UPDATE 2-New York budget deal includes minimum wage hike, tax breaks
* Budget to make deadline for third consecutive year
* Minimum wage set to rise
* High-earner surcharge extended
* Utility tax to be phased out
By Edward Krudy
NEW YORK, March 21 (Reuters) - New York state's leaders have agreed to a tentative $135 billion budget deal that raises the minimum wage, gives tax breaks to middle-class families and businesses, and extends a tax on high earners.
The deal for fiscal year 2013-14 was announced in Albany, the state capital, late Wednesday after days of closed-door wrangling as lawmakers sought to reconcile three separate proposals.
The agreement paves the way for a vote by the legislature this weekend, setting this year's budget on course to be the third in a row to be passed on time. The budget could be the earliest since 1976.
State Governor Andrew Cuomo, a Democrat, said the deal was still subject to minor changes, but said the vote could take place on Saturday or Sunday - well ahead of the deadline of April 1, when the new fiscal year begins.
"For the first time in almost three decades our state is poised to pass its third on time fiscally responsible budget in a row," said Cuomo in a statement. "A feat that is restoring public and investor confidence in our state's finances and economic future."
There is a Democratic majority in New York's state legislature but a power sharing agreement with Republicans in the state Senate can complicate negotiations.
The state's minimum wage, now at $7.25 an hour, would rise to $9 an hour by 2015. That would be accompanied by a business tax cut that includes phasing out a tax on utility companies over three years, starting in 2014-2015. The business tax cut includes breaks for businesses that employ young people and veterans.
Raising the minimum wage is an important issue for Democrats who see it as matter of workplace fairness. New York's proposed hike is in line with President Obama's push to increase the minimum wage, an initiative that the Labor Department has been promoting around the country.
But free-market and business groups say the move will overburden businesses and could mean companies cut back on lower paying jobs or offer existing employees fewer hours.
"This deal on the minimum wage is the worst kind of compromise, where a terrible policy is paired with token tax breaks in the hope that the latter will minimize the damage of the former," said Michael Saltsman, a research director at the Employment Policies Institute.
Middle-class families with children will get a tax cut of $350. The agreement defines middle class as those earning $40,000 to $300,000 per year. The middle class tax cut will reduce revenues by $1.1 billion over three years.
A surcharge on high-earning couples, making over $2 million a year, or single filers making over $1 million, is being extended. Introduced in 2011, it was set to expire in 2014.
The tax deal is already reigniting a longstanding debate about how taxpayers should share the burden of funding cash-strapped public services, and whether tax cuts are affordable as many municipalities struggle to close budget deficits.
Carol Kellermann, president of the Citizens Budget Commission, which describes itself as an independent budget watchdog, faults the extension of the surcharge on wealthy earners to fund tax cuts in other groups rather than using it to tackle deficits.
"It makes it pretty clear that there's no such thing as a temporary surcharge. Everything becomes permanent," said Kellermann. "There is still a structural deficit problem in New York and this is not being used to address that."
The surcharge adds abut $1.9 billion in revenue per year to the state.
Cuomo's budget takes the view that tax breaks help spur growth. Some Republican-controlled states, such as Louisiana, propose ending income and corporate taxes, and replacing them with sales taxes, a move most Democrats say would unfairly burden low and middle income earners.
Although New York is recovering from the financial crisis but still faces other longer term economic problems such as the loss of industry in the north and a slimmer securities industry on Wall Street. Unemployment in the state is around 8.4 percent compared to 7.7 percent nationally.
The plan includes a program aimed at stabilizing pensions that targets relief for local government where pensions contributions can be a serious burden on local finances.
The budget also includes an increase of almost $1 billion in education aid.