December 16, 2008 / 7:06 PM / 11 years ago

UPDATE 1-NY Gov's $121 bln budget shuts hedge fund loopholes

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By Joan Gralla

NEW YORK, Dec 16 (Reuters) - New York Gov. David Paterson on Tuesday proposed a new $121.1 billion budget that increases spending by 1.1 percent and relies on cuts as well as higher taxes and fees to close a 15-month $15.4 billion deficit.

Saying the state faces its worst fiscal crisis since the Great Depression, the Democratic governor in a televised address said he was not proposing any “broad-based” tax increases. But he did recommend shutting tax loopholes for hedge funds and proposed an extra 5 percent sales tax on luxury items, including yachts and jets, jewels and furs.

Wall Street’s troubles cost the state dearly because it gets one-fifth of its tax revenues from the financial sector. Hedge funds have in the past avoided federal tax hikes proposed by Congress by arguing they would move overseas. New York City is home to a number of hedge funds, although lower-tax Connecticut has also attracted many firms.

Democrats in the Assembly have sought to raise personal income taxes for millionaires. Paterson’s strategy includes a number of fee increases that would hit residents of all income levels, from a new obesity-fighting tax on sugary soft drinks to higher motor vehicle fees.

Beer and wine drinkers may pay higher excise taxes, but consumers would be able to buy wine from groceries and drug stores. At present, beer is available in groceries and drug stores but wine can only be sold at specialist liquor stores.

A sales tax exemption for clothing and footwear that costs less than $115 would be abolished. Homeowners would lose rebates under a property tax relief plan, called STAR.

Noting the credit crunch has driven interest rates on student loans as high as 18 percent, Budget Director Laura Anglin unveiled a new $350 million lending program for students that will only charge 8 percent rates. But students will have to pay higher tuition at state universities and colleges.

New York City is the only municipality to get less aid from the state, taking a $328 million reduction over last year’s budget. Paterson is planning to reduce funding for the state mass transit agency by $285 million, although the agency says it needs 23 percent more revenue.

Lame duck Senate Republicans last month rejected Paterson’s plan to slice $2 billion of spending, and since then, the Democrats, who won a two-seat majority in November, have failed to pick a new leader. That could imperil Paterson’s budget.

“I think the legislature has been sobered by the incredible downturn in the economy,” Paterson said. “It won’t be easy, it won’t happen overnight.”

Paterson is proposing to save more than $1 billion by enacting his budget by March 1, a month before the deadline.

He is also proposing to increase welfare grants for the first time in 18 years, increasing 10 percent per year for three years, a move that would benefit children most, said Anglin.

More than 500 workers will be laid off as at least 7 agencies are merged. The state workforce will lose a total of 3,108 positions. Workers, who on average earn $68,000 a year, will be asked to forego a planned pay increase, and benefits for new workers will be reduced while the retirement age is raised to 62 from 55.

Paterson is proposing $3.6 billion of cuts in healthcare, mostly in Medicaid, the state-federal health plan for the elderly, disabled and poor. Paterson noted New York’s Medicaid plan will still be the most generous in the nation.

Public schools will lose $2 billion of aid, though Paterson said a majority have sufficient reserves to offset the cut.

Other popular programs singled out for cuts include over $400 million of cuts in environmental protection and mental hygiene, and $300 to $400 million of reductions in human services, economic development, work force, and higher education. (Reporting by Joan Gralla; Editing by Chizu Nomiyama)

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