New York agrees on $132 billion budget plan

NEW YORK Mon Mar 30, 2009 2:59pm EDT

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NEW YORK (Reuters) - New York Governor David Paterson and the state legislature on Monday unveiled a nearly $132 billion budget for next year that slices health care and temporarily raises income taxes for high-earners to close a two-year $17.7 billion deficit.

But with New York's economy crumbling as Wall Street's fortunes decline, the Democratic governor warned that he will probably have to again recommend unpopular measures that were dropped in negotiations with fellow Democrats, Assembly Speaker Sheldon Silver and Senate Majority Leader Malcolm Smith.

"We will be back into cutting human services, we will be going back to those nuisance taxes," Paterson said at an Albany news conference.

The governor is expecting revenues to slide another $3 billion this year and plans to lay off up to 8,900 workers.

Homeowners lost a $1.7 billion tax rebate plan because New York cannot now afford it, and the budget does not bail out the mass transit agency, which last week said that without more state aid it will raise fares and tolls 20 to 30 percent.

Other tax and fee actions include vehicle registration fees, a cigar tax, a rental car tax and a car insurance tax. Bottled water drinkers will be required to pay the nickel deposit already levied on carbonated beverages. Film-makers won a battle to keep a tax credit.

Tuition at state universities and colleges will go up $310 a semester, while a $600 million gas and utility tax hike will add to the nation's highest utility rates, the Republican Senate Majority Leader Dean Skelos said in a statement.

Paterson has long resisted raising income taxes on wealthy residents, saying legislators first had to slice spending. On Monday he defended the income tax rise, saying Silver and Smith accepted 75 percent of his cuts, the deepest since 2003-2004.

Income taxes were raised 1.0 percentage point to 7.85 percent for couples whose incomes top $300,000; couples with more than $500,000 in income will pay 8.97 percent, up from 6.85 percent. This three-year tax hike should raise $4 billion this year.

New York state's income taxes will still be lower than New Jersey's proposed new top rate of 10.25 percent. The highest New York state rate is well below the top rate of 15 percent levied from 1969 to 1977.

California now has the highest state tax rate at 10.55 percent. But New York City dwellers pay more than that as they have a combined city-state rate of 12.52 percent. That's well below the 19.30 percent combined rate levied from 1976 to 1977 at the height of a fiscal crisis.

New York's budget includes $6 billion in spending cuts, including shifting Medicaid dollars from hospitals to more local clinics and doctors. That should save $1.6 billion in the health program for the elderly, poor and disabled. The federal stimulus funds restored some school cuts, but one category, called Foundation Aid, will be phased in more slowly.

If the budget is enacted on Tuesday as planned, the state will meet its April 1 deadline. That is an achievement for New York, which has often run weeks or months late.

It was the first time Democrats have led the senate in decades, and the new senate leader gains from getting an on-time accord because his leadership has been questioned due to recent squabbles with dissident Democratic senators.

Smith pledged to cut 200 to 300 workers he inherited from Republicans.

But lawmakers were criticized for negotiating in secret, which civic groups say deprives the public of a voice. Paterson said no one -- from President Barack Obama to unions -- negotiates in public.

Both Smith and Silver defended their member items, often called pork, saying they were focused on helping the needy.

(Additional reporting by Ciara Linnane; Editing by Andrea Ricci)

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