New York Governor Kathy Hochul unveiled a $252 billion budget proposal on Tuesday, balancing income tax cuts with increased social safety net spending. This ambitious plan comes as the state anticipates potential financial challenges under a Republican-led federal government.
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Hochul’s budget prioritizes substantial investments in public schools, Medicaid, and social services such as childcare, all while avoiding tax hikes as she prepares for her 2026 reelection campaign. State Budget Director Blake Washington indicated that higher-than-projected revenues and a federal Medicaid waiver will largely finance the spending increases. Although the budget avoids new taxes for the current year, Hochul aims to extend the state’s top income tax rates, currently set to expire in 2027, for high earners (over $1 million annually) until 2032. These rates range from 9.6% to 10.9%.
While state budget officials aren’t currently factoring in federal funding changes under President Donald Trump, they acknowledge potential “headwinds ahead,” Washington stated. They are prepared to monitor the situation but haven’t incorporated solutions for potential federal shifts in the current budget.
Income Tax Relief and Revenue Projections
Hochul’s proposal, initially outlined in her January 14 State of the State address, includes income tax reductions for New Yorkers earning up to $323,200 for joint filers. This would be achieved through a 20 basis point reduction across five of the state’s nine tax brackets over two years. The plan also calls for an expanded child tax credit, potentially reaching $1,000 per child (up from $330), and a one-time $300 rebate for taxpayers earning under $150,000.
These initiatives, estimated to cost $5 billion, will be funded by the surplus tax revenue. The administration projects a $3.5 billion surplus by the end of the current fiscal year (April 1) and a $1.8 billion surplus by the close of fiscal 2026, largely due to increased personal income tax collections.
Despite the current surplus, state officials anticipate future challenges, forecasting a $6.5 billion budget gap in fiscal 2027, potentially widening to $11 billion by fiscal 2029. The cumulative budget gap through fiscal 2029 is projected to reach $27.3 billion, a $4 billion increase from the previous mid-year report.
Pressures and Priorities: Taxes, Transportation, and Key Spending
Hochul is likely to face pressure from the legislature to increase taxes on high earners, especially given the Metropolitan Transportation Authority’s (MTA) significant $33 billion capital plan deficit. Senate Finance Chair Liz Krueger hinted that tax discussions could be central to budget negotiations to secure funding for “critical issues,” particularly the proposed 3.6% increase for public schools and the 14% increase for Medicaid. The budget allocates $37.4 billion for school aid and $35.4 billion for the state’s Medicaid contribution.
Addressing business concerns, Hochul proposes extending the deadline for utilizing the state’s workaround for the $10,000 federal deduction cap on state and local taxes. This extension allows partnerships and similar businesses until September (instead of March) to opt for the state’s pass-through entity tax. This aligns with efforts by bipartisan federal lawmakers from high-tax states to repeal the $10,000 SALT deduction limit imposed by the 2017 federal tax law.
A $165 million trust fund is designated to cover interest penalties for employers, who are advocating for the state to repay the substantial debt accumulated by its unemployment insurance fund. The state anticipates generating $3.7 billion over two years from a tax on managed care organizations, federally approved under the previous Biden administration. This tax bolsters Medicaid funding, with a portion allocated to support hospitals and nursing homes.
Policy Proposals and Negotiations
Hochul’s budget initiates negotiations with the state Senate and Assembly on various policy initiatives, including increased subsidies for housing and childcare, potential regulations on AI companion apps, and a proposed ban on smartphone use in schools, allowing local districts flexibility in implementation. The budget deadline is April 1.
Navigating Federal Uncertainty and Addressing Key Voter Concerns
Hochul has maintained a conciliatory stance towards President Trump, who outperformed previous Republican presidential candidates in New York. Trump has proposed several actions with potential fiscal implications for the state, including tariffs, federal tax code revisions, and revoking authorization for congestion pricing, a key funding source for transit.
The forthcoming budget bills are expected to address inflation and crime, key concerns for voters in the 2024 election. Hochul’s proposals include measures to facilitate treatment for the mentally ill following recent violent incidents on New York City subways and a delay in implementing a cap-and-invest program intended to fund renewable energy projects. Other proposals include banning landlords from using algorithms to coordinate rents and restricting institutional investors from purchasing one- and two-family homes.
The state legislature will play a crucial role in the budget process, particularly regarding funding for the MTA’s capital plan. This issue has previously created friction between Hochul and legislative leaders. Negotiations and compromises will be essential in shaping the final budget.
