middle-class” tax cut shaving 0.2 percentage points off rates in the lowest five income-tax brackets, ultimately saving eligible filers some $1 billion a year; and a temporary increase in the state’s refundable child tax credit, now set at $333 per child, to a maximum of $1,000 for children under age four and $500 for those aged four to 16.
The governor hasn’t explained why her child-tax-credit boost would expire after only three years, but the answer is obvious: at $825 million a year, it would be costly to maintain. Yet Hochul’s budget commits roughly the same amount to a two-year extension (from 2034 to 2036) of New York’s film-production credit, by far the largest ongoing corporate subsidy in the state budget, which she proposes to elevate from $700 million to $811 million. While a state-commissioned economic study last year found that the tax credit doesn’t come close to paying for itself, the rebate has been a reliable way to drive contributions from the entertainment industry and its labor unions to New York’s leading politicians.
Hochul has left unanswered the question of how to fill a $33 billion revenue gap in the next five-year capital plan of the separately budgeted state Metropolitan Transportation Authority (MTA), which has delayed billions in capital projects due to the governor’s “pause” of a congestion-pricing plan for Manhattan’s business district. The solution won’t necessarily have to be part of a state budget deal, though that’s what Democratic legislative leaders would prefer. Whenever the issue is finally addressed, the solution is widely expected to be some new or increased revenue, in addition to the $8.5 billion the MTA already collects annually in taxes on retail sales, motor fuel, corporate profits, and employer payrolls in New York City and surrounding suburban counties. (In other words, some of the “money in your pockets” Hochul promises from her tax givebacks will be pulled out of those same pockets and dropped into the MTA’s coffers.)
Hochul’s projected budget gaps are a stubborn reminder that her proposals will eventually need to be paid for. Compounding the ever-present risk of a recession or financial-market turmoil is the real possibility of federal budget and tax changes that could strain New York’s bottom line. Nearly half of Albany’s $252 billion total budget consists of federal grants and reimbursements, 70 percent of which flows to Medicaid. Cutting the federal Medicaid entitlement is among the leading options House Republicans are considering as they look to reduce the enormous federal budget deficit.
Another federal variable with major implications for the Empire State is the 2017 Tax Cuts and Jobs Act, set to expire at the end of this year, and its $10,000 cap on state and local tax deductions. Hochul and other New York politicians in both parties are fond of claiming that the SALT cap hurts middle-class families, but it’s really the state’s highest earners who bear the brunt. While some of New York’s Republican congressional members have talked of raising the SALT cap, Hochul has demanded “nothing less” than a full repeal of the 2017 provision and restoration of the pre-2018 deduction. As she surely realizes, the likelihood of this happening is virtually nil. Congress may raise the cap a bit, but even that concession could be tied to other changes that disproportionately affect Albany’s tax base. One option already in congressional sights: closing the federal business-tax-deduction loophole that New York and 34 other states have exploited to create work-around laws restoring the full SALT income tax deduction for high earners.
Over the past 20 years, New York has grown increasingly dependent on revenues generated by its highest-earning 1 percent of taxpayers, who, in 2021, accounted for 54 percent of total income tax liabilities. Record growth in high-earner bonuses and incomes have masked New York’s declining share of the nation’s income millionaires and securities-industry jobs, which were falling even before Cuomo’s final tax hike gave them added incentive to leave. The tax increase Hochul seeks to extend—higher levies on incomes starting at just over $1 million for single filers—raises about $5 billion a year. She assumes that the affected taxpayers will sit still for this, which her budget briefing book, adopting language long favored by progressives, describes as “pay[ing] their fair share.”
In the short term, at least, Hochul has made it clear that her strategy for dealing with fiscal adversity is to blame the Republicans in New York’s congressional delegation if federal aid to the state is disrupted or the SALT cap is not eliminated. “[I]f they fail, they must be held accountable,” she said. For her part, the governor is more likely to respond to any federal-aid reductions by draining reserves rather than by cutting spending—especially if it means reducing any of the cash giveaways she’s counting on to generate support for her reelection bid next year.
Hochul is hardly the first Albany Democrat to view budgeting primarily as an exercise in income redistribution. But in the name of improving “affordability” for New Yorkers, she’s making their state government unaffordable in the long run.
Photo by Roy Rochlin/Getty Images for (BAM) Brooklyn Academy of Music
