NY gov sees deficit hitting $2 bln as taxes slide

By Joan Gralla

NEW YORK (Reuters) - New York Gov. David Paterson on Friday pledged not to raise taxes, even as he predicted an increase in the state's budget deficit to $2 billion amid fallout from the credit crisis and recalled the legislature for a special session next month to address the economy.

Paterson, a Democrat, said he feared Wall Street, which accounts for one out of every five tax dollars in the state, could slash bonuses by 60 percent and capital gains tax collections could plunge by about 50 percent.

Paterson said Wall Street bonuses generate 30 percent of the state's taxes in the January to March quarter.

But Paterson, speaking at an economic summit with state legislative leaders and the state comptroller, said he would not raise taxes. The state already faces a $1.2 billion budget deficit.

Asked by Republican Senate Majority Leader Dean Skelos if he would hike taxes, Paterson, said, "No." Skelos, who leads the senate with just a two-seat majority ahead of the November elections, asked Paterson if he would stand firm on that pledge. "I just did," Paterson said.

Paterson, who in August wrung $427 million in spending cuts in an emergency legislative session in response to shortfalls spawned by Wall Street's declining profits, said he was recalling lawmakers for a second round of emergency spending cuts on Nov. 18, a move that he said should help safeguard the state's credit rating.

In pledging not to raise taxes, Paterson also said he does not believe in lay-offs or taking money from schools.

Democratic Speaker Sheldon Silver agreed that taxes would not go up this year, while warning against "fiscal gimmicks," a reference to one-time measures that do not raise revenues over the long term.

But, Silver said, "When you get beyond that...I think everything is open."

Skelos, meanwhile, said his economists believed now was not the time to "definitively" revise forecasts. "I'm not saying we're not going to revise the forecasts but we have to act prudently," he said, adding that the state should allow video lottery terminals at Aqueduct Racetrack and Belmont Park, plans that have long stalled.

Skelos also said the next budget should not boost spending beyond the rate of inflation, noting that this had happened in previous budgets.

Paterson, however, said it would be impossible to increase next year's budget by even the rate of inflation.

"I don't think we all get how serious the problem is," Paterson said. As he predicted a rise in the budget deficit to $2 billion, he criticized Skelos for wanting more data.

"This is an emergency, this is one of the times when you can't wait for all the numbers," Paterson said.

Paterson also noted that the declines in Wall Street bonuses and capital gains tax revenues could be less severe than the personal predictions he gave on Friday. He said Wall Street bonuses may only fall 40 percent, costing the state $20.7 billion in tax revenues, and capital gains tax revenues might drop 35 percent, producing $38 billion less revenue.

Skelos, who criticized the governor repeatedly for lecturing him, did agree the economic situation was "dire," warned against "job-killing" tax hikes. He said the state must start collecting the billions of dollars of taxes on sales of fuel and cigarettes that Native American stores do not charge.

Asked about a lawsuit New York City filed earlier this week to force eight tribal stores on Long Island to collect cigarette taxes, Paterson noted at least four previous governors had failed to resolve this problem. He said he is taking an "omnibus" approach that aims to solve all the outstanding issues, including disputes over casinos.

(Editing by Leslie Adler)