UPDATE 2-NY governor calls millionaire's tax a last resort

(Adds details, byline)

By Joan Gralla

NEW YORK, April 9 (Reuters) - New York should consider increasing income taxes on millionaires only as a last resort, after cutting spending further and increasing efficiencies, Gov. David Paterson said on Wednesday.

The Democratic governor's comment came as he announced a new $122 billion budget, representing a 4.9 percent hike.

The budget, approved past the March 31 deadline, compares with last year's $116 billion accord. The state spent $2 billion less than expected.

New York gets 20 percent of its tax revenues from Wall Street, and the financial sector's losses related to subprime mortgage investments has put the state's finances at risk.

"I am very, very fearful of our national economy," Paterson told reporters in Albany. "I think we set a sound budget but I don't think we left enough room," he said, adding he would be pleased if the legislature agreed on more cost savings.

The Democratic-led Assembly wanted the 70,000 workers who earn more than $1 million a year to pay higher income taxes, but the Republican-controlled Senate feared it would prove a job killer. Paterson says state taxes are already so high that they are driving people out.

"We're running out of time, thinking we can tax our way into the future," Paterson said. "Meanwhile, the public doesn't want to pay taxes. And some of them are on the Thruway right now looking for new homes."

Still, New York City residents who earn over $250,000 a year will lose a personal income tax credit.

A $1.6 billion capital plan to buoy the economy includes $700 million for upstate New York.

Some $1.6 billion will be spent on colleges and universities, though the state system's share grows when compared with how much New York City's system will get.

State agencies will only spend 1 percent more, versus an average increase of 5 percent in the past five years.

Some $828 million was sliced from health-care spending on drugs, nursing homes and home care. As a result, Medicaid, which provides health benefits for the poor, elderly and disabled, will only rise 1.2 percent.

But the state's 400,000 children without health insurance will be covered because the state will fully fund the federal share of increasing the Child Health Plus program to 400 percent of the federal poverty level from 250 percent.

Local aid was cut by $270 million, though schools and most entitlement programs were spared. The expansion of the property tax relief program will be delayed a year.

Public schools will get an extra $1.75 billion, nearly a 9 percent increase. Nearly $14 billion of the over $21 billion school budget will be Foundation Aid, focused on high-needs schools, measured by district wealth and student requirements.

Cigarette taxes will rise by $1.25 per pack, pushing the total tax for New York City residents to $4.25.

A loophole for real estate trusts was closed, and a new capital-based tax was enacted, both of which sunset after three years. A provision curbing abusive tax shelters was extended for two more years. Internet vendors will have to charge sales taxes and credit card companies also will face a levy.

The revenue raisers include a plan to raise $250 million by licensing video lottery terminals at the Aqueduct Racetrack in the New York City borough of Queens.

After years of wrangling, the state overhauled the Wicks Law that establishes when more than one contractor must be hired for public projects. New York City's limit was raised 60-fold to $3 million. A new $1.5 million threshold applies downstate; a $500,000 limit will be used upstate. (Additional reporting by Elizabeth Flood Morrow in Albany; Editing by Leslie Adler)