UPDATE 1-New York skips Internet, soda and other tax hikes

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By Joan Gralla

NEW YORK, March 11 (Reuters) - New York has scrapped a plan to impose taxes on Internet downloads, clothing over $100 and non-diet sodas, a move that had been aimed at closing a $14 billion state budget deficit, Governor David Paterson and legislature leaders said on Wednesday.

"We're coming up with money from the federal stimulus money for what we're taking off the table today," Paterson said at an Albany news conference joined by state senate and assembly leaders.

The Democratic governor had hoped to raise $1.3 billion to help shut the state's budget deficit with nearly 140 tax hikes. Proposed tax increases on movie tickets, hair cuts and gasoline if it cost more than $2 a gallon were also eliminated, Paterson said.

Many New Yorkers had viewed the proposed taxes as an attack on their leisure activities. "They see it as inconvenient and frustrating," said Paterson.

He denied that foregoing tax hikes meant he was ducking tough choices, saying the decision to not raise taxes will encourage people to spend, which is the purpose of the stimulus plan.

New York's revenues have tumbled as Wall Street, a key driver of the state's economy, has suffered with the financial crisis.

Paterson also repeated his opposition to raising income taxes on millionaires, a move favored by the state Assembly and the New York City Council.

Both Paterson and New York City Mayor Michael Bloomberg say higher income taxes would cause the wealthy to move elsewhere.

In addition, Paterson said on Wednesday, "When we raised taxes on the wealthy in the past, we have seen an immediate loss of job growth."

However, he said, "everything is on the table, only because we don't know where the floor of this crisis is."

The state's current top income tax rate is 6.85 percent, while the city's is 3.65 percent.

Paterson also wants to slash spending on health and education. The health-care industry and Bloomberg have criticized Paterson for siphoning money earmarked for Medicaid, the federal-state health insurance program for the poor, from the federal stimulus plan.

Congress lets states decide how much of the federal money should be spent on Medicaid, Paterson said. (Editing by Leslie Adler)