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New York State
Revenue Report
March 2003
 
 
Sheldon Silver, Speaker Herman D. Farrell, Jr., Chairman
Seal
New York State Assembly
Ways and Means Committee Staff



ASSEMBLY WAYS AND MEANS COMMITTEE

HERMAN D. FARRELL, JR.
CHAIRMAN

MAJORITY MEMBERS


JOSEPH R. LENTOL

ALEXANDER B. GRANNIS

IVAN C. LAFAYETTE

ROBIN L. SCHIMMINGER

CLARENCE NORMAN, JR.

WILLIAM L. PARMENT

RONALD J. CANESTRARI

THOMAS P. DINAPOLI

DAVID F. GANTT

HELENE E. WEINSTEIN

RONALD C. TOCCI

DEBORAH GLICK

CATHERINE T. NOLAN

BRIAN M. MCLAUGHLIN

JAMES GARY PRETLOW

ROGER L. GREEN

N. NICK PERRY

WILLIAM COLTON

RUBEN DIAZ, JR.

ADRIANO ESPAILLAT

AURELIA GREENE

ROANN DESTITO

SAM HOYT

JACK MCENENY



NEW YORK STATE

REVENUE REPORT

2002-03 & 2003-04



 

March 2003


 

Sheldon Silver
Speaker
New York State Assembly

Herman D. Farrell, Jr.
Chairmam
Assembly Ways and Means Committee


 

Prepared by the
Assembly Ways and Means Committee Staff

Dean A. Fuleihan
Secretary to the Committee



Roman B. Hedges
Deputy Secretary
Kristin M. Proud
Deputy Secretary

Edward M. Cupoli
Chief Economist/Director of Research
Steven A. Pleydle
Director of Tax & Fiscal Studies

Thomas R. Andriola
Associate Deputy Director for Fiscal Studies
Scott V. Palladino
Deputy Director of Fiscal Studies


March, 2003

Dear Colleagues:

I am pleased to provide you with the NYS Assembly Ways and Means Committee Revenue Report for State Fiscal Year (SFY) 2002-03 and 2003-04. This report is part of our commitment to presenting clear and accurate information to the public. It provides an overview of the national and State economies, as well as an analysis of the Committee Staff revenue forecast for SFY 2002-03 and 2003-04.

The Committee Staff projects that tax receipts will total $40.849 billion in SFY 2002-03, which represents a decline of $3.465 billion, or 7.8 percent, over SFY 2001-02. The Committee Staff estimate is $189 million lower than the Executive's estimate for SFY 2002-03. This difference is largely attributable to differences in economic projections and how this translates into receipts.

The Committee Staff projects that tax receipts will total $41.185 billion in SFY 2003-04, an increase of $336 million, or 0.8 percent, over SFY 2002-03. The Committee Staff forecast is $252 million higher than the Executive's forecast for SFY 2003-04.

The Committee Staff projections are reviewed by an independent panel of professional economists drawn from major financial corporations, prestigious universities, and private forecasters from across the State. Assembly Speaker Sheldon Silver and I would like to express our appreciation to all of the members of our Board of Economic Advisors. Their dedication and expert judgement have been invaluable in helping the Ways and Means Committee Staff refine and improve this forecast. They have served to make the work of the staff the best in the State. Of course, they are not responsible for either the numbers or any of the views expressed in this document.

I wish to acknowledge the fine work done by the talented Ways and Means Committee Staff. Their forecasts are integral to the budget process. The Speaker and I look forward to working with each of you to achieve a fair budget for all New Yorkers.

Sincerely,
signature
Herman D. Farrell, Jr.
Chairman



REVENUE REPORT
2002-03 & 2003-04

TABLE OF CONTENTS

THE EXECUTIVE SUMMARY

TAX REVENUE REVIEW AND OUTLOOK

GENERAL FUND RECEIPTS

DEDICATED TAXES

EXECUTIVE TAX PROPOSALS

INCREMENTAL TAX CUTS

ECONOMIC OUTLOOK

RISKS TO THE FORECASTS

SPECIAL POLICY REPORTS

TAX ANALYSIS

TABLES:

FIGURES:



THE EXECUTIVE SUMMARY

State Receipts Overview

The main part of the receipts discussion and analysis will focus on total tax collections rather than on General Fund and Lottery receipts, which was done in the past. In recent years, a significant portion of tax revenue has been shifted out of the General Fund and redirected to dedicated funds. While a large portion of this revenue is ultimately returned to the General Fund in the form of transfers, the discussion of total tax collections provides a more accurate picture of the relationship between tax revenues and the underlying economic data that drive revenue growth. General Fund and Lottery receipts, however, will still be discussed in a separate section of the report.

SFY 2002-03

  • The Committee Staff estimates that tax collections will total $40.849 billion in State Fiscal Year (SFY) 2002-03, a decline of $3.465 billion, or 7.8 percent, over SFY 2001-02. The Committee Staff estimate is $189 million lower than that of the Executive.
  • Through January 2003, total tax collections have declined by $4.803 billion, or 12.0 percent, over the same period in SFY 2001-02.
  • General Fund and Lottery receipts are expected to total $41.313 billion, a decline of $1.392 billion, or 3.3 percent over SFY 2001-02.
  • Non-recurring tax revenues, miscellaneous receipts and transfers from other funds of more than $2.8 billion, a Refund Reserve transaction of $1.250 billion, and funds resulting from tobacco securitization of $1.900 billion will help to mitigate the overall decline in General Fund and Lottery receipts for the full fiscal year.

SFY 2003-04

  • In SFY 2003-04, the Committee Staff forecasts total tax collections of $41.185 billion, an increase of $336 million, or 0.8 percent, over SFY 2002-03. This forecast is $252 million higher than that of the Executive.
  • General Fund and Lottery receipts are forecast to total $40.262 billion, a decline of $1.051 billion, or 2.5 percent, over SFY 2002-03.

Economic Overview

  • The Committee Staff estimates that employment in New York declined by 1.8 percent in 2002, and anticipates a slight rebound of 0.4 percent growth in 2003. This compares to an estimated decline of 0.9 percent at the national level in 2002, followed by expected growth of 0.5 percent in 2003.
  • The Committee Staff estimates that New York wages declined by 3.3 percent in 2002, followed by anticipated wage growth of 2.1 percent for the State in 2003. This compares to estimated wage growth of 1.5 percent at the national level in 2002, followed by an anticipated increase of 4.4 percent in 2003.

Table 1

Table 1

Table 2

Table 2

Table 3

Table 3



TAX REVENUE REVIEW AND OUTLOOK

SFY 2002-03

The Committee Staff projects that tax collections will total $40.849 billion in State Fiscal Year (SFY) 2002-03, representing a decline of $3.465 billion, or 7.8 percent, over SFY 2001-02. This estimate is $189 million lower than that of the Executive.

Through January 2003, total tax collections have declined by $4.803 billion, or 12.0 percent, over the same period last fiscal year. Much of the decline in tax collections is the result of the April 2002 "settlement" on Tax Year 2001 income tax liability. However, current year tax collections have also declined due to continued weakness in the economy.

In addition to these factors, part of the year-to-date decline in tax receipts reflects a deposit of only $1.677 billion from the Refund Reserve account at the beginning of the year versus the $3.517 billion transferred in April 2001. The Committee Staff estimate for SFY 2002-03 also reflects approximately $664 million in incremental tax cuts, as well as approximately $339 million in non-recurring tax receipts.

SFY 2003-04

The Committee Staff forecasts that tax receipts will total $41.185 billion in SFY 2003-04, representing an increase of $336 million, or 0.8 percent, over SFY 2002-03. Although a mild rebound in the economy is expected in 2003, the loss of non-recurring tax actions and incremental tax cuts of approximately $518 million will serve to dampen tax collections for SFY 2003-04. The Executive Budget contains approximately $733 million in newly proposed taxes will mitigate this decline to some degree.

The Committee Staff forecast is $252 million higher than that of the Executive. Over the two-year forecast period, the Committee Staff forecast for tax collections is $63 million higher than that of the Executive.

Where Did the Revenues Go?

The Committee Staff estimates that tax collections in SFY 2002-03 will be about $2.6 billion less than estimated in the Executive's Mid-Year Financial Plan Update, which was released October 30, 2002, and reflected no change from the Enacted Budget Report released in May 2002. Most of this reduction is in the Personal Income Tax, which is expected to yield approximately $2.1 billion less for the fiscal year than originally estimated in the Enacted Budget Report. The Committee Staff estimate for Business Tax collections reflects a $499 million reduction, while receipts for the other tax categories are projected to end the year approximately $32 million higher than budgeted for in the Financial Plan Update.

Growth in the nation's economy throughout much of the 1990s led to unprecedented growth in New York State tax receipts during that time period. As shown in Figure 1, tax collections, adjusted for withdrawals from and deposits to the Refund Reserve account, grew on average by 7.1 percent for each of the three fiscal years beginning in SFY 1998-99. Since then, the recession of 2001 has caused tax receipts to decline for two years in a row. Tax collections are expected to rebound in SFY 2003-04, but are only expected to increase by 4.1 percent over SFY 2002-03.

Figure 1 Figure 1

Strong growth in technology, productivity and the equity markets led to high growth in wages and variable income in the latter part of the 1990s. In fact, much of the strong receipts growth was due to stock options, capital gains and bonuses that accrued to high level executives because corporate profits were rising sharply. These economic variables tend to generate proportionately higher levels of tax revenues because they tend to affect wealthier taxpayers that pay under a higher income tax bracket. For example, thirty percent of tax liability in Tax Year 2000 came from taxpayers making more than $1 million that year, yet taxpayers in this income range represent less than one-half of one percent of all tax filers. Those same taxpayers collected two-thirds of all capital gains for the year, or roughly $41 billion out of slightly more than $62 billion.

Figure 2 illustrates the actual volatility in capital gains growth over a ten-year period, as well as estimates for 2002 and 2003. Following the burst of the stock market bubble, capital gains realizations declined substantially. Consequently, capital gains in Tax Year 2001 are estimated to have fallen by 54.3 percent to $28.5 billion, the lowest level since 1996, after an increase of 28.9 percent in 2000. Capital gains are estimated to have declined by an additional 32.6 percent in calendar year 2002, to a level of approximately $19.2 billion, almost 70 percent below the $62.3 billion reported in 2000.

Figure 2 Figure 2

Such a large swing in capital gains from one year to the next can cause a dramatic impact on the amount of tax State revenues collected. This impact can easily be seen in quarterly estimated payment collections. For example, quarterly estimated payments increased by $953 million, or 20.4 percent, in SFY 2000-01, followed by a decline of $936 million, or 16.7 percent, the following fiscal year. In SFY 2002-03, quarterly estimated payments are expected to fall by an additional $857 million, or 18.3 percent.

A more dramatic illustration is in the April "settlement" numbers, which can be seen in Figure 3.1 In SFY 2001-02, filing extensions and final payments increased by 36.6 percent and 14.7 percent respectively, and refund payments declined by 11.3 percent.2 In the following fiscal year, filing extensions and final payments declined by 39.3 percent and 32.8 percent respectively, while refund payments increased by 31.7 percent. All told, the decline in the "settlement" components of the Personal Income Tax resulted in a revenue loss of almost $1.6 billion from SFY 2001-02.

Figure 3 Figure 3


1 The April "settlement" consists of Personal Income Tax collections resulting final payments, filing extensions, and refunds paid based on the traditional April 15th filing deadline on prior year tax liability.

2 Refund "settlement" numbers are based on April and May combined due to additional processing time requirements.


Ignoring Reality

The State's current fiscal crisis is directly related to inaction on the part of the Executive to recognize the precarious nature of the State's receipts and take corrective action upon the release of his Mid-Year Financial Plan Update on October 30, 2002. The Executive's Enacted Budget Report, released on May 22, 2002, reflected certain revenue revisions from his original Budget proposal in January 2002. The revisions reflected the disappointing April "settlement" noted earlier, as well as expected revenues resulting from legislation enacted as part of the Budget.

Over time revenues continued their downward trend as the economy remained weaker than had been anticipated. By the end of September 2002, tax revenues had declined by $1.9 billion, or 8.8 percent, over the same period in SFY 2001-02. Yet, the Executive's Enacted Budget Report continued to expect tax revenue decline of only $271 million, or 0.6 percent for the entire fiscal year. This meant that in order for the tax revenues to finish the year as projected, they would have to grow by $1.6 billion, or 7.6 percent, during the second half of the fiscal year. More specifically, Personal Income Tax collections would have to grow by 10.4 percent, and Corporate Franchise Tax collections would have to grow by more than 50 percent just to reach the numbers reflected in the Enacted Budget Report.

Figure 4 Figure 4

Based on the available revenue data and continued weakness in the economy at the time, a reasonable analysis would have resulted in a downward revision in the Executive's Mid-Year Financial Plan. However, this was not the case. In fact, the Executive did not change a single revenue or spending estimate for SFY 2002-03. In conclusion, the Mid-Year Financial Plan Update significantly overstated receipts in light of what was known then and what has happened since.

Personal Income Tax Collection Remain Sluggish

SFY 2002-03

The Committee Staff estimates that Personal Income Tax receipts will total $22.584 billion in SFY 2002-03, representing a decline of $2.990 billion, or 11.7 percent over SFY 2001-02. This estimate is $171 million lower than that of the Executive. However, funds from the Refund Reserve account will be used to boost Personal Income Tax receipts by $1.250 billion, increasing the total to $23.834 billion for the fiscal year. This represents a decline of $3.580 billion, or 13.1 percent, over SFY 2001-02. This additional decline is due to the fact that funds from the Refund Reserve account used to boost SFY 2001-02 Personal Income Tax revenues totaled $1.840 billion.

Through January 2003, Personal Income Tax receipts have declined by $2.951 billion, or 13.0 percent over the same period in SFY 2001-02. Again, much of this decline is attributable to the April "settlement" of Tax Year 2001 liability. Filing extensions and final payments have declined by 38.6 percent and 30.5 percent respectively, and refund payments have increased by 28.4 percent year-to-date. However, weakness in both quarterly estimated payments and withholding collections is also a contributing factor to the overall decline in Personal Income Tax receipts.

Table 4

Table 4

The estimated decline in Personal Income Tax receipts also includes approximately $175 million in incremental tax cuts resulting from the continued phase-in of the enhanced Earned Income Tax Credit (EITC), the College Tuition Deduction/Credit, and the Marriage Penalty reduction. These estimates also include an exemption worth $25 million granted to the families of the victims of the attack on the World Trade Center, an increase of $25 million for changes to the Electronic Funds Transfer (EFT) filing program and an increase of approximately $181 million for the Tax Amnesty program.

General Fund Personal Income Tax collections are expected to total $16.941 billion in SFY 2002-03, representing a decline of $8.912 billion, or 34.5 percent over SFY 2001-02. This estimate is $129 million lower than that of the Executive. This estimate includes funds transferred from the Refund Reserve account totaling $1.250 billion, and reflects dedicated transfers of $2.667 billion to fund the School Tax Relief (STAR) Program and of $4.226 billion deposited into the recently created Revenue Bond Tax Fund (RBTF). 3 Because deposits into the RBTF began in SFY 2002-03, General Fund Personal Income Tax collections will be significantly lower than in past years.


3 As of May 2002, 25 percent of Personal Income Tax receipts, excluding reserve transactions, are deposited into the Revenue Bond Tax Fund (RBTF), which is used for debt service.

SFY 2003-04

The Committee Staff forecasts Personal Income Tax collections to total $23.220 billion in SFY 2003-04, representing an increase of $636 million, or 2.8 percent, over SFY 2002-03. However, funds from the Refund Reserve account will not be available to boost Personal Income Tax receipts in SFY 2003-04. In fact, $41 million in Personal Income Tax receipts will be moved back to the Refund Reserve account over the course of the fiscal year, reducing total Personal Income Tax collections to $23.179 billion, an actual decline of 2.7 percent. This forecast is $120 million higher than that of the Executive.

In SFY 2003-04, Personal Income Tax receipts will be dampened by an estimated $195 million in incremental tax cuts, again resulting from the continued phase-in of the enhanced Earned Income Tax Credit (EITC), the College Tuition Deduction/Credit, and the Marriage Penalty reduction. In addition, the forecast includes $89 million resulting from legislation proposed by the Executive to double the filing fees required by certain Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs) and to require certain organizations to pay estimated tax to New York on behalf of non-resident members.

General Fund Personal Income Tax collections are forecast to total $15.344 billion in SFY 2003-04, representing a decline of $1.597 billion, or 9.4 percent over SFY 2001-02. This forecast includes funds transferred to the Refund Reserve account of $41 million, and estimated transfers to STAR of $2.707 billion and to RBTF of $5.128 billion. This forecast is $90 million higher than that of the Executive.

Table 5

Table 5

Personal Income Tax Components

There are several components that make up the Personal Income Tax, ranging from withholding, which is forwarded by employers to the Tax Department on behalf of their employees, to payments or refunds made by or to individuals upon settling up tax liability by the traditional April 15 deadline. All of the Personal Income Tax components are included in the tables, and some of the more important ones are also discussed below.

Withholding

Withholding collections currently account for almost 50 percent of all tax collections. Changes in withholding are closely tied to changes in New York wages, and tend to grow or decline at a faster rate than the corresponding growth or decline in wages. This elasticity, measured by the ratio of the percentage change in withholding to the percentage change in New York wages, tends to be even greater for variable compensation than it is for base wage compensation. This is because variable compensation, which includes bonuses and stock options, is generally earned by taxpayers in the higher income brackets that pay a higher effective tax rate on each additional dollar earned.

Figure 5 Figure 5

The elasticity of withholding to wages has averaged approximately 1.2 during the most recent five fiscal years ending in SFY 2001-02. When variable compensation hit its peak in SFY 2000-01, the elasticity of withholding to wages reached almost 1.7. The Committee Staff estimates that this elasticity will to return to a level of about 1.2 for both SFY 2002-03 and SFY 2003-04, reflecting lower levels of variable compensation due to the current state of the economy.

Through January 2003, withholding collections have declined by $179 million, or 1.1 percent, for the fiscal year, following a decline of 3.3 percent in SFY 2001-02. Withholding collections are expected to total $19.900 billion in SFY 2002-03, representing a decline of $361 million, or 1.8 percent. This estimate is based on collections through January 2003, coupled with an expected decline in variable wages of 19.5 percent and expected growth in base wages of 1.7 percent in the first quarter of 2003, and includes a reduction in the threshold requirement for EFT filers. This estimate is $145 million lower than that of the Executive.

The Committee Staff forecasts withholding receipts to total $21.011 billion in SFY 2003-04, an increase of $1.111 billion, or 5.6 percent over SFY 2002-03. This forecast includes $89 million resulting from legislation proposed by the Executive to double the filing fees required by certain Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs), and to require certain organizations to pay estimated tax to New York on behalf of non-resident members. Excluding this proposed legislation and certain other adjustments, withholding collections are expected to grow by 4.9 percent over SFY 2002-03. Expected wage growth of 3.9 percent in SFY 2003-04 translates to an elasticity of withholding growth to wage growth of slightly more than 1.2. This forecast is $94 million lower than that of the Executive.

Installment Payments

Installment payments are quarterly estimated tax payments made by taxpayers if their final tax liability is expected to be significantly higher than the amount of tax being withheld from their wages. One of the main drivers of installment payments is capital gains, which are estimated to have declined by 32.6 percent in calendar year 2002. Since 2000, taxable capital gains reported by New York taxpayers are estimated to have declined by almost 70 percent to a level of approximately $19.2 billion from a reported high of $62.3 billion in 2000.

Installment payments have declined by $845 million, or 18.2 percent, through January 2003. The Committee Staff estimates that installment payments will total $3.828 billion in SFY 2002-03, representing a decline of $857 million, or 18.3 percent for the full fiscal year. This estimate is $2 million lower than that of the Executive. In SFY 2003-04, installment payments are forecast to total $3.765 billion, a decline of $63 million, or 1.6 percent. This decline in installment payments is based on an additional falloff in capital gains of 16.6 percent for calendar year 2003. This forecast is $120 million higher than that of the Executive.

A significant amount of capital gains realizations come from the sale of equities that gain value over the course of time. As can be seen in Figure 6, the burst of the stock market bubble has decreased stock valuations sharply over a short period of time.

Figure 6 Figure 6

Settlements

In April, taxpayers must file either an extension or final return to settle up their tax liability for the prior calendar year. These returns are accompanied by a corresponding payment, if the taxpayer owes money, or by a claim for a refund, if the taxpayer has paid too much over the course of the year. As a result, the month of April is usually large in terms of Personal Income Tax collections. As stated previously, the "settlement" collected in April 2002 for liability incurred in Tax Year 2001 declined sharply compared to the prior year.

Final payments, which result from the timely filing of tax returns due each April 15, have declined by $541 million, or 30.5 percent, through January 2003. The Committee Staff estimates that final payments will total $1.322 billion in SFY 2002-03. This estimate is $13 million lower than that of the Executive. In SFY 2003-04, final payments are forecast to total $1.163 billion, a decline of $159 million, or 12.0 percent. This forecast is $23 million higher than that of the Executive.

Table 6

Table 6

Taxpayers are allowed an automatic four-month extension for final payment on tax liability from the previous calendar year. However, they are still required to accurately estimate liability and submit any corresponding payment with the extension. Generally, more than 90 percent of these extension deposits are made in April.

In April 2002, extension deposits fell by $641 million, or 39.3 percent, over April 2001. The Committee Staff estimates that extension deposits will total $1.024 billion in SFY 2002-03, representing a decline of or 38.6 percent. This estimate is $1 million lower than that of the Executive. In SFY 2003-04, extension deposits are forecast to total $887 million, a decline of $137 million, or 13.4 percent. This forecast is $47 million higher than that of the Executive.

Refunds are issued to taxpayers that have paid too much based on their tax liabilities. The dollar amount of refunds paid out between January and March of each year is administratively determined by the Executive. The amount paid during this three-month period over the past few years has been $960 million. Beginning in April, the rest of these refunds, known as prior year refunds, are paid to taxpayers as they are processed. Roughly two-thirds of prior year refunds are paid out in April and May of each year.

The Committee Staff estimates that prior year refunds will total $2.773 billion in SFY 2002-03, representing an increase of $608 million, or 28.1 percent. This estimate is $3 million higher than that of the Executive. In SFY 2003-04, prior year refunds are forecast to total $2.793 billion, an increase of $20 million, or 0.7 percent. This forecast is $127 million lower than that of the Executive.

User Taxes and Fees Shows Signs of Life

SFY 2002-03

User Taxes and Fees include Sales and Compensating Use, Cigarette and Tobacco, Highway Use, Motor Fuel, Auto Rental and Alcohol Beverage Taxes, and Motor Vehicle and Alcohol Beverage Fees. For SFY 2002-03, the Committee Staff estimates that User Taxes and Fees will total $10.813 billion, an increase of 2.6 percent from SFY 2001-02. The Committee Staff estimate is $26 million higher than that of the Executive. A large part of the increase can be explained by a rebound in Sales and Use Taxes, coupled with strong collections in Motor Fuel Taxes and Motor Vehicle Fees. On a General Fund basis, User Taxes are expected to total $7.017 billion, a decline of $28 million, or 0.4 percent. Much of the decline in the General Fund is attributed to a decline in General Fund Cigarette Taxes, which have declined by $81 million in spite of the recent tax increases due to an increase in revenue dedicated to fund components of the Health Care Reform Act (HCRA). The remaining $3.7 billion of total User Tax and Fee collections are dedicated for other purposes.4


4 Excluded from this amount are Cigarette Tax collections dedicated to the Tobacco Control and Insurance Initiatives Pools established pursuant to the Health Care Reform Act. The funds in these pools are not considered part of the State Funds Budget and therefore are not included in the figures reported here. In SFY 2002-03, the total amount of dedications to these pools is estimated at $697 million. In SFY 2003-04, total dedications are forecast at $636 million.

Table 7

Table 7

SFY 2003-04

In SFY 2003-04, User Taxes and Fees are expected to total $11.450 billion, an increase of $637 million, or 5.9 percent. Much of the growth in this category is due to Executive Article VII proposals which are expected to increase total tax collections by $412 million. This estimate is $13 million lower than that of the Executive.

On a General Fund basis, collections from User Taxes and Fees are expected to generate $7.495 billion, an increase of $424 million, or 6.0 percent. Again, the increase is largely attributable to Executive proposals to increase taxes.

Table 8

Table 8

Sales Tax

The largest component of the User Taxes, the Sales Tax has been a relatively stable contributor to the State's tax collections, as shown in Figure 7. Sales Tax collections rebounded moderately in State Fiscal Year (SFY) 2002-03 from the suppressed levels of the previous year, and is expected to total $8.791 billion, an increase of $251 million, or 2.9 percent from SFY 2001-02. However, a portion of this growth is due to legislative changes enacted last year as part of the budget that increased receipts in the current fiscal year. These changes include the State Tax Amnesty Program and lowering the requirement for payment by Electronic Funds Transfer, which together provided a one-time injection of $107 million in the current fiscal year. After adjusting for these legislative actions, the growth rate for SFY 2002-03 is reduced to 1.9 percent. The Committee Staff estimate is $18 million above the Executive on an All Funds basis.

Figure 7 Figure 7

Twenty-five percent of total Sales Tax collections generated from the statewide tax are dedicated to pay debt service incurred by the Local Government Assistance Corporation (LGAC). The amount dedicated to LGAC is expected to total $2.104 billion. All other Sales Tax receipts, which are estimated at $6.312 billion, are deposited into the General Fund. The growth in General Fund Sales Tax collections is also expected to be 2.9 percent. In addition to the four percent statewide Sales Tax, total collections include receipts from the 0.25 percent tax imposed in the Metropolitan Transportation Commuter District (MCTD). Revenues generated from the special MCTD portion of the tax are expected to total $375 million and are dedicated to Mass Transportation Operating Assistance Fund (MTOAF).

Figure 8 Figure 8

Despite a steady decline in Consumer Confidence, growth in Sales Tax collections remained positive thanks in large part to strong auto sales and a robust housing market. (see Figures 8 and 9) National auto sales grew by 5.6 percent in 2002, helped by aggressive dealer incentives and low interest rates. In addition, low mortgage rates led to a surge in home refinancing, lowering payments and freeing cash to be used for other household needs such as home improvements. Many households also used refinancing as an opportunity to extract equity from their homes, further spurring consumer spending. The above factors, combined with the non-recurring revenue proposals described earlier, help to offset overall declines in New York State employment and wages in 2002, which negatively impact growth in Sales Tax collections.

Figure 9 Figure 9

In SFY 2003-04, the Committee Staff forecasts Sales Tax revenues, including the impact of the Executive Article VII proposal, will total $9.4 billion, an increase of $609 million, or 6.9 percent from SFY 2002-03. General Fund collections are expected to total $6.752 billion, an increase of $440 million, or 7.0 percent from SFY 2002-03. Sales Tax collections dedicated to LGAC are expected to total $2.251 billion, while dedications to the MTOAF are forecasted at $397 million. The Committee Staff forecast is $13 million below the Executive on an All Funds basis.

The forecast for total collections includes an estimated $523 million resulting from the Executive's Article VII proposal that would repeal the current Sales Tax exemption on articles of clothing and shoes under $110. In lieu of the current exemption, the Executive is proposing four one-week Sales Tax Holiday periods each year and would raise the dollar limit on the price of an exempt item from $110 to $500. This proposal would reduce revenues by $160 million in SFY 2003-04. After adjusting for the impact of the Article VII legislation, however, growth in the Sales Tax is only 2.7 percent.

The increase in Sales Tax collections is based, in part, on the expectation that two years of declines in New York employment will reverse in SFY 2003-04, growing by 0.8 percent. Growth in personal income, another factor in forecasting Sales Tax revenues, is expected to accelerate next year and is forecasted to grow by 3.9 percent. Consumer Confidence is now becoming a risk to the forecast, and has now declined to its lowest level since October of 1993. While there appears to be a weak correlation, at best, between the Consumer Confidence Index and consumer spending patterns, should declining consumer sentiment translate into a slowdown in spending growth, Sales Tax collections will be negatively affected.

Motor Fuel Taxes

The Committee Staff estimates that Motor Fuel taxes will total $537 million in SFY 2002-03, an increase of 9.7 percent. The Committee Staff estimate is $2 million higher than the Executive on an All Funds basis. Revenues collected from Motor Fuel Taxes are not deposited into the General Fund, but instead are statutorily dedicated in the following manner:

  • $68 million deposited in the Dedicated Mass Transportation Trust Fund;
  • $351 million to the Dedicated Highway and Bridge Trust Fund and,
  • $118 million, split 50/50, to the Emergency Highway Reconditioning and Preservation Fund and the Emergency Highway Construction and Reconstruction Fund.

The Committee Staff forecast for Motor Fuel Taxes in SFY 2003-04 is $533 million, a 0.7 percent decrease. The decline is largely due to a forecast of increased fuel prices in the coming year, which will tend to reduce fuel consumption. The Committee forecast for Motor Fuel Tax collections is $4 million lower than the Executive. Motor Fuel Taxes will be distributed as follows:

  • $111 million to the Dedicated Mass Transportation Trust Fund; and,
  • $422 million to the Dedicated Highway and Bridge Trust Fund.

Motor Vehicle Fees

The Committee Staff estimates that total collections from Motor Vehicle Fees will total $614 million, an increase of 5.2 percent from SFY 2001-02. This estimate is $5 million lower than the Executive. Of this amount, $463 million is dedicated to the Dedicated Highway and Bridge Trust Fund, which is classified as a Capital Projects fund. Another $77 million is dedicated to the Dedicated Mass Transportation Trust fund and the remaining $74 million will be deposited to the General Fund. The General Fund estimate represents a decline of $111 million, or 60 percent from SFY 2001-02. Most of this decline is attributable to legislation enacted in 2000 and 2001 that increased the dedication of Motor Vehicle Fees by $169 million in SFY 2002-03 to support the Dedicated Highway and Bridge Trust Fund.

In SFY 2003-04 Motor Vehicle Fees are forecasted at $653 million, an increase of 6.4 percent from SFY 2002-03. Motor Vehicle Fees deposited to the General Fund are expected to decrease to $72 million, a decrease of $2 million, or 2.7 percent. General Fund Receipts are expected to decline despite Executive proposals to raise fees on title applications, license plates and boat registrations due to a commensurate increase in the level of fee dedications enacted in prior years that are effective in the upcoming fiscal year. Deposits to the Dedicated Highway and Bridge Trust Fund are expected to increase to $485 million, while dedications to the Dedicated Mass Transportation Trust Fund are expected to total $96 million.

Cigarette and Tobacco Taxes

Over the past couple of years, the excise tax on cigarettes has been increased several times. Beginning in 1999 with the enactment of the Health Care Reform Act (HCRA) of 2000, the tax rate on cigarettes in New York State has risen from 56 cents per pack in 1999 to today's rate of $1.50 per pack of twenty cigarettes. Currently, New York is tied with New Jersey as having the second highest cigarette excise tax rate in the country. Only the state of Massachusetts is higher at $1.51 per pack. All together, New York now collects over $1 billion annually from taxes on cigarettes.

In addition to the State's tax rate increase, New York City also increased their excise tax rate on cigarettes from eight cents to $1.50 per pack effective July 2, 2002. This tax is in addition to the State's $1.50 rate and the Federal rate of 39 cents per pack. Cigarettes sold in New York City are typically over $7 per pack.

These increases in the cigarette excise tax have had an adverse impact on the number of taxable packs sold in New York State. Figure 10 illustrates the impact that the State and City excise tax rate increases have had on consumption in New York City and the rest of the State.

Figure 10 Figure 10

As shown above, there has been steep declines in the number of tax stamps sold to stamping agents immediately after the tax rate increases of March 1, 2000 and April 3, 2002.5 The rate increase from 56 cents to $1.11 in March 2000 resulted in a 60 percent decline in the number of tax stamps sold statewide on a month-to-month basis. The second rate increase from $1.11 to $1.50 per pack that occurred in April 2003 resulted in a statewide decline of 63.7 percent. On July 2, 2002, New York City's tax rate increase took effect. The number of tax stamps sold in New York City declined by 60.6 percent on a month-to-month basis while the rest of the State experienced a 10.1 percent increase. The increase in the rest of the State may be the result of New York City residents shifting their purchases to areas of the State outside of New York City.

Figure 10 illustrates that cigarette consumption, as shown by stamp sales, has fallen dramatically in the month following the imposition of a cigarette tax increase. Yet consumption tends to bounce back somewhat, though usually remaining below previous levels.

Part of the explanation for this may be the "pre-buying" effect that occurs shortly before a tax rate increase goes into effect. Pre-buying occurs when consumers, in order to avoid paying the additional tax, increase their purchases of cigarettes right before the tax increase goes into effect. Shortly after the tax increase, however, consumption tends to increase as consumers run out of their pre-bought supply and are forced to pay the increased tax when purchasing additional cigarettes, although some may still look for other ways to avoid paying the tax.

Sales of Cigarette Stamps in New York City just before the effective date of their tax increase provide a good illustration of the pre-buying effect. In June of 2002, there were 39.6 million tax stamps sold in New York City, an amount that was 54 percent higher than the previous month and 34 percent higher than June 2001. The following month, sales of tax stamps in New York City dropped to 15.6 million, a decline of 60 percent from the previous month and 46 percent below the July 2001 level. In August, there was a slight rebound in New York City consumption, though consumption continue to be about 40 to 50 percent below pre-tax increase levels.

Despite the apparent decline in taxable cigarette consumption, the rate increases have yielded additional revenue for the State's coffers. Figure 11 illustrates the impact of the tax rate increases on the revenue generated by the sale of stamps to stamping agents.

Figure 11 Figure 11

The Committee Staff estimates that General Fund Cigarette and Tobacco Tax receipts in SFY 2002-03 will total $460 million, a decline of 13.5 percent over SFY 2001-02. General Fund Cigarette Tax receipts represents $417 million of this total.

In SFY 2003-04, the Committee Staff forecasts revenue of $446 million for General Fund Cigarette and Tobacco Taxes, which represents a 3.1 percent decrease from SFY 2002-03. General Fund Cigarette Tax receipts represents $401 million of this total in SFY 2003-04.


5 Stamping agents consist of producers, wholesalers or other agents. After the cigarette packs are stamped, the agents sell the stamped packs to retailers and other wholesalers, which are then purchased by the consumer thereby reflecting consumption.

Health Care Reform Act (HCRA)

Over 60 percent of State Cigarette Tax collections are statutorily dedicated to the Tobacco Control and Insurance Initiatives Pool, which was created pursuant to the Health Care Reform Act of 2000. Although the revenues dedicated to the Tobacco Control and Insurance Initiatives Pool are used to support a variety of State health care initiatives, they are considered "off-budget" and, therefore, are not included in the reporting of the State's All Governmental Funds Budget. The Committee estimates that $697 million in Cigarette Tax collections will be dedicated to the pool in SFY 2002-03, with $636 million dedicated in SFY 2003-04. The following table details the distribution of Cigarette Tax Collections over the past three years.

Table 9

Table 9

Cigarette Tax Enforcement

In an effort to protect Cigarette Tax receipts from further erosion, the Legislature has passed several measures to counter bootlegging and other forms of cigarette tax evasion. One such measure was enacted under Chapter 262 of the Laws of 2000, which effectively prevented the sale of cigarettes over the Internet to New York residents. This legislation was ruled unconstitutional by the U.S. District Court of the Southern District of New York and it was enjoined from going into effect. New York State appealed this ruling and the 2nd U.S. Circuit Court of Appeals recently overturned it. The Appeals Court concluded that this legislation did not discriminate against interstate commerce and New York consumers' access to cigarettes.

The direct fiscal impact of this ruling is yet to be determined, though a recent study estimated that in 2002 New York lost over $895 million due to various forms of cigarette tax evasion.6 An argument can be made that those who are looking to evade State and local excise taxes on cigarettes would just find other means of evasion. On the other hand the court decision may produce additional revenue for the State since at least some Internet consumers will be forced to buy the product from traditional retailers markets. Whatever the outcome, it is clear that cigarette tax evasion will continue to be a major concern for New York State.


6 "New Cigarette Tax Revenue Sources for New York State", Ridgewood Economic Associates, Ltd., prepared for the FACT Alliance, December 24, 2002.

Business Taxes Continue to Erode

SFY 2002-03

Business Tax collections have declined by $229 million, or 5.9 percent, through January 2003. Virtually all components of the Business Tax category have declined sharply so far this fiscal year, with the exception of the Insurance Tax and the Petroleum Business Tax, which have increased by 11.4 percent and 7.3 percent respectively. The Committee Staff estimates that Business Tax receipts will total $4.990 billion in SFY 2002-03, representing a decline of $195 million, or 3.8 percent, over SFY 2001-02. This estimate is $46 million lower than that of the Executive.

In 2002, corporate profits are estimated to have declined by 1.5 percent, leading to the expected decline of 3.8 percent in Business Tax collections in SFY 2002-03. This estimated decline also includes approximately $285 million in incremental tax cuts including the continued phase-in of recent reductions in the general rate imposed on Entire Net Income (ENI), Utility Tax Reform, and the expansion of the Empire Zones Program. Collections from the current Tax Amnesty program and an increase in the required corporate prepayment in March will somewhat mitigate the overall decline in Business Tax receipts.

Table 10

Table 10

Taxpayers with business activity in the Metropolitan Commuter Transportation District (MCTD), which includes the City of New York, and seven surrounding counties (Dutchess, Orange, Putnam, Rockland, Westchester, Nassau and Suffolk), are required to pay a 17 percent Regional Business Tax Surcharge. Collections from the surcharge are deposited into the Mass Transportation Operating Assistance Fund (MTOAF). These provisions do not apply to the Petroleum Business Tax.

In addition, 80 percent of Utility Tax receipts resulting from the franchise tax on transportation and transmission corporations and associations are deposited into MTOAF, and all collections resulting from the imposition of the Petroleum Business Tax are dedicated either to the Highway Bridge and Trust Fund or MTOAF. The Executive proposes to dedicate 20 percent of the collections from the franchise tax on transportation and transmission corporations and associations to the Dedicated Highway and Bridge Trust Fund beginning April 1, 2004. Dedicated Business Tax receipts are estimated to total $1.602 billion in SFY 2002-03, while the remaining $3.388 billion will remain in the General Fund.

SFY 2003-04

The Committee Staff forecast for Business Tax receipts is $5.365 billion in SFY 2003-04, an increase of $375 million, or 7.5 percent, over SFY 2002-03. This forecast is $129 million higher than that of the Executive. This increase is based on an expected increase in corporate profits of 10.0 percent in 2003, and includes approximately $249 million in incremental tax cuts resulting from the expansion of the Empire Zones Program and the continued phase-in of Business Tax incentives including Utility Tax Reform. Part of the expected growth in Business Tax receipts will result from an estimated $158 million increase in tax liability for insurance companies due to the Executive's proposed restructuring of the Insurance Tax.

Corporate Franchise Tax

Corporate Franchise Tax collections have significantly declined over the past couple of years from the receipts levels of the 1990s. In SFY 2000-01, Corporate Franchise Tax receipts totaled more than $2.6 billion, and generated only about $1.7 billion just one year later. (see Figure 12).

Corporate Franchise Tax collections have declined by $122 million, or 9.7 percent, through January 2003. The Committee Staff estimates that Corporate Franchise Tax receipts will total $1.674 billion in SFY 2002-03, representing a decline of $29 million, or 1.7 percent over SFY 2001-02. This estimate is $10 million lower than that of the Executive. Much of this decline is due to continued weakness in the overall economy and, more specifically, in corporate profits.

However, the estimate also reflects incremental tax cuts, including about $95 million from the most recent phase of general rate reduction that became applicable to fiscal years beginning on and after July 1, 2001. Because the fiscal year for most businesses coincides with the calendar year, much of the reduction from the last phase of the rate reduction fell in SFY 2002-03. It is estimated that the rate reduction lowered Corporate Franchise Tax collections by a total of $260 million in the current fiscal year. Additionally, the 30 percent bonus depreciation write-off provided to businesses as a part of the Federal Job Creation and Worker Assistance Act of 2002 will reduce Corporate Franchise collections by an estimated $105 million in SFY 2002-03. Tax Amnesty collections and the additional prepayment requirement will partially offset this decline, generating about $72 million under the Corporate Franchise Tax for the fiscal year.

Figure 12 Figure 12

Utility Tax

Chapter 63 of the Laws of 2000 contained provisions that restructured the Utility Tax by changing the method of taxation for certain utility companies from a gross receipts base to a net income base. Under these provisions, certain portions of the gross receipts tax were eliminated, while others are still being phased-down through 2005. As a result, many of the businesses now pay under the Corporate Franchise Tax reducing the Utility Tax significantly.

Utility Tax receipts have declined by $150 million, or 16.4 percent, through January 2003. The Committee Staff estimates that Utility Tax receipts will total $1.050 billion in SFY 2002-03, representing a decline of $168 million, or 13.8 percent, over SFY 2001-02. This estimate includes incremental tax reductions of approximately $93 million from the continued phase-in of Utility Tax Reform, which effectively reduces the rates applicable to different portions of the tax. This estimate is $13 million lower than that of the Executive.

Utility Tax receipts are forecast to total $1.086 billion in SFY 2003-04, representing an increase of $36 million, or 3.4 percent, over SFY 2002-03. The forecast includes the continued phase-in of Utility Tax Reform, reducing revenues by an estimated $114 million in SFY 2003-04. This forecast is $93 million higher than that of the Executive.

Figure 13 Figure 13

Insurance Tax

Insurance Tax collections have increased by $54 million, or 11.4 percent, through January 2003. The Committee Staff estimates that Insurance Tax receipts will total $741 million in SFY 2002-03, representing an increase of $45 million, or 6.4 percent over SFY 2001-02. This estimate is $4 million higher than that of the Executive. This estimate includes incremental tax cuts resulting from reductions in both the tax rate and the tax cap based on premiums written, totaling approximately $15 million for the fiscal year.

The Executive proposes to restructure the Insurance Tax to one based mainly on premiums, resulting in a net increase in tax liability for insurance companies of $158 million in SFY 2003-04. (see page 114)

The Executive also proposes to create a new Certified Capital Company (CAPCO) Program authorizing tax credits of $125 million in total for insurance companies that invest in CAPCOs. These insurance companies would receive tax credits equal to 50 percent of their investment, up to $10 million per investor. These credits would be available beginning in 2005, and would be spread out over a ten-year period.

The CAPCO proposal requires that investments be made in companies that have a minimum relationship with a research center that has received financial support from the State through the Centers of Excellence Program, the Gen*NY*sis Program, the Centers for Advanced Technology Program, or the Capital Facilities Program. Investments in a high technology or biotechnology project authorized by the RESTORE New York program would also qualify. Program eligibility would also be expanded to certain subsidiaries of the New York State Urban Development Corporation (UDC).

Insurance Tax receipts are forecast to total $917 million in SFY 2003-04, representing an increase of $176 million, or 23.8 percent over SFY 2002-03. This forecast reflects $158 million in increased tax liability for insurance companies resulting from the Executive proposal to restructure the Insurance Tax. This forecast is $14 million higher than that of the Executive.

Bank Tax

Bank Tax collections have declined by $70 million, or 16.6 percent, through January 2003. The Committee Staff estimates that Bank Tax receipts will total $496 million in SFY 2002-03, representing a decline of $70 million, or 12.3 percent over SFY 2001-02. This estimate reflects continued weakness in corporate profits, coupled with incremental tax cuts of approximately $30 million resulting from recent reductions in the Bank Tax rate. This estimate is $22 million lower than that of the Executive.

In SFY 2003-04, Bank Tax collections are forecast to total $514 million, representing an increase of $18 million or, 3.6 percent over SFY 2002-03. This forecast reflects somewhat of a turnaround in corporate profits, and includes an estimated $25 million in incremental tax reductions resulting from the final phase of the Bank Tax rate reduction. This forecast is $29 million lower than that of the Executive.

Petroleum Business Tax

The Committee Staff anticipates receipts of $1.029 billion for Fiscal Year 2002-03, representing a 2.6 percent growth over Fiscal Year 2001-02. Revenues from this tax are divided between various dedicated funds. Of the total expected in SFY 2002-03, $334 million will be deposited in the Dedicated Mass Transportation Trust Fund, and $126 million will be deposited into the Mass Transportation Operating Assistance Fund. The remaining $569 million is deposited into the Dedicated Highway and Bridge Trust Fund.

In State Fiscal Year 2003-04, total Petroleum Business Tax collections are estimated to total $1.041 billion, a 1.2 percent increase from SFY 2002-03. This forecast is $40 million higher than the Executive.

Of the total expected in SFY 2003-04, $338 million will be deposited in the Dedicated Mass Transportation Trust Fund, and $128 million will be deposited into the Mass Transportation Operating Assistance Fund. The remaining $575 million is deposited into the Dedicated Highway and Bridge Trust Fund.

Petroleum Business Tax receipts are based on the volume of fuel imported or produced, refined, manufactured or compounded in the state. On January 1st of each year, the tax rates are indexed based on the producer price index for refined petroleum products published by the Bureau of Labor Statistics. Annual changes in Petroleum Business Tax rates are statutorily limited to plus or minus five-percent. In 2002, Petroleum Business Tax rates were lowered by 5 percent. The Committee Staff expects tax rates to increase by the maximum of 5 percent in 2003.

Other Taxes

Other Tax collections are expected to total $1.212 billion in SFY 2002-03, representing an increase of $39 million, or 3.3 percent over SFY 2001-02. This estimate is $4 million lower than that of the Executive. In SFY 2003-04, Other Tax receipts are forecast to total $1.191 million, a decrease of $21 million, or 2.9 percent. Other Taxes include the Estate Tax, Real Estate Transfer Tax, Pari-Mutuel, and the Real Property Gains Tax (repealed in 1996).

Table 11

Table 11

Estate Tax

The Committee Staff estimates that SFY 2002-03 receipts will total $722 million, a decrease of 6.0 percent. Collections year-to-date are down 4.9 percent over the same period a year ago, after showing strong signs earlier in the year. The estimate assumes Gift Tax receipts of $5 million and $4 million resulting from the Tax Amnesty Program. Congressional action to gradually phase-out the Estate Tax increased the State threshold for taxable estates to $1 million for 2002, and is estimated to have lowered receipts by $31 million in SFY 2002-03. The Committee Staff estimate is $4 million below that of the Executive.

The Committee Staff forecast for SFY 2003-04 is $732 million, which represents an increase of 1.4 percent in overall Estate Tax receipts. The increase reflects a forecasted rebound in equities prices, which are correlated with increases in the value of taxable estates. This forecast is $4 million below the Executive.

Real Estate Transfer Tax

Real Estate Transfer Taxes are dedicated to the Environmental Protection Fund (EPF) and to pay debt service on the Clean Water/Clean Air Bond Act (CW/CA). Each year $112 million is statutorily dedicated to the EPF, while the remainder is dedicated to CW/CA. Revenues that are not needed to pay debt service on the CW/CA Bond Act are transferred back to the General Fund. See page 37-38 for a description on Transfers to the General Fund.

The Committee Staff estimate for total Real Estate Transfer Tax collections in SFY 2002-03 is $455 million, representing growth of 22.8 percent over the prior fiscal year. Of the total, $112 million is statutorily dedicated to the EPF, and the remaining $343 million is dedicated for debt service on the CW/CA. Despite the slump in the commercial real estate market in New York City, Real Estate Transfer Tax collections have been boosted by continuing strength in the residential real estate market.

In SFY 2003-04, expectations of a softening real estate market will lead to a significant decline in Real Estate Transfer Tax collections. The Committee forecast is $420 million, a decline of 7.7 percent. Of the total, $112 million will be dedicated to the EPF and the remaining $308 million will be dedicated to pay CW/CA debt service.

Table 12

Table 12

Table 13

Table 13

Table 14

Table 14

Table 15

Table 15
* These estimates include a Refund Reserve Transaction of $1.250 billion

Table 16

Table 16



GENERAL FUND RECEIPTS

The General Fund is used to pay for most of the State's operations and local assistance. General Fund Receipts include all tax collections and Miscellaneous Receipts not dedicated to other funds, as well as transfers from other funds. The Committee Staff also estimates Lottery receipts since proceeds from the Lottery are dedicated to fund education.

Table 17

Table 17

SFY 2002-03

The Committee Staff estimates that General Fund Receipts and Lottery will total $41.313 billion in SFY 2002-03, a decline of $1.392 billion, or 3.3 percent, over SFY 2001-02. This estimate is $254 million below the Executive's estimate.

The decline in General Fund Receipts and Lottery is somewhat offset by approximately $2.8 billion in one-shot revenue actions included in the Enacted Budget, including $339 million in non-recurring tax actions, $542 million in non-recurring Miscellaneous Receipts, and $680 million in one-time fund sweeps and transfers. In addition, the Executive Budget proposal includes $1.9 billion in Tobacco Securitization proceeds to boost General Fund Receipts in the current fiscal year.

Tax collections earmarked for the General Fund are estimated to total $28.157 billion in SFY 2002-03, representing a decline of 24.7 percent over SFY 2001-02. However, most of this decline reflects an accounting change in the Comptroller's reporting of Personal Income Tax collections (see below box). After adjusting for this change and other adjustments (see Table 18), General Fund Tax collections are estimated to total $33.800 billion, a decline of $3.291 billion, or 8.9 percent, from SFY 2001-02. This decline is due to the impact of the recession on receipts, including a sharp drop in total Personal Income Tax and Business Tax collections from the prior fiscal year.

Through January 2003, General Fund Tax collections have declined by $3.297 billion, or 10.3 percent from the same period in SFY 2001-02. Collections for the remainder of the fiscal year are expected to remain flat due to an expected increase in receipts from non-recurring tax actions such as the State Tax Amnesty Program and increased business tax prepayments that are due in March.

Transfers, Transfers, Transfers

The General Fund has been reshaped over the past several years because of a large increase in dedicated revenues that are no longer included in General Fund receipts. Included in this increase in dedicated revenues is the newly created Revenue Bond Tax Fund (RBTF), which is used for debt service. Beginning in May 2002, 25 percent of Personal Income Tax receipts, excluding reserve transactions, are now deposited into the RBTF. Although most of these receipts are returned to the General Fund in the form of a transfer, they are no longer considered as General Fund Personal Income Tax receipts. As a result, it is also important to discuss General Fund Tax collections will be done on an adjusted basis, excluding reserve transactions and transfers, so that the corresponding analysis can be done based on the state of the economy as opposed to reflecting accounting practices. For more details on the dedication of tax revenues, see the Dedicated Taxes section beginning on page 47.


SFY 2003-04

The Committee forecast for General Fund Receipts and Lottery is $40.262 billion in SFY 2003-04, representing a decline of $1.051 billion or 2.5 percent from SFY 2002-03. Despite an increase of 4.3 percent in General Fund Tax collections, non-recurring revenue actions that boosted revenues in SFY 2002-03 will not take place to the same degree in SFY 2003-04, contributing to the anticipated a net decline in receipts.

The Committee Staff forecast includes approximately $1 billion in proposed tax and fee increases by the Executive, offset by of $518 million in incremental tax reductions enacted in prior years. This forecast is $188 million higher than that of the Executive. Over a two-year period, the Committee Staff estimates are $66 million below the Executive's.

Table 18

Table 18

The Committee Staff forecast for General Fund Tax collections is $27.365 billion in SFY 2003-04, a decline of $792 million, or 2.8 percent, from SFY 2002-03. This decline reflects dedications of the Personal Income Tax to the Revenue Bond Tax Fund over and above those in SFY 2002-03. Adjusting once again for accounting changes detailed in Table 18, General Fund Tax collections are forecasted to total $35.241 billion, an increase of $1.441 billion, or 4.3 percent, from SFY 2002-03.

Transfers From Other Funds to the General Fund

In SFY 2002-03, more than 30 percent of all tax revenues are dedicated to Special Revenue, Debt Service or Capital Project Funds. However, the impact on General Fund spending is noticeably smaller as a result of transfers back to the General Fund of tax collections that are in excess of debt service, or other programmatic requirements.

The Committee Staff estimates that transfers back to the General Fund will total $7.268 billion in SFY 2002-03. For SFY 2003-04, the Committee Staff forecasts total transfers to the General Fund will total $7.487 billion, an increase of 3.0 percent over SFY 2002-03. The increase is due to a rebound in growth in the Sales Tax, and includes the net impact from the Executive's proposed repeal of the current clothing tax exemption and the establishment of four new Sales Tax-free weeks.

While there are dozens of funds that transfer excess funds back to the General Fund, the majority of such transfers are from transfers in excess of debt service: 1) The Revenue Bond Tax Fund; 2) Transfers in Excess of Local Government Assistance Corporation requirements, and 3) Real Estate Transfer Tax revenues in excess of Clean Water/Clean Air Bond Act debt service requirements.

Table 19

Table 19

Revenue Bond Tax Fund (RBTF)

Chapter 383 of the Laws of 2001 created the Revenue Bond Tax Fund (RBTF), which is used for debt service. As of May 2002, 25 percent of monthly Personal Income Tax receipts are deposited into the RBTF. Receipts not required to pay debt service on Revenue Bonds are ultimately transferred back to the General Fund.

In SFY 2002-03, the Committee Staff estimates that $4.226 billion will initially be dedicated to the RBTF. Of that amount, only $28 million is required for debt service and the remaining $4.198 billion will be transferred back to the General Fund. In SFY 2003-04, the Committee Staff estimates that $5.128 billion in Personal Income Tax collections will initially be transferred to the Revenue Bond Tax Fund. Of that amount, $233 million will be required for debt service and the remaining $4.895 billion will be transferred back to the General Fund.

Local Government Assistance Tax Fund (LGATF)

The Local Government Assistance Corporation (LGAC) was created in 1990 to help the State eliminate the need for spring borrowing. One-fourth of the sales and use tax collections are dedicated to LGATF to pay debt service on the bonds issued by LGAC. In SFY 2002-03, LGATF is expected to receive $2.104 billion. Of this amount, $248 million is used for debt service, while $1.856 billion in transferred back to the General Fund. In SFY 2003-04, the Committee Staff estimates that $2.251 billion will be dedicated to the LGTAF, with $255 million used for debt service and the remaining $1.995 billion transferred back to the General Fund.

Real Estate Transfer Tax (RETT)

Real Estate Transfer Taxes are dedicated to the Environmental Protection Fund (EPF) and to debt service on the Clean Water/Clean Air Bond Act (CW/CA). Each year $112 million is statutorily dedicated to the EPF, while the remainder is dedicated to CW/CA. Revenues that are not needed to pay debt service on the CW/CA Bond Act are transferred back to the General Fund.

The Committee Staff estimates that $272 million in excess Real Estate Transfer Tax revenues will be transferred back to the General Fund in SFY 2002-03. An additional $218 million will be transferred back to the General Fund in SFY 2003-04. Most of the decline can be explained by an expected decline in overall Real Estate Transfer Tax collections in the upcoming fiscal year.

Other Transfers

On a separate note, Chapter 383 of the Laws of 2001 permitted the Executive to negotiate a tribal-state compact with the Seneca Indian Nation to operate casinos in Niagara Falls, Buffalo and a potential third site. The authorization is contingent upon a memorandum of understanding between the Executive and the Nation, which requires the Nation to remit to the State 18 percent of the proceeds from slot machines in the first four years of operation, and a larger share thereafter. On December 31, 2002, the Seneca Niagara Casino opened its doors to the public. Under the terms of the tribal-state compact negotiated between the Executive and the Seneca Indian Nation, however, the State will not receive any of its share of the proceeds until December 31, 2003.

Miscellaneous Receipts

Miscellaneous Receipts consist of a wide variety of non-tax receipts that are dedicated to the General Fund. There are currently six categories of collections that encompass General Fund Miscellaneous Receipts: Abandoned Property, Federal Grants, General Fund Refunds and Reimbursements, Investment Income, Licenses and Fees, and Other Transactions. Other Transactions has become the catchall category for non-recurring revenue transactions (aside from those that can be categorized elsewhere). Though not covered in this report, the State Funds budget also includes approximately $10 billion in Miscellaneous Special Revenue Funds, including fees and agency offsets, that are used to support State Agency appropriations.

The Executive is proposing to use $1.9 billion in Tobacco Securitization Bonds to help close the SFY 2002-03 budget gap. This action raises total Miscellaneous Receipts to $4.085 billion, an increase of $2.6 billion from SFY 2001-02 and $1.937 billion above the Enacted Plan. Absent this action, total Miscellaneous Receipts are expected to total $2.185 billion, or $37 million higher than the Enacted Plan.

Aside from the addition of Tobacco Bond receipts, some of the main items in the Other Transactions category include:

  • Bond Issuance Charges: $158 million;
  • Fines Received from Wall Street Firms: $87.1 million, including $48 million from Merrill Lynch, $30.5 million from other Wall Street Firms (not specified) and $8.6 million from Western Union; and
  • Power Authority of New York (PASNY): $67 million for Power For Jobs Tax Credit reimbursement.

The Committee Staff estimate is the same as that of the Executive.

The Committee Staff forecast for SFY 2003-04 is also the same as the Executive's. The proposed law forecast is $3.538 billion, a decrease of $505 million from the proposed law forecast in SFY 2002-03. The decline represents the absence of several non-recurring revenue actions contained in the SFY 2002-03 Enacted Plan that are not expected to recur in the upcoming fiscal year. Excluding the Tobacco Proposal, Miscellaneous Receipts are expected to total $1.680 billion, a decline of $505 million from the current law in SFY 2002-03.

Table 20

Table 20

Article VII proposals in the Executive Budget

Securitization of Tobacco Settlement Payments

The Executive has proposed Article VII legislation that would authorize the State to securitize revenues from the 1998 Master Settlement Agreement, which is an agreement between tobacco companies and 46 States, the District of Columbia and five U.S. territories. The remaining four states (Florida, Minnesota, Mississippi and Texas) have settled in earlier agreements.

Under this legislation, a portion of the State's share of revenues from the tobacco companies will be secured through the issuance of bonds from the Tobacco Settlement Financing Corporation, a proposed new subsidiary of the Municipal Bond Bank Agency. The Corporation would be authorized to issue bonds to reimburse the State's General Fund for any of the following purposes: any capital purpose or programs; payment of debt service for any of the State's obligations; grants to local governments, school districts or public benefit corporations; or as a revenue source for other State expenditures. If the Executive proposal were to be adopted, General Fund Miscellaneous Receipts would receive Tobacco Bond receipts of $1.9 billion in SFY 2002-03 and $1.9 billion in SFY 2003-04.

In addition to the Tobacco Securitization proposal, the Executive is proposing a series of fee increases and one-time revenue actions to close the expected SFY 2003-04 budget gap. The total amount attributable to fee increases, additional fines, abandoned property and indirect costs are expected to total $178 million. Other transactions include a contribution from the Power Authority for the Power for Jobs program of $58 million. PASNY will be contributing $125 million over a two-year period, which is the statutory limit on contributions for this program from PASNY. Other transactions also include Bond Issuance Charges of $71 million, and Wireless Surcharge collections of $62.7 million.

One-Shot Revenues

According to the review of the SFY 2003-04 Executive Budget issued by the State Comptroller, the Executive used a total of nearly $6 billion in enacted and proposed non-recurring revenue actions in order to balance the budget in SFY 2002-03. Of that total, approximately $4 billion would provide General Fund relief, while the remaining savings accrue to other funds. Of the General Fund amounts, $2.4 billion would come in the form of Miscellaneous Receipts, including $1.9 billion in Tobacco Securitization receipts. In addition, $338 million in one-time revenues will be received from tax actions taken in the Enacted Budget, $1.25 billion in Refund Reserve transactions and $680 million in transfers from other funds.

In SFY 2002-03, the Executive is proposing to generate an additional $3.3 billion in non-recurring revenues, including another $1.9 billion in Tobacco Securitization proceeds. The following table lists the items that were enacted in SFY 2002-03 and those proposed for SFY 2003-04.

Table 21

Table 21

Source: Ways and Means and the Office of the State Comptroller.

Table 22

Table 22

Lottery

The Committee Staff expects SFY 2002-03 revenues to total $1.803 billion, which falls short of the current Lottery Aid Guarantee of $1.843 billion by $40 million, and represents growth of 15.5 percent. This estimate is $26 million lower than that of the Executive.

Lottery receipts have increased by $137 million, or 12.2 percent, through January 2003. Most of this increase is due to the introduction of a new multi-state lottery game, Mega Millions, for which sales began May 15, 2002. Excluding Mega Millions, lottery revenues would have increased by only 2.8 percent through January 2003. Instant Game sales have also been strong, growing by 27.0 percent year-to-date. Some of this increase is the result of recently enacted legislation allowing for a 75 percent prize payout for up to three Instant Games each year.

Legislation enacted in 2001 authorizes the Lottery Division to license the operation of video lottery gaming at Aqueduct, Monticello, Yonkers, Finger Lakes and Vernon Downs. Certain other racetracks may also be licensed pursuant to local law. In the 2002 Legislative Session several enhancements were made to address concerns raised by some of the racetracks. These enhancements included an extension of the original sunset provisions, provisions for the subordination of debt for the New York Racing Association (NYRA), a conditional extension of the NYRA franchise, and temporary authorization for racetracks to negotiate with horsemen's organizations regarding the shares to be allocated to purses.

In SFY 2003-04, Lottery receipts are expected to total $1.830 billion, an increase of $27 million, or 1.5 percent, over SFY 2002-03. This forecast is $5 million lower than that of the Executive.

The Executive submitted Article VII legislation with the SFY 2003-04 Executive Budget to address some additional concerns raised by the tracks regarding their percentage of the revenues, hours of operation, and the ability to obtain financing to construct the facilities that will house the Video Lottery Terminals (VLTs). The Executive proposal would extend the hours of operation and make them more flexible by allowing facilities to run for a maximum of 126 hours per week, an average of 18 hours per day. The proposal would also remove the current sunset and reduce the amount that the tracks would be required to enhance purses and share with the horsemen.

Although the Executive proposal attempts to address some of the basic concerns raised by the tracks, there has been no confirmation that the tracks would accept the proposal as currently drafted and begin the operation of VLTs if the legislation were enacted. Additionally, although the Executive included $61 million in last year's financial plan for the operation of VLTs, there is no revenue included in this year's financial plan even though the Request for Proposals (RFP) process is essentially completed and the justification for this proposed legislation is that tracks would begin operating VLTs.

Table 23

Table 23

Table 24

Table 24



DEDICATED TAXES

Taxes not deposited into the General Fund but dedicated for other purposes have tripled since SFY 1994-95. As the following chart illustrates, the portion of State tax collections that was dedicated to funds other than the General Fund was roughly 10 percent in SFY 1994-95. That share has now increased to approximately 34 percent in SFY 2003-04. The actual size of the dedication, however, is somewhat misleading. Approximately 57.5 percent of all dedicated taxes flow back to the General Fund in the form of transfers. After adjusting for transfers back to the General Fund, the share of All Funds Taxes that end up in the General Fund Receipts is approximately 84 percent.

The rationale for these accounting maneuvers is to allow a larger share of revenue flow through the State Debt Service and Capital Project Funds in order to meet the required coverage ratios mandated by agreed to bond covenants. By dedicating a tax revenue stream, the State is also able to provide an increased level of comfort to creditors, thereby lowering the interest rates the State pays on debt issuances.

Figure 14 Figure 14

Figure 14 summarizes, by State Fund, the total amount of State taxes that are dedicated for special purposes. Beyond the scope of this report, however, is the growing level of dedicated fees and other Miscellaneous Receipts, which show up as Special Revenue Funds, that support total State spending. In SFY 2002-03, dedicated fees and other Miscellaneous Receipts will total over $12 billion, and account for nearly 22 percent of the State Funds Budget (excluding Federal Funds). This percentage will increase to 23.4 percent of the State Funds Budget in SFY 2003-04 should the Legislature adopt the proposed Executive Budget.

The following sections will describe the major funds that receive the bulk of non-General Fund Tax receipts.

Special Revenue Funds

STAR Fund

The STAR Fund was created to receive funds from the Personal Income Tax that were set aside to pay for the cost of the State's School Tax Relief program (STAR). The money deposited into this fund is used to reimburse school districts for revenues foregone due to the STAR Basic and Enhanced Real Property Tax exemptions. The amount of revenue dedicated to pay for the cost of the STAR program in SFY 2003-03 is expected to total $2.667 billion. In SFY 2003-04, the cost of the STAR program, including $93 million in savings from the Executive's Article VII proposal, is expected to total $2.707 billion, an increase of 1.5 percent.

Mass Transit Operating Assistance Fund

The Mass Transit Operating Assistance Fund (MTOAF) was created by the Legislature in SFY 1981-82 to help finance State mass transportation operating systems, which at that time were experiencing operating deficits. Pursuant to 88-a of the State Finance Law, the fund is subdivided into upstate and downstate dedicated tax fund accounts. The downstate account provides funding for the transit systems in the Metropolitan Transportation Commuter District (MCTD) and consists of revenues from the following taxes: the Petroleum Business Tax (PBT); the MTA Corporate Tax Surcharge; a 0.25 percent Sales Tax imposed in the counties that comprise the MCTD, and surcharges on companies subject to tax under Article 9. A portion of the PBT is also dedicated to the upstate account and is the sole source of dedicated funding for that account.

In SFY 2002-03, the Committee Staff estimates that $1.146 billion will be dedicated to support the activities funded through the MTOAF, an increase of 8.6 percent. In SFY 2003-04, the Committee Staff forecasts a total of $1.094 billion will be dedicated from the various taxes to support MTOAF, a decrease of 4.5 percent from SFY 2002-03.

Dedicated Mass Transportation Trust Fund

The Dedicated Mass Transportation Trust Fund (DMTTF) receives dedicated revenues from the PBT, Motor Fuel Tax, and Motor Vehicle Fees. Dedicated tax revenues deposited into the DMTTF are expected to total $477 million in SFY 2002-03. Fund dedications are expected to total $545 million in SFY 2003-04. Much of this increase is due to legislative increases in the level of statutory dedications to this fund.

Debt Service Funds

Revenue Bond Tax Fund (RBTF)

Chapter 383 of the Laws of 2001 created the Revenue Bond Tax Fund (RBTF), which is used for debt service. As of May 2002, 25 percent of Personal Income Tax receipts, excluding reserve transactions, are deposited into the RBTF. In SFY 2002-03, it is estimated that $4.226 billion will be dedicated to the RBTF. Of that amount, it is expected that only $28 million is necessary for debt service payments, with the remaining $4.198 billion transferred back to the General Fund. In SFY 2003-04, the Committee forecasts that the RBTF dedication will total $5.128 billion. Of that amount, $233 million will be required for debt service and the remaining $4.895 billion will be transferred back to the General Fund.

Local Government Assistance Tax Fund (LGATF)

The Local Government Assistance Corporation (LGAC) was created in 1990 to help the State eliminate the need for spring borrowing. One-fourth of the Sales and Use Tax collections are dedicated to LGATF to pay debt service on the bonds issued by LGAC. In 2002-03, LGATF is expected to receive $2.104 billion. Of this amount, $248 million is used for debt service, while $1.856 billion is transferred back to the General Fund. In 2003-04, the Committee Staff estimates that $2.251 billion will be dedicated to the LGTAF, with $255 million used for debt service and the remaining $1.995 billion transferred back to the General Fund.

Real Estate Transfer Tax (RETT)

Real estate transfer taxes are dedicated completely dedicated to the Environmental Protection Fund (EPF) and to pay debt service on the Clean Water/Clean Air (CW/CA) Bond Act. Each year $112 million is statutorily dedicated to the EPF, while the remainder is dedicated to CW/CA. Revenues not needed to pay debt service on the CW/CA Bond Act are transferred back to the General Fund.

The Committee estimates that $272 million in excess Real Estate Transfer Tax revenues will be transferred back to the General Fund in SFY 2002-03 and that $218 million will be transferred back to the General Fund in SFY 2003-04. Most of the decline can be explained by an expected decline in overall Real Estate Transfer Tax collections in the upcoming fiscal year.

Capital Projects

Dedicated Highway and Bridge Trust Funds (DHBTF)

The DHBTF is the largest component of the State's Transportation Capital Program. The fund receives dedicated revenues from the PBT, Motor Fuel Tax, Highway Use Tax, Motor Vehicle Fees, and the Auto Rental Tax. In SFY 2002-03, the fund is expected to receive $1.569 billion in dedicated tax revenues, an increase of 12.6 percent from the prior year. In SFY 2003-04, the fund is expected to receive $1.675 billion, an increase of 6.8 percent over SFY 2002-03. The Committee Staff estimate is $22 million higher than the Executive.

A major reason for the increased dedication of former General Fund Tax revenues is that the amount of debt incurred through this fund has required an ever increasing share of revenue to enable the State to maintain coverage ratio on the bonds issued.

Table 25

Table 25

Table 26

Table 26


EXECUTIVE TAX PROPOSALS
FOR STATE FISCAL YEAR 2003-04

TAX INCREASE PROPOSALS

The Executive has proposed various tax increases that total approximately $733 million in SFY 2003-04. These proposals include the following

    Reinstate Sales Tax on Clothing  $535 Million

    The elimination of the current year-round State and local Sales Tax exemption on clothing and footwear under $110.

    Restructure the Insurance Tax  $158 Million

    A restructuring of the current Insurance Tax, which consists of a combination of net income tax and a premiums based tax, with a tax based mainly on premiums. The tax rates would vary depending upon the policy type.

    Increase Limited Liability Company Filing Fee  $25 Million

    An increase in the filing fees for certain limited liability companies and limited liability partnerships. The minimum and maximum fees would be raised to $500 and $25,000 respectively. The new filing fee would be $100 per member. Under current law, the minimum and maximum fees are $325 and $10,000 respectively, and the per member filing fee is $50.

    Initiate Withholding for Nonresident Partnerships  $15 Million

    A required payment of estimated tax by partnerships, limited liability companies, and S corporations on behalf of nonresident individual partners, members, or shareholders.

    Decouple From Federal Expensing for Certain SUV's

    A decoupling from the special federal expensing option for certain vehicles over 6,000 pounds. This proposal will have no fiscal impact in SFY 2003-04, and will increase receipts by approximately $2 million annually when fully implemented.

FEE INCREASE PROPOSAL

The Executive has also proposed various fee increases that total approximately $734 million. Of this amount, approximately $269 million would remain in the General Fund, and the rest would be dedicated to other funds.

REVENUE REDUCTION PROPOSALS

The Executive has proposed various tax reduction proposals that will reduce receipts by approximately $238 million when fully implemented. These proposals would:

  • Provide taxpayers/homeowners with a State tax credit for rehabilitating an historic home, reducing Personal Income Tax receipts by $10 million annually starting in 2004-05.
  • Establish a fourth Certified Capital Company Program (CAPCO) in order to encourage investments in high technology companies through State-supported research centers. This proposal would reduce revenues by $12.5 million per year for 10 years beginning in SFY 2004-05.
  • Provide four one-week exemption periods for clothing and footwear items costing less than $500. This proposal would reduce revenues by approximately $160 million in SFY 2003-04, and $228 million annually when fully effective.

SCHOOL TAX RELIEF PROGRAM (STAR)

In order to realize savings in this fiscal year, the Executive is proposing to freeze School Year 2003-04 Basic STAR benefits at their School-Year 2002-03 levels. This proposal is expected to save the State $93 million in STAR reimbursements in SFY 2003-04.

OTHER PROPOSALS

The Executive proposes to change the VLT program by increasing the hours of operation, altering the distribution of receipts, and eliminating the current sunset provision.


EXECUTIVE REVENUE PROPOSALS
FOR STATE FISCAL YEAR 2003-04
(Dollar Amounts in Millions)


REVENUE SOURCE SFY 2003-04
REVENUE IMPACT

Tax Increase Proposals $733.0
Eliminate Exemption from Sales Tax on Clothing 535.0
Restructure the Insurance Tax 158.0
Increase Limited Liability Company Filing Fee 25.0
Initiate Withholding for Nonresident Partnership 15.0

Fee Increase Proposals $734.3

Department of Agriculture and Markets

New Biennial Fee on Unregistered/Unlicensed Retail
Stores, Food Warehouses, Feed Mills
0.3

New Annual Fee for Certificates of Free Sale 0.07

Increase Biennial Fees for Slaughterhouses, Refrigerated Warehouses, Food Salvage Facilities 0.02

Increase Biennial Fees for Nursery Dealers and Growers 0.3

Division of Alcoholic Beverage Control

Increase Penal Bonds 0.5

Division of Budget

Increase Cost Recovery Assessment's Cap 15.0

Office of the State Comptroller

Increase Criminal Fines Deposited Into the Justice Court Fund 6.3

Reduce Dormancy Period for Uncashed Checks 38.0

Consumer Protection Board

Increase the Do Not Call Registry Fee 0.0

Department of Correctional Services

Increase Charge for License Plates 21.7

Crime Victims Board

Increase Crime Victims Assistance Fee 0.8

Impose Crime Victims Assistance Fee on V&T Offenses 4.5

Increase Mandatory Surcharges on Penal Law 2.0

Increase Mandatory Surcharges on Penal Law Convictions by 25%-50% 2.0

Increase Mandatory Surcharges on V&T Convictions by 25%-50% 1.5

Division of Criminal Justice Services

Increase Mandatory Surcharges 11.9

Increase Attorney Registration Biennial Fee 2.0

Impose $35 Surcharge on Driver's License Reinstatement 9.0

HAZMAT License Criminal Background Check 2.0

DNA Databank and Sex Offender Registration Fees 0.8

Raise Fingerprinting Fee 9.9

Increase Data Processing Fee for Criminal History 9.5

Education Department

Cap STAR Savings for Non-Seniors at 2002-03 Levels 93.0

Department of Environmental Conservation

Impose Fee on New Tire Sales 22.5

Increase Oil and Gas Depth Fees 0.2

Increase Pollutant Discharge Fee for Industrial Facilities 1.0

Increase Pollutant Discharge Fee for Power Plants 0.5

Increase Fees for Mining Permits 0.8

Increase Current User Fees 0.5

Department of Health

Reestablish Assessment on Hospital Revenues 190.2

Reestablish assessment on Home Care Services 17.0

Increase Vital Records Fee 1.7

Increase EPIC Rates and Deductibles 1.5

Increase Covered Lives Assessment in HCRA 35.0

Increase HCRA Surcharges 20.0

Higher Education Services Corporation

Increase Fee for College Choice Tuition Savings Program 0.7

Insurance Department

Impose Assessment for Disaster Preparedness 2.1

Impose Assessment for Fraud Proof Prescription Program 10.0

Impose Assessment for Immunization Program 8.0

Impose Assessment for Newborn Screening 6.0

Impose Assessment for Center for Community Health Screening and Wellness Program 10.0

Judiciary

Increase Parking Surcharges 16.0

Impose an Appellate Court Motion Fee 0.6

Increase all Civil Courts Fees 18.2

Impose a $25 Surcharge on DWI or DWAI Convictions 0.5

Impose a $35 Motion Fee on Supreme/County Courts 4.2

Department of Labor

Impose Interest Assessment on Employer Unemployment Insurance Tax 22.0

Department of Law

Increase Fee for Broker/Dealer Statements 2.0

Increase Fee for Real Estate Syndication Offerings 1.0

Temporary State Commission On Lobbying

Double Annual Lobbyist Registration Fee 0.2

Division of Military and Naval Affairs

Increase Fee for Nuclear Generating Facility Operators 2.4

Department of Motor Vehicles

Increase Certificate of Vehicle Sale Fee 6.0

Increase Data Search Fees 5.5

Increase Original Title Application Fee 7.3

Increase Emissions Sticker Fee 8.0

Increase Photo ID Fee 10.0

Parks and Historic Preservation

Double Boat Registration Fees 1.3

Increase User Fees at State Facilities 2.5

Racing and Wagering

Assess Fee on Annual Racing Handle 16.0

Office of Real Property Services

Increase Fee on Real Property Transfers 9.6

Division of State Police

Raise Vehicle Insurance Fee 42.7

Department of Transportation

Increase Heavyweight "Killer Truck" Fine 1.5

Revise and Expand Heavyweight Truck Permit Program 0.8


EXECUTIVE REVENUE PROPOSALS
FOR STATE FISCAL YEAR 2003-04
(Dollar Amounts in Millions)

REVENUE SOURCE SFY 2003-04
REVENUE IMPACT
FULLY
IMPLEMENTED

Revenue Reduction Proposals $160.0 $238.0

Historic Homes Tax Credit 0.0 10.0
CAPCO IV 0.0 0.0
Temporary Clothing Exemption Periods 160.0 228.0


INCREMENTAL TAX CUTS

In SFY 2003-04, incremental tax reductions are expected to total approximately $518 million. Many previously enacted tax cuts are still in the process of being phased in, including the following:

Personal Income Tax

    Marriage Penalty

    In an effort to help reduce the income tax penalty facing married couples, legislation was enacted in 2000 that increased the standard deduction to $14,600 over a three-year period. For the 2003 Tax Year, the standard deduction will increase to $14,600. These provisions will reduce revenues by an additional $77 million in SFY 2003-04.

    College Tuition Deduction/Credit

    To help make college more affordable for working families, legislation enacted in 2000 provides taxpayers with a choice of an itemized deduction or a refundable credit for qualified tuition expenses. When fully implemented, the itemized deduction will be 100 percent of qualified tuition expenses up to $10,000. For qualified tuition expenses of up to $5,000, the credit will be the lesser of $200 or tuition paid. For qualified tuition expenses between $5,000 and $10,000, the credit will be equal to four percent of tuition paid. The credit and deduction are currently being phased in over a four-year period, and will be fully effective in Tax Year 2004. These provisions will reduce revenues by an additional $55 million in SFY 2003-04.

    Earned Income Tax Credit

    The Earned Income Tax Credit (EITC) benefits working families earning less than $34,692 annually. Taxpayers with no children may qualify for the credit, but must be between the ages of 24 and 65. Legislation enacted in 2000 increased the EITC from 25 percent to 30 percent of the federal credit over a two-year period beginning in 2002. In 2002, the State credit was increased to 27.5 percent. The credit will be further increased in 2003 to 30 percent of the federal credit. In SFY 2003-04, these provisions are expected to reduce revenues by an additional $59 million.

    Alternative Energy Fuel Cell Credit

    Beginning in Tax Year 2003, a new tax credit will be available to taxpayers that purchase and install a fuel cell to supply power to the taxpayer's home. The credit is equal to 20 percent of the cost of purchase and installation and is expected to reduce revenues by $1 million in SFY 2003-04.

Business Taxes

    Green Buildings Tax Credit

    The Green Buildings Tax Credit is designed to encourage the construction of environmentally-friendly buildings. The credit amount is allocated each year based on a statutory schedule, with a maximum allocation of $5 million worth of credits in 2005. This tax credit is expected to reduce revenues in SFY 2003-04 by an additional $6 million.

    Sales Allocation for Financial Services

    Given that New York is the financial capital of the world, the financial sector is vital to New York's economy. To help make this sector more competitive, the method by which financial services companies allocate receipts was changed from the location of the service performance to the location of the customer's domicile. This change encourages financial services to expand both their payroll and their property holdings in New York State. These provisions are expected to reduce revenues by an additional $30 million in SFY 2003-04.

    Small Business Rate Reduction

    Small business has been an engine for job growth in recent years. To provide assistance to these businesses, the Legislature reduced the Entire Net Income (ENI) rate of 7.5 percent that small corporations face under the Corporate Franchise Tax to 6.85 percent for businesses with ENI at or below $200,000. For businesses with ENI between $200,000 and $290,000, the rate would range from 6.85 percent to 7.5 percent. The rate reductions go into effect for tax years beginning on or after June 30, 2003 and are expected to reduce revenues by $5 million in SFY 2003-04.

    Utility Tax Reform

    In 2000, legislation was enacted to eliminate the Gross Receipts Tax on utilities. In lieu of the Gross Receipts Tax, utilities will now pay tax based on their net income. In addition, an Industrial or Manufacturing Business Tax Credit was enacted to provide immediate relief to these taxpayers and the Gas Import Tax was eliminated. These changes were phased-in over a four-year period, and will be fully effective in Tax Year 2005. In SFY 2003-04, these provisions are estimated to reduce revenues by an additional $114 million.

User Taxes

    Sales Tax on Energy

    Beginning September 1, 2000, a four-year phase-out of the Sales Tax on the transportation, transmission or distribution of gas or electricity became effective. The remaining one percent Sales Tax on energy transmission and distribution will be eliminated on September 1, 2003, and is expected to reduce revenues by an additional $2.8 million in SFY 2003-04.

    Beer Tax Rate Reduction

    A reduction in the Alcohol Beverage Tax imposed on beer is scheduled to take effect on September 1, 2003. At that time the tax rate will be reduced from 12.5 cents per gallon to 11 cents per gallon. The rate reduction is expected to reduce revenues by $2.3 million in SFY 2003-04.



ECONOMIC OUTLOOK

Real Gross Domestic Product (GDP)

The 2001 recession was relatively mild compared to the 1991 recession. In fact, GDP actually grew by 0.3 percent in 2001, even though it contained three consecutive quarterly declines, while GDP declined by 0.5 percent in 1991. Yet recovery continues to remain sluggish in the face of substantial domestic and international risks. Preliminary estimates for GDP for 2002 indicate growth of 2.4 percent, which is below historical norms for a post recession recovery. For 2003, the Committee Staff forecasts a gradual acceleration in the pace of economic recovery, leading to GDP growth of 2.5 percent. The relatively sluggish pace of GDP growth in 2003 is due to an expected deceleration in consumption spending, partially offset by an acceleration in business investment.

Figure 15 Figure 15

While the national economy emerged from a short-lived recession in the fourth quarter of 2001, it is still struggling to regain its long-run momentum. The nation appears to be in what is being characterized as a "jobless recovery". Despite healthy growth in consumer spending, geopolitical uncertainties have made businesses overly cautious in both their investment and hiring decisions. In calendar year 2002, national employment declined by an estimated 0.9 percent, led by lower levels of employment in the manufacturing, wholesale and securities industries. This recent decline in national employment is clearly reflected in the unemployment rate, which has slowly crept up to an estimated 5.8 percent in 2002 from 4.0 percent in 2000, its lowest point since 1969. The national unemployment rate is expected to reach 6.0 percent in 2003 before declining again in 2004.

Any growth in the overall economy appears to be coming from government spending and consumers who continue to demonstrate a remarkable resiliency in the face of economic uncertainty. Part of the strength of consumer spending can be attributed to record low interest rates, which have bolstered the real estate market and sparked a mortgage-refinancing boom. According to Freddie Mac, primary mortgage refinancing allowed homeowners to cash out $90 billion in equity in 2002. In addition, the strong housing market increased the equity value of homes by $500 billion in the last year alone. Over the last five years, the cumulative growth in the value of housing is estimated at 40 percent.7

The equity increase in residential real estate has served as a partial buffer to the dramatic decline in the stock market. The S&P 500 declined by 22.1 percent in 2002, marking the third straight year of declines, which hadn't happened since 1939-41.8 The decline in equity markets erased an estimated $3.5 trillion of household wealth in the first three quarters of 2002, a decline of 9.0 percent.9 Such steep declines have not only hurt institutional investors, but have had a severe impact on household net worth as individual investors have suffered severe losses in their 401(k) plans and other retirement accounts.

The sluggishness in the stock market has been attributed in large part to geopolitical uncertainties surrounding potential military action in Iraq, tensions on the Korean peninsula, disruption in the supply of Venezuelan oil and a global economic slowdown. The outcome of the Iraqi conflict could have important consequences for the U.S. economy, especially if the conflict drags on for longer than many economists are expecting. While the Committee Staff forecast does not include any adjustments for a war scenario, the uncertainty of the outcome of the current confrontation in Iraq poses a substantial risk to the forecast


7 "Freddie Mac Quarterly Survey Finds Refinanced Mortgages Average 1 1/8 Percentage Points Lower Than Original Mortgage," January 29, 2003, Press Release (www.freddiemac.com).
8 Standard & Poor 2002 Review: U.S. Indices (www.spglobal.com).
9 Federal Reserve Board, Monetary Report to the Congress, February 11, 2003.

U.S. Employment Forecast

After an estimated decline of 0.9 percent in 2002, the Committee Staff forecasts U.S. employment to grow by 0.5 percent in 2003, followed by 1.6 percent growth in 2004. The unemployment rate is expected to peak in the second quarter of 2003 at 6.1 percent, and gradually decline afterwards, resulting in a 6.0 percent average rate in 2003.

U.S. Wage Growth

Growth in U.S. wages is expected to accelerate from the 1.5 percent rate estimated in 2002, to 4.4 percent in 2003. Stronger growth in wages is attributable to a combination of strong productivity growth, which allows for greater non-inflationary wage increases, coupled with an expected rebound in corporate profitability.

Corporate Profits

The Committee Staff estimates that corporate profits declined by 1.5 percent in 2002, following a decline of 14.3 percent in 2001. On a tax accounting basis, corporate profits have been extremely weak in recent quarters. Much of this is due to an increase in capital depreciation allowances resulting from the Federal Job Creation and Worker Assistance Act of 2002. This Act, which became effective March 9, 2002, allows businesses an immediate 30 percent bonus depreciation write-off for properties placed in service after September 10, 2001 and before September 11, 2004. As a result, it is estimated that the amount written-off by corporations in 2001 doubled from the average of the previous twenty years of $28.7 billion to $56.5 billion. In 2002, it is expected that capital depreciation allowances will more than double again, to $129.2 billion. In 2003, a modest rebound in economic activity, coupled with a drop-off in capital depreciation allowances to $87.3 billion for the year, translates to anticipated growth in corporate profits of 10 percent.

New York State Economy

The New York economy was more severely impacted by the 2001 recession than was the national economy. Employment in New York is estimated to have declined by 1.8 percent in 2002, as compared to an estimated 0.9 percent decline at the national level. New York wages are estimated to have declined by 3.3 percent in 2002, the first overall decline since 1991. In contrast, wages at the national level are estimated to have increased by 1.5 percent.

The attacks of September 11, 2001 magnified the effects of the recession on the New York economy. New York lost 221,311 jobs in the fourth quarter of 2001, a decline of 2.6 percent over the same period in 2001. Wages in New York also fell by 2.6 percent in the fourth quarter of 2001, the first decline since 1994. Apart from the government sector, every sector of the New York economy experienced a decline in employment in 2001.

Table 27

Table 27

In the aftermath of September 11, small businesses with fewer than 100 employees accounted for nearly half of all job losses. Seven out of every ten jobs lost across the State in the fourth quarter of 2001 were lost in New York City. Approximately 60 percent of all jobs lost during this period were in Manhattan, and almost 20 percent of the total number of jobs lost in the State were below 14th Street in Manhattan.

New York State Employment

The Committee Staff estimates that New York State employment will continue to decline through the first quarter of 2003. Overall, there were an estimated 155,300 jobs lost in 2002, translating to a New York employment decline of 1.8 percent. This is the worst decline since 1991, when employment declined by 4.1 percent, resulting in approximately 328,000 job losses. State employment is expected to begin growing again in the second quarter of 2003, resulting in a modest increase of 0.4 percent for calendar year 2003, which is slightly below the national average.

While the government sector is the only one that grew in 2002, several sectors of employment are expected to show signs of life again in 2003, most prevalently in the services and construction sectors. Continued employment declines, however, are expected in the manufacturing, securities, and utilities and transportation industries. The FIRE sector is expected to register a modest 0.2 percent increase in employment in 2003, while the securities industry is expected to continue to lose jobs at a rate of 3.2 percent.

Figure 16 Figure 16

New York State Wages

The recession, the September 11 attacks, declining Wall Street profitability and the resulting decline in variable compensation, including bonuses and stock options, have all taken a dramatic toll on New York State wage growth. In the first quarter of 2002, New York wages declined by 8.1 percent. During that quarter, variable compensation declined by 28.7 percent, which included a decline in securities industry variable compensation of 25.9 percent. Overall, wages are estimated to have declined by 3.3 percent in 2002.

In 2003, New York wages are expected to recover slightly, growing by an estimated 2.1 percent, despite an expected 19.5 percent decline in variable compensation in the first quarter of 2003. This rate of growth is significantly lower than the 4.4 percent wage growth expected at the national level for 2003. Much of the difference in expected wage growth between New York State and the nation as a whole is the result of the severity that the September 11 terrorist attack had on New York City. The impact on Wall Street has dampened the outlook for variable compensation, resulting in expected continued weakness in New York State Personal Income Tax receipts.

Figure 17 Figure 17



RISKS TO THE FORECASTS

Downside Risk - The Jittery Economy

Each recession is unique, however, it is important to note that there is greater ambiguity in the current environment than in typical forecasting periods. There is still a great deal of uncertainty regarding what shape the recovery will take, with a possibility that the economy will stall and again enter negative territory.

The looming threat of war adds a great deal of uncertainty to the future state of the economy. The uncertainty created by the threat of war could cause businesses to hold back on investment, resulting in a prolonged delay in the investment spending cycle. Although consumer spending remains relatively strong, consumer confidence is at its lowest level since October 1993. Recent increases in fuel and energy prices have led to a higher cost of doing business and lower profitability. If fuel and energy prices remain high for a sustained period of time, the cost of doing business will increase, and profitability will continue to suffer.

In addition, another terrorist attack could cause major disruption to an already-damaged infrastructure, and possibly have a large adverse effect on tourism and the location decisions of both residents and businesses. Businesses on Wall Street and elsewhere may set up operations at remote locations so that vital computer systems and employees are available to continue business operations as a result of September 11th. If there is another terrorist attack, businesses may disperse operations and employees.

The uncertainty regarding variable compensation is a major risk to the State forecast. Variable compensation has been highly volatile. It is also highly focused in certain sectors, particularly Wall Street. How these industries adjust their compensation plans to the decline in the stock market and securities industry profits, in what form bonuses are paid, and when stock options will be exercised are all difficult to predict.

The behavior of Wall Street and the finance, insurance, and real estate (FIRE) sector in general is a risk to this forecast. New York is particularly sensitive to the performance of the FIRE sector and recent events have highlighted the level of uncertainty for this sector in particular. The securities industry is at a pause, as businesses are less optimistic than they were just a few months ago. If the amount of business activity, such as Initial Public Offerings (IPOs) and merger and acquisition activity remain at a low level for a prolonged period of time, the stock market will remain stagnant.

Even if evidence of a economic recovery becomes strong in the near future, stock market performance may be hindered by concerns regarding accounting practices. There has been a breakdown of trust in financial markets due to these scandals. Confidence in the market is expected to gradually return. However, the market may be fragile for quite some time and investor trust will be more easily shaken by negative news, particularly regarding corporate conduct.

Upside Potential

There is an upside to the current stock market situation. Investors may regain their lost confidence and propel stock values back towards their recent peaks. There is also an upside potential to the uncertainty regarding consumer spending. If consumer spending rebounds more rapidly, the economy could perform better than assumed in this forecast. A war with Iraq could have some positive economic impact due to fiscal stimulus through a large, unexpected spending increase.

In addition, stronger-than-expected corporate profits cold lead to faster stock market growth than predicted, producing in turn higher profits on Wall Street, higher bonus income, higher stock options, and higher capital gains. Since the forecast assumes little actual rebuilding underway in 2003, the positive stimulus from rebuilding Manhattan could be stronger than expected. A better-than-expected national economy would also improve conditions in the State economy.



SPECIAL POLICY REPORTS

Simplifying State and Local Sales Taxes

Since the enactment of the first General State Sales Tax in Mississippi in 1932, 45 States and the District of Columbia have enacted similar taxes.10 Sales Taxes are a fiscally attractive solution to raising revenues for State and Local governments because they keep pace with inflation and are easy, and cost effective to collect. The regressive nature of the Sales Tax, however, raises many equity concerns. To address these concerns many States exempt necessities such as medical supplies, unprepared foods, energy for home heating, and clothing from the Sales Tax. Over time, the list of Sales Tax exempt items has grown, leading to an ever more complex Sales Tax system. This complexity can cause vendor and consumer confusion about what is and is not subject to the tax, and increases the cost and difficulty of administering the tax.

The Streamlined Sales Tax Project (SSTP) is an ambitious, multi-state project that hopes to simplify the Sales and Use Tax system by adopting uniform rules and definitions for Sales Tax systems nationwide. States involved in the project hope that a simplified Sales Tax system will reduce the administrative burden of collecting and remitting Sales Taxes and halt the erosion of the Sales Tax base due to Internet and mail order purchases. Although the SSTP's progress was at first slow and often controversial, the project appears to be here to stay. The SSTP has made several significant advances including recruiting the participation of 34 States and the District of Columbia, but fears about reduced flexibility and loss of autonomy have prevented New York and other States from participating in the project.11 12

This special report briefly reviews New York's Sales Tax laws and provides an overview of the Streamlined Sales Tax Project.


10 States without a Sales and Use Tax are Alaska, Delaware, Montana, New Hampshire and Oregon.
11 Streamlined Sales Tax Project, "Status of State efforts on Streamlined Sales Tax Project". 6/24/02.
12 Northeastern States that have enacted simplification legislation include: Maine, Maryland, New Jersey, and Vermont. The Massachusetts Legislature passed simplification legislation as part of the 2003 budget bill, but it was line-item vetoed by former Governor Jane Swift.


Overview of the Sales and Use Tax

In 1934, New York City introduced the first municipal Sales Tax in the United States. Difficulty in balancing their budgets prompted upstate municipalities to request similar taxing authority from the New York State Legislature. In 1947, the State granted upstate municipalities the authority to adopt several non-Property Taxes including a retail Sales and Use Tax. New York's current State Sales and Use Tax was not established until 1965. Today, the New York State Sales Tax is the second largest revenue source for New York State after the Personal Income Tax, growing from $3.721 billion in State Fiscal Year (SFY) 1983-84 to $8.175 billion in SFY 2001-02.13


13 New York State Comptrollers monthly report to the Legislature.

Rates and Base

New York imposes a four percent Sales Tax on all retail sales, leases, rentals, barters and exchanges of goods, unless specifically exempted in the tax law. The three largest categories of exempt goods in New York are clothing and shoes that are under $110 per item, medicine and medical supplies, and unprepared food. The most recent exemption from the Sales Tax is for clothing and shoes under $110. This action reduces State Sales Tax collections by $621 million. The medicine and medical supplies exemption reduces State Sales Tax collections by $563 million and the food exemption by $1.349 billion.14

As a complement to the Sales Tax, New York also imposes a four percent Use Tax on the use, consumption, and storage of goods within New York. A Use Tax is due when no New York Sales Tax was paid because the tangible property was purchased out-of-state, but the property was used or consumed in New York. One aim of the Use Tax is to reduce the loss to New York retailers from consumers purchasing goods in neighboring States and having them shipped to New York so as to avoid paying the New York Sales Tax. Compared to Sales Tax collections, Use Tax collections are minimal due to difficulties in enforcing the tax.

Some New York services are also subject to a four percent Sales and Use Tax. Unlike the tax on tangible personal property, services are exempt from the tax unless they are explicitly enumerated in the Tax Law. Services that are subject to the State Sales and Use Tax include telephone charges, hotel and motel occupancy, and parking services.

In addition to the four percent State Sales and Use Tax, New York also imposes a 0.25 percent Sales Tax in localities that are within the Metropolitan Commuter Transportation District (MCTD).15 These Sales Tax receipts are dedicated to the operation of New York's Metropolitan Transportation network.


14 NYS Division of Budget and NYS Department of Taxation and Finance, "NYS Tax Expenditure Report 2003-04".
15 The MTCD is composed of New York City (Bronx, Kings, New York, Queens and Richmond counties), Dutchess County, Nassau County, Orange County, Putnam County, Rockland County, Suffolk County and Westchester County.

Disposition of Revenues

Receipts from the State Sales Tax are deposited into the State General Fund, with the exception that one quarter of the receipts are dedicated to the New York Local Government Assistance Corporation (LGAC). LGAC provides a means for the State to reduce its annual reliance on intra-year short-term borrowing for cash flow purposes. These monies go to paying the principal and interest on bonds and notes issued by the LGAC. Any revenues in excess of the debt service requirements are transferred back to the General Fund.

Reliance on the Sales and Use Tax to fund expenditure is not limited to the New York State Government. Counties and cities in New York are authorized to impose up to a three percent combined Local Sales Tax.16 In 2000, 20 percent of all Local revenues came from the Local Sales and Use Tax.17 To increase the Local Sales Tax above the three percent rate, localities require the authorization of the State Legislature. In 2002, more than half of all counties had received State authorization to impose a Local Sales Tax above the standard three percent rate.

Localities may choose to impose their Local Sales Tax on all of the same tangible personal property and services that are subject to the State Sales and Use Tax. Alternatively, a locality may elect to impose the tax on one or several of the following categories only: consumer utility, food and drink, hotel and motel occupancy, and certain admission charges. Revenues from the New York Local Sales and Use Tax totaled $8.781 billion in SFY 2001-02.18


16 For example, if a City within a County has a 1.5 percent local Sales Tax, the County may impose a maximum of 1.5 percent local Sales Tax in that City.
17 Comptroller's Special Report on Municipal Affairs for Local Fiscal Year Ended In 2000.
18 New York Department of Taxation and Finance Sales Tax quarterly collections.


Administration

Although consumers are primarily liable for the Sales Tax, responsibility for collecting and remitting the Sales Tax rests with vendors. If a vendor fails to collect the Sales Tax, the New York State Department of Taxation and Finance may pursue either the vendor or consumer to collect the monies owed.19 In the case of the Use Tax, out-of-state vendors are often not required to collect or remit Use Tax on purchasers made by New York residents or businesses. The tax is still due and owing; however, responsibility for remitting the tax rests with the purchaser. Up to now, New York has made no significant effort to collect Use Tax from non-business consumers. A national study by the General Accounting Office (GAO) found that Use Tax compliance by individual purchasers was extremely low - on the order of zero to five percent, with the exception of motor vehicles.20 Motor vehicles have a user compliance rate of close to 100 percent because taxes must be paid before vehicle registration.21


19 To compensate vendors for some of the cost of collecting and remitting the New York State Sales Tax, vendors are allowed a credit equal to 3.5 percent of State Sales Tax collections. The amount of the credit cannot exceed $150 per quarter. Vendors do not receive any credit for collecting local Sales Taxes.
20 General Accounting Office (GAO). "Sales Taxes Electronic Commerce Growth Presents Challenges; Revenue Losses are Uncertain," June 2000.
21 The GAO study does not provide a definitive estimate for Use Tax compliance on the part of business purchases. It estimates compliance could be as low as 50 percent.


Why simplify the Sales and Use Tax system?

Increased personal mobility and advances in new technologies has generated concern by some State and Local elected officials about loss of Sales and Use Tax revenues. Of particular concern are retail sales through mail order and Internet (remote sales) companies, and retail sales in neighboring States that have lower or no Sales Taxes. Some businesses, especially those who operate in more than one State, are also concerned about the complexity of the current Sales Tax system. With over 7,600 State and Local taxing jurisdictions nationwide, businesses must comply with a multitude of tax rules, definitions, and rates.22 For example, while some States impose a Sales Tax on unprepared foods, others exempt it. Furthermore, while some States treat candy as a food and therefore exempt it, others like New York subject it to the tax. The cost of complying with so many different Sales Tax systems is said to be burdensome to businesses, and to create confusion among businesses and consumers.

New York State has accepted certain levels of complexity in their Sales Tax system in order to address Local fiscal concerns. For example, when it reduced its State Sales Tax on residential energy consumption to zero percent and eliminated the State Sales Tax on clothing and shoes that are under $110, it provided localities with the authority to continue to impose Local Sales Tax on these items. Consequently, counties and cities may impose a combined Local Sales Tax on residential energy consumption of up to three percent, certain school districts of up to three percent and New York City of up to four percent. Localities tax treatment of clothing and shoes under $110 also differs between taxing districts. As of March 2003, fourteen counties and New York City provide an exemption from the Local Sales Tax for clothing and shoes. An additional two counties, Madison and Oswego, provide an exemption from the county component of the Local Sales Tax but not the city component.23


22 National Governors Association. "States forge ahead to streamline Sales Tax system," June 6, 2002.
23 Madison County imposes a 3 percent local Sales Tax outside of the city of Oneida. Since Oneida imposes its own Sales Tax of 1.5 percent, the county tax rate within Oneida is 1.5 percent. Oswego County imposes a 3 percent local Sales Tax outside the cities of Fulton and Oswego. Since these cities impose their own Sales Tax of 3 percent, the county Sales Tax does not apply in these cities.

The Problem of Remote Sales

The explosion of interstate sales through mail order companies and more recently the Internet, has raised concerns about the erosion of the Sales Tax base. States are constitutionally banned from imposing a Sales Tax collection duty on vendors who do not have a substantial physical presence (nexus) in that State. This ban stems from the 1967 U.S. Supreme Court ruling in National Bellas Hess v. Illinois Department of Revenue. In Bellas Hess, the court ruled that a State could not impose the duty to collect Sales Tax on vendors when the vendor's only contact with the State is through common carrier or the United States mail. Remote sellers generally meet the nexus standard if they have an office or other place of business, property, or agent in the taxing State, however, advances in communication and transportation technology have made this physical nexus more problematic. From centralized distribution centers companies are now able to reach millions of customers via the Internet or telephone and to deliver the merchandise to the customer within days of the sale.

The U.S. Supreme Court reaffirmed this physical presence requirement in the 1992 ruling Quill Corporation v. North Dakota. In Quill, the court argued requiring vendors to collect the Sales Tax when there is no physical presence imposes an undue burden on interstate commerce thus violates the Commerce Clause. However, the court held that since Congress has the ultimate power for regulating interstate commerce, Congress could give States the authority to require remote sellers to collect Sales and Use Tax.24

Although the Quill decision removes the capacity of States and localities from requiring vendors to collect Sales Tax when the vendor has no physical presence in that taxing jurisdiction, the tax is still due and owing on such purchases. The responsibility for remitting the tax, however, now rests with the individual purchaser not the vendor. Besides placing many "Main Street vendors" at a competitive disadvantage, this physical presence requirement also results in the loss of much needed Sales Tax revenue for State and Local governments.25

Reasons for the vast majority of interstate sales going untaxed is many consumers are not aware of their tax obligations and tax agencies are not aware of the interstate purchase and the tax owed. Even if a tax agency is aware of the purchase, the administrative cost of pursuing hundreds of thousands of individual purchases of small amounts is burdensome and seldom cost effective.


24 The Mobile Telecommunication Sourcing Act is a recent example of the Federal Government using Statute to require States to simplify their taxation system.
25 Harley T. Duncan. "Cooperative Interstate Efforts to Enforce State Sales and Use Taxes". Paper presented at the Sales and Use Tax Seminar, Nashville, Tennessee, November 1988.


Revenue Loss

A number of studies have attempted to estimate the loss in Sales and Use Tax revenues to State and Local governments from remote sales. However, most scholars agree that estimates from these studies are no more than educated guesses due to lack of reliable data and uncertainty about assumptions.26 Researchers at the University of Tennessee estimated that in 2001 New York lost $1.053 billion in State and Local Sales Tax revenues from Internet sales.27 The researchers expect this loss will rise to $3.57 billion by 2006. A national study by the General Accounting Office (GAO) generated significantly smaller numbers for revenue loss. For 2000, the authors reported the loss in State and Local Sales and Use Tax revenues from Internet sales for New York ranged from $22 million to $357 million. For all remote sales, the authors estimated the loss ranged from $196 million to $889 million. Because of the large differences in these estimates, reliable conclusions are difficult to establish.


26 Richard Hunt. "Florida joins the Streamlined Sales Tax Project: An important first step in modernizing Florida's tax system." Florida TaxWatch, August 2001.
27 Donald Bruce and Willam Fox. "State and Local Sales Tax Revenue Losses from E-Commerce: Update Estimates." Center for Business and Economic Research, University of Tennessee, September 2001.


The Streamlined Sales Tax Project - An effort to simplify the Sales Tax system

Many State and Local government officials believe that if States simplify and standardize their Sales Tax systems, Congress might consider granting States the power to require remote sellers to collect Sales Tax.

In an effort to deal with these issues, the National Conference of State Legislatures (NCSL) and the National Governor's Association (NGA) called for a multi-state project to develop a "Streamlined Sales and Use Tax System." In January 2000, the NCSL's Task Force approved model legislation for the Sales and Use Tax Administration Act. To participate in the Streamlined Sales Tax Project (SSTP) and have voting rights, States must either pass the model legislation indicating a willingness to enter into multi-state discussions on the SSTP or obtain Executive Orders of their Governor. As of June 2002, 34 States and the District of Columbia have enacted simplification legislation (participating States), two States have introduced simplification legislation which is pending consideration, and six States are formal observers.28 New York is not a participating State or a formal observer State.

The primary purpose of the SSTP is to reduce the Sales Tax collection burden on all vendors (especially multi-State vendors) by developing uniform definitions within tax bases, by developing simplified audit and administration procedures and by adopting new technologies. Uniform definitions within tax bases does not limit the ability of a State from taxing some categories of goods, while exempting others. An unstated goal, but one that underlies the efforts of the SSTP, is to increase the collection of Sales Tax by remote vendors. The SSTP hopes that this simplified Sales Tax system will encourage vendors that have no nexus with a State to voluntarily collect Sales Tax for that State. Failing voluntary compliance, States involved in the SSTP hope to win the right, either in Congress, or in the courts, to force remote vendors to collect Sales Tax.

On November 12, 2002, States participating in the SSTP approved the Streamlined Sales and Use Tax Agreement. Once a State amends all of its tax laws and regulations to conform to the Agreement, it qualifies to become a SSTP member State. The Agreement becomes binding when ten or more States comprising of at least twenty percent of the total population of all States imposing a State Sales Tax have met the Agreement's requirements. Once this occurs, authority to administer the Agreement is transferred to a governing board comprised of representatives of each member State.

The process of developing these standardized rules has proven to be extremely complex and controversial. For example, when developing a definition for prepared foods, the SSTP had to wrestle with the question of whether to differentiate between a casserole that is cooked by a deli and sold cold with the same casserole sold hot. Another controversial issue is whether to create a subcategory under food for candy. Industry groups like the National Confectioners Association opposed separating candy from food, claiming that it runs directly counter to the goal of simplifying the burden of tax compliance. Many States, however, support using separate categories because it provides them with the option of taxing non-nutritional foods such as candy while continuing to exempt nutritional foods.


28 Streamlined Sales Tax Project. "Status of State efforts on Streamlined Sales Tax Project", 6/24/02. Streamlined Sales Tax Project Steering Committee. "Executive Summary", August 2001.


The Streamlined Sales and Use Tax Project Agreement

The SSTP Agreement focuses on simplifying and modernizing the Sales and Use Tax system by establishing a uniform set of set of rules, definitions and procedures that States must comply with to qualify to become a SSTP member State. In developing the Agreement, project participants attempted to balance the needs of State and Local governments, for flexibility and choice, with the ultimate goal of the project, to reduce the administrative burden on retailers of collecting the Sales Tax. For example, the Agreement provides separate definitions for candy and food so that States may elect to tax candy but not food. It also allows Local jurisdictions to impose their own Sales Taxes, and provides no limits on what those rates may be.

The SSTP Agreement allows States to offer Sales Tax holidays, and permits thresholds to be used for the Sales Tax exempt items during that period. It tries to limit the burden on retailers from Sales Tax holidays by requiring that the Sales Tax exemption apply to both State and Local Sales Taxes. Finally, the Agreement requires States to provide and maintain databases containing Local jurisdiction boundaries, tax rates and tax base information to ensure information is readily accessible to retailers, especially multi-state retailers.

The following is a brief description of some of the requirements included in the Agreement.29


29 Streamlined Sales and Use Tax Agreement. Adopted November 12, 2002, pending final review.


Definitions

The Agreement provides product definitions for clothing, health care (medicine and medical supplies), computers, and food. In addition, it provides a list of items that are considered part of these definitions. For example, while belts are considered to be clothing, belt buckles that are sold separately are not. Definitions for candy, dietary supplements and soft drinks are also provided, thus allowing member States to tax these products differently from food and food ingredients.

Exemptions

The Agreement does not tell States what they can or cannot tax, in fact, it goes out of its way to say that the Agreement "shall not be construed as intending to influence a member State to impose a tax or provide an exemption from the tax for any item or service". However, it does say if a State elects to tax a product, it must use the Agreements definition for that product, and it must tax all items included within the definition of that product. If the Agreement does not have a definition for a product, then a member State may enact a product based exemption on this item without restriction.

Seller Registration

The Agreement requires member States to participate in an online Sales and Use Tax registration system. A seller registering under the Agreement is registered in each of the SSTP member States.

Notice for State Tax Changes

The Agreement requires that member States provide sellers with as much advance notice as is practicable of changes in the Sales Tax rate or base. In addition, it limits the effective date of a rate change to the first day of a calendar quarter.

Database requirements

The Agreement requires that member States provide and maintain an electronic database of Local jurisdiction boundaries and their Sales Tax rate. In addition, the Agreement requires that member States provide and maintain a taxability matrix - an electronic database containing taxable products and services. A member State shall relieve sellers from liability to the member State and its Local jurisdictions for having charged and collected incorrect amounts of Sales and Use Tax resulting from the seller relying on erroneous data provided by the member State in the taxability matrix.

State and Local Tax Rates

The Agreement requires that member States have a single Sales and Use Tax rate on all products and services after December 31, 2005. In addition, member States that allow Local jurisdictions to levy a Sales Tax shall not have more than one Sales Tax rate per Local jurisdiction.

Sourcing Rules

The Agreement provides sourcing rules for determining which State or Local Sales Tax applies to a purchase. Sourcing rules are provided for sales, leases or rentals by brick and mortar stores, products or services that will be concurrently available for use in more than one jurisdiction, products delivered by mail, and sale of telecommunication products and services. The Agreement bases its sourcing rules for telecommunication products and services on rules established by the Mobile Telecommunications Sourcing Act.

Sales Tax Holidays

The SSTP Agreement permits member States to provide temporary exemption periods (Sales Tax holidays), provided the exempted items are specifically defined in the Agreement and the exemptions are uniformly applied to State and Local Sales and Use Taxes. In other words, during these Sales Tax holiday periods, localities cannot elect to continue to impose a Local Sales Tax on items that are exempt from the State Sales Tax. Sales Tax holidays that utilize price thresholds are also permitted by the Agreement. The Agreement requires that a member States provide notice of the exemption period at least sixty days' prior to the first day of the calendar quarter in which the exemption period will begin.

Rules in the SSTP Agreement which conflict with existing New York laws

Although, many of the rules that form part of the SSTP Agreement are already part of New York's Sales Tax laws, rules governing thresholds and tax bases conflict with existing New York laws.

Caps and Thresholds

A threshold is generally defined as "an exclusion from taxation or the application of a different tax rate for amounts above or below the set threshold level." Historically, thresholds have been used to distinguish between necessities and luxury items, and to limit the revenue loss from an exemption. The primary downside of thresholds is they add to the complexity of the Sales Tax system. To achieve its goal of simplifying the Sales Tax system, the SSTP proposes to prohibit "caps or thresholds on the application of state and local sales or use tax rates or exemptions that are based on the value of the transaction or item after December 31, 2005."

A major threshold was introduced into the New York Sales Tax system when the Legislature enacted a law to exempt clothing and shoes that are under $110 from the Sales Tax, effective 2000. This legislation was designed to reduce the regressivity of the Sales Tax and minimize losses to New York vendors from shoppers flocking to neighboring States that provide Sales Tax exemptions on clothing. A secondary rationale for the threshold relates to the differentiation between a necessity and a luxury item.

For New York to comply with the SSTP's threshold requirement, it would have to either exempt all clothing and shoes from the Sales Tax regardless of the price of the item, or eliminate the exemption on clothing and shoes. While the former would result in some losses in Sales Tax revenues for the State government and Local governments, the latter would reduce the competitiveness of New York retailers when compared to retailers in neighboring States and produce a more regressive tax.

State and Local Tax Bases

The SSTP proposes to simplify the Sales Tax system by requiring that "if a member state has local jurisdictions that levy a sales or use tax, all local jurisdictions in the state shall have a common tax base. After December 31, 2005, the tax base for local jurisdictions shall be identical to the state tax base unless otherwise prohibited by federal law." 30

Local Sales Tax bases in New York differ between localities because localities are permitted to choose between imposing their Sales Tax on the same goods and services (tax base) that are subject to the State Sales Tax or imposing it only on certain categories of goods. For localities that elect the "General" Sales Tax category, New York permits them to opt out of the Local component of the Sales Tax exemption on clothing and shoes, and residential energy. The opt-out provision was added by the Legislature to counter Local government concerns about loss in Sales Tax revenues. While this flexibility is desirable because it provides Local governments with greater control over tax revenues, it has the negative effect of complicating New York's Sales Tax system.

Compliance with the SSTP Agreement would require New York localities to relinquish their right to choose between the General Sales Tax category and one of the prescribed categories. Furthermore, localities will no longer be able to opt out of the Sales Tax exemption on clothing and shoe sales.


30 Streamlined Sales and Use Tax Agreement, Sections 302 and 323, November 12, 2002.


Signs of Progress

The SSTP Agreement requires that a member State "provide amnesty for uncollected or unpaid sales or use tax to a seller who registers to collect and remit sales or use tax on sales made to purchases in the registered State, provided that the seller was not registered in that State in the twelve-month period preceding the effective date of the State's participation in the Agreement."

Even though the SSTP Agreement is still pending final approval and no State has yet to amend all of its laws to conform to the Agreement, the SSTP is beginning to achieve one of its primary goals - encouraging online retailers to voluntarily collect Sales and Use Tax. Many large retailers, such as Wal-Mart and Target, who have physical stores in most States, have structured their web operations as separate subsidiaries to avoid tax liability. To achieve this Sales Tax free status, an Internet retailer maintains a physical presence (nexus), such as warehouse or a call center, in a small number of States. The Internet retailer can then sell merchandise to customers all over the country, but must only collect Sales Tax from purchases made in States with which they have a nexus. To maintain this Sales Tax-exempt status Internet retailers must bar their customers from returning, picking up or exchanging online purchases at physical stores, because doing so could constitute a nexus between the stores and the Web site.

Effective February 3, 2003, several large online companies have agreed to collect Sales and Use Tax for purchases by consumers in that State. The National Conference of State Legislatures reported Wal-Mart, Target, and Toys "R" Us are three of ten multi-state online retailers who have agreed to voluntarily collect Sales and Use Tax on Internet sales. In return, participating States agreed to absolve the Internet retailer from any liability for taxes not previously collected on online sales. Although these agreements were negotiated between individual retailers and individual States, and the States are not necessarily participants in the SSTP, it is believed that this move by Internet retailers was born from the "Amnesty" requirement in the SSTP Agreement.

Conclusion

From its beginnings in 1932, the Sales and Use Tax has evolved into one of the most important revenue sources for State and Local governments. However, the proliferation of sales through mail order and Internet companies, and the inability of the States to impose a Sales Tax collection duty on remote sellers, has raised concerns about the erosion of the Sales and Use Tax base.

The Streamlined Sales Tax Project (SSTP) is a multi-state effort to simplify the Sales Tax system. Potential benefits from the project include reduced consumer and vendor confusion, lower administration and auditing costs, adoption of new and uniform technologies nationwide, and if Congress acts to amend the nexus laws, a halt to the erosion of the Sales Tax base from remote sales. The downside of a streamlined Sales Tax system is reduced flexibility and loss of autonomy for State and local governments. Flexibility at the State level enables States to tailor State policy objectives to local conditions.

Focus on the Corporate Franchise Tax

Overview of the Corporate Franchise Tax

The State of New York imposes a tax on New York businesses for the privilege of operating in a corporate form in New York State. Non-New York based businesses may be taxed only if they trigger "nexus". A company is assumed to have nexus if it has a physical presence in the State, which occurs primarily when a company employs capital, owns or leases property, form, has business operations (including joint ventures and partnerships), or maintains an office in New York State.

Like most states, New York's Corporate Franchise Tax is based on Federal Entire Net Income (ENI), with adjustments for items such as interest on Federal, state or municipal bonds, income and similar taxes paid to U.S. possessions and foreign countries, and income related to subsidiaries. One very important adjustment is for Net Operating Losses (NOLs) allocated to New York State. NOLs are also available at the Federal level; however, only NOLs allocated to New York are subtracted for State tax purposes. The remaining amount is subsequently split into business income, and investment income.

It would be difficult to determine the states within which profits were generated in the context of a business entity with multi-state operations. Therefore, business income is apportioned between the various states using an allocation formula. The State of New York currently uses a three-factor formula based on property, payroll and double-weighted sales.

Tax liability is then calculated based on the highest of four alternative methods: New York ENI (described above), an alternative minimum tax, a capital investment base, and a fixed dollar minimum tax, which is based on gross payroll. The highest of the four alternative bases is added to a tax imposed on New York allocated subsidiary capital, which becomes the amount of tax due. This amount is then further reduced by any applicable tax credits.

Figure 18 Figure 18

Figure 18 shows that during the late 1990s, despite rapid increases in productivity and profits, Corporate Franchise Tax receipts exhibited little to no growth. In SFY 2001-02 Corporate Franchise Tax collections totaled $1.515 billion, which represented 4.1 percent of General Fund Tax collections, excluding reserve transactions and transfers. (See Figure 19.) However, Corporate Franchise Tax collections totaled more than $2 billion as recently as SFY 1996-97, when they accounted for 6.8 percent of tax revenues on a General Fund basis. Estimates for SFY 2002-03 and SFY 2003-04 are expected to account for a similar percentage of General Fund tax collections as they did in SFY 2001-02.

State Tax Cuts

Tax cuts enacted over the past several years have served to reduce Corporate Franchise Tax collections in SFY 2003-04 by an estimated total of over $1 billion.

The statutory rate on the ENI base has been lowered from 9.0 percent to the current rate of 7.5 percent over the past several years. The annual impact resulting from this reduction is estimated to be approximately $260 million. In addition to rate reductions, various tax credits have been applied to lower liability. The Investment Tax credit is currently the largest single tax credit. In SFY 1999, the most recent data available, taxpayers earned over $175 million in ITC. Changes to allocation rules have also led to reduced collections. The allocation rules regarding certain financial services were recently changed, the result of which is a $30 million annual reduction in Corporate Franchise Tax collections.

Finally, the Empire Zones Program provides a virtually tax free environment for businesses that create jobs in New York State. Two major tax credits, The Empire Zone Real Property Tax Credit and the Empire Zone Tax Reduction Credit, can significantly lower the tax liability of a certified business in the Empire Zones Program that increases its employment within zone boundaries. These job promoting tax credits are expected to result in tax savings of approximately $150 million in SFY 2003-04.


Corporate Tax Erosion

In contrast to the State Corporate Franchise Tax revenue trends, corporate tax revenues at the Federal level grew by an average of 6.0 percent a year, during the period 1995 to 2000. Over the same time period, all states imposing a corporate tax experienced an average increase in revenues collections of only 3.0 percent.31 Although New York's Corporate Franchise Tax is coupled to the federal definition of income, growth in New York State Corporate Franchise Tax collections was approximately 3.0 percent, half the federal growth average.32 Therefore, the adjustments used to derive New York ENI, as mentioned above, reduce the amount of income reported when compared to Federal ENI. In addition, this slower growth in State Corporate Tax collections can be at least partially attributed to states competing to attract business through tax incentives as well as multi-state tax planning on the part of businesses.

Figure 19 Figure 19

When adjusted for inflation, Corporate Franchise Tax collections were $1.698 billion in SFY 1976-77, but only $805 million in SFY 2001-02. This represents a decline of 52.6 percent over that time period. (See Figure 19.)

The erosion of Corporate Franchise Tax revenues in New York State is consistent with that experienced by other states. The effective corporate tax rate for states that impose a corporate tax has fallen from a high of 8.1 percent in 1986 to 3.8 percent in 1998.33 (See Figure 20.) The effective rate measures the amount of tax actually paid on ENI, which due to NOLs and credits may be lower than the rate on ENI imposed by law. In New York, the effective rate of tax for 1998 was 3.5 percent.34

In a recent article examining declining effective corporate tax rates across the nation, it was noted that intended tax cuts account for only about 25 percent of the decline in the effective rate. A large amount of the remaining 75 percent of the decline was attributable to taxpayer behavior including the employment of aggressive tax strategies.35

Figure 20 Figure 20

A report by the Center on Budget and Policy Priorities offers several insights as to what some of these filing practices may be.36 The following describes in brief detail the report's findings:


31 St. George, James and McLynch, Jeff, 'Gone With the Wind: Massachusetts' Vanishing Corporate Income Tax", State Tax Notes, February, 10, 2003.
32 Reflects collections on a fiscal year basis over a similar time period.
33 Maguire, Steve, "Average Effective Corporate Tax Rates", Congressional Research Service, 2000.
34 Source: 1998 New York State Corporate Tax Statistical Report, Table 13 (as calculated by dividing Tax Due by Entire Net Income).
35 CCH State Tax Advisory Board, "Board Discusses States' Fiscal Condition", November, 2002.
36 Mazerov, Michael, Closing Three Common Corporate Tax Loopholes Could Raise Additional Revenue for Many States, Center on Budget and Policy Priorities, April, 2002.


Passive Investment Companies

Passive Investment Companies (PICs) are companies that derive income only from passive investment activities such as collecting royalties, or interest on loans or bonds. A large number of these companies are set-up in Delaware or Nevada, where income generated from these activities is not taxed.

For example, when a New York company sets up a PIC subsidiary, it often transfers intellectual or intangible property to it. The PIC then charges a royalty for the use of the property, such as a trademark for example, which siphons income out of New York to Delaware where it is not taxable. Furthermore, the PIC has no substantial business expenses such as employees or rents, and so they often loan these royalties back to the New York parent company, which is then allowed to deduct the interest as a business expense.

"Nowhere Income"

Another example is "nowhere income." This occurs when companies derive income from states that they do not create nexus with, which, simply put, is a substantive connection with a state that gives it a right to tax business operations conducted within its borders. An increasingly frequent example of nowhere income comes from electronic commerce, which in many cases does not trigger nexus in and of itself. Public Law 86-272 limit's a state's power to impose taxes on income generated from interstate business that does not have a sufficient presence in the state. Thus, a New York corporation that does not have physical presence in Massachusetts can sell goods to Massachusetts residents without being taxed by Massachusetts for the profits generated. However, the sales do not show up in the New York apportionment formula as sales, so the income effectively goes untaxed.

In response to this, 24 states have enacted a "throw-back" rule to handle instances of nowhere income. This rule specifies that any income not claimed by another state is "thrown-back" to the state of domicile. New York State currently does not have a throw-back provision.

In addition to examples from the report, other examples include the following:

Transfer Pricing

Another way to shift income out of state to a jurisdiction where it will be taxed less (or not at all) is by using inter-company transactions to shift profits. More specifically, this is accomplished by selling components made in a lower tax state to a related company (i.e. a parent or subsidiary company) in a higher tax state at a price exceeding prevailing fair market prices. This decreases the overall tax burden.

Business Structure Decisions

While much of the discussion related to the corporate franchise tax deals with the C-corporation, other business structures exist and often can conduct the same types of activities being conducted by C-corporations. The common theme of these alternative organizational structures is that, in general, they are "pass-through entities", meaning that income generated is not taxed at the entity level but is instead "passed-through" to the share-holders, members, or partners to be taxed at the individual level. A few examples of pass-through entities are outlined below.

The early 1990s saw the rapid creation, in many states, of Limited Liability Companies (LLCs), which combine the liability protection of the general corporate form with the tax treatment of a partnership. The major advantage of the LLC over a general corporation is that income is only taxed at the individual level, not at both the individual level and the corporate level. New York State recognized LLCs for State Tax purposes beginning in 1994, which are taxed under the Personal Income Tax37.

A few variations on the LLC exist, including Limited Liability Partnerships (LLPs). They offer the option of tax treatment as either a partnership or a C-corporation, as well as the limited liability treatment of members with respect to the actions of others.

S-Corporations, which are incorporated businesses with no more than 75 shareholders, offer a different mix of advantages and disadvantages. While S-Corporation income is taxed at the individual level under the Personal Income Tax, there is also a New York State entity level tax on income that is not taxed at the individual level under the Corporate Franchise Tax. S-Corporations currently are estimated to account for more than half of all corporations38.

A final example of a pass-through entity is the Real Estate Investment Trust (REIT). REITs were created as a way to allow investors to share the risk and capital costs of large-scale real estate investments, in much the same way that mutual funds accomplish these ends in equity and debt investment. REITs are required to distribute at least 90 percent of their income to shareholders in the form of dividends, meaning the income generated is again taxed under the Personal Income Tax, and not the Corporate Franchise Tax on the basis of business structure.

The shift in income from C corporations to these "pass through" business entities has resulted in a growing portion of corporate income being reported on individual income tax returns. Federal taxes paid at the individual level on passthrough business income have grown from $6.2 billion in 1980 to $41.8 billion in 1999. During the period from 1980 to 2002, Federal passthrough business income grew at an annual average rate of 9.1 percent, compared with Federal C-corporation net income, which grew at an annual average rate of 5.9 percent. 39


37 Taylor, Jack H., Passthrough Organizations Not Taxed As Corporations, Congressional Research Service Report, August, 2002.
38 Ibid.
39 Fox, William F. and Luna, LeAnn, State Corporate Tax Revenue Trends: Causes and Possible Solutions, National Tax Journal, September, 2002.



TAX ANALYSIS

Alcoholic Beverage Fees
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual 34 9.7% 34 9.7%
2002-2003 Estimate 41 19.9% 40 17.0%
2003-2004 Forecast 43 4.9% 42 5.0%

Distillers, brewers, retailers, wholesalers, and others who sell alcoholic beverages in New York State are required by Articles 4, 4-A, 5, and 6 of the Alcoholic Beverage Control Law to be licensed by the State Liquor Authority. Approximately, 2,500 retail outlets and 26,500 bars and restaurants are licensed.

General Fund

The Committee Staff estimates receipts will total $41 million in SFY 2002-03, a 19.9 percent increase over SFY 2001-02. This estimate is $1 million higher than that of the Executive's Enacted Budget estimate. Receipts are particularly strong in SFY 2002-03 due to the passage of legislation that increased Alcoholic Beverage Control license and permit fees for various proprietors. This change is expected to generate $8 million in additional revenue for SFY 2002-03.

The Committee Staff forecasts receipts to total $43 million in SFY 2003-04, representing a 4.9 percent increase over SFY 2002-03. This increase is attributable to the full year impact of the 2002 increase in license and permit fees.

Recent Legislative History

Legislation enacted in 2002 increased various Alcoholic Beverage Control license and permit fees by approximately 10 percent for grocery stores and approximately 28 percent for all other fees except for cider produces, fraternal organizations and one day charitable permits, which were held harmless. This legislation, which became effective August 1, 2002, is expected to increase revenue by $8 million in SFY 2002-03 and $10.3 million in SFY 2003-04.

In 1997, the credit period offered to beer and wine retailers was decreased from 30 days to 15 days. Also, the payment period for license renewal relating to liquor licenses for on-premise consumption, special on-premise consumption, and bottle club liquor licenses was changed from a mandatory 3-year license to an optional annual, biennial, or triennial license, effective December 1, 1998. These actions lowered revenues by $14 million in SFY 1999-00, and $4 million in SFY 2000-01.


Alcoholic Beverage Tax
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual 178 -0.6% 178 -0.6%
2002-2003 Estimate 184 3.3% 182 2.1%
2003-2004 Forecast 182 -1.1% 180 -1.1%

New York State, through Article 18 of the Tax Law, currently imposes a tax on various Alcoholic Beverages, including beer, wine, and other spirits. The tax rate varies depending on the alcohol content. All of the receipts are deposited in the General Fund.

General Fund

The Committee Staff estimate for SFY 2002-03 is $184 million, which represents a 3.3 percent increase over SFY 2001-02. This estimate is $2 million higher than that of the Executive.

The Committee Staff forecast for SFY 2003-04 is $182 million, a decrease of 1.1 percent over SFY 2002-03. This decrease can be attributed to an expected slight decrease in liquor consumption, offset by minor growth in the consumption of beer and wine.

Recent Legislative History

Legislation enacted in 2002 extended certain alcoholic beverage tax enforcement provisions. Specifically, it removed the expiration date of the enforcement tools that were set to expire on October 31, 2002, thus making these provisions permanent. In addition, it authorizes any peace officer acting pursuant to his/her duties, or police officer or any duly authorized representatives of the State Liquor Authority to inspect premises licensed under various sections of the Alcoholic Beverage Control Law. This legislation is expected to protect $1 million in receipts for SFY 2002-03, and approximately $3 million each year thereafter.

Legislation enacted in 2000 accelerated the effective date of the expansion of the Small Brewers exemption under the beer tax retroactively to January 1, 2000 from the original effective date of April 1, 2001. In addition, the Alcoholic Beverage Tax (ABT) on beer was reduced from 12.5 cents to 11 cents per gallon. This change will become effective September 1, 2003, and will build upon the one cent reduction that was passed with the SFY 1999-00 budget.

In 1999, the Small Brewers exemption was increased to the first 200,000 barrels of beer (31 gallons/barrel) from the first 100,000 barrels effective March 1, 2001. In addition, the ABT was reduced by one-cent from 13.5 cents to 12.5 cents effective April 1, 2001.

In 1998, legislation was enacted which reduced the tax rate on beer from 16 cents-per-gallon to 13.5 cents-per-gallon effective January 1, 1999.

In 1997, legislation was enacted that repealed 1996 legislation requiring payment by Electronic Funds Transfer (EFT). The Alcoholic Beverage Enforcement provisions, which were due to expire on October 31, 1997, were extended until October 1, 2002.

In 1996, legislation was enacted to require alcohol distributors with an annual tax liability of more than $5 million to remit payment by means of EFT.

On January 1, 1996, the State excise tax on beer was reduced from 21 cents to 16 cents-per-gallon.


Auto Rental Tax
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual 38 -2.6% 38 -2.6%
2002-2003 Estimate 39 2.9% 41 8.2%
2003-2004 Forecast 41 5.1% 44 7.3%

The Auto Rental Tax, imposed by Article 28-A of the Tax Law, applies to the rental of any passenger car with a gross vehicle weight of 9,000 pounds or less that can seat up to a maximum of nine passengers. The Auto Rental Tax is imposed at a rate of five percent on the charges incurred for any rental for use in New York State. The tax does not apply to leases of one year or more.

All Funds

Legislation enacted in 2002 dedicated all Auto Rental Tax receipts to the Highway and Bridge Trust Fund, effective April 1 2002.

Based on historical collection patterns, the Committee Staff estimates that State Fiscal Year (SFY) 2002-03 receipts will total $39 million, representing a 2.6 percent increase from SFY 2001-02. This reflects a recovery in New York's domestic tourism industry from the suppressed levels of 2001.

The Committee Staff forecast for SFY 2003-04 is $41 million. This represents an increase of $2 million, or 5.1 percent from the previous year.


Bank Tax
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual 566 496 -1.8% 566 496 -1.8%
2002-2003 Estimate 496 427 -13.9% 518 449 -9.4%
2003-2004 Forecast 514 443 3.7% 543 468 4.2%

Article 32 of the Tax Law, imposes a tax on banking corporations for the privilege of operating a banking business in a corporate manner, employing capital owning or leasing property, or maintaining an office in New York State. The tax had been assessed at a rate of nine percent of Entire Net Income, but was recently phased down to 7.5 percent over a three-year period. One of the three alternative bases, allocated assets, alternative minimum income, or fixed dollar minimum, must be used if it results in a greater amount of tax owed.

General Fund

The Committee Staff estimates that SFY 2002-03 receipts will total $427 million, a decrease of 13.9 percent when compared to SFY 2001-02. In spite of an estimated rebound in financial profits of 12.3 percent in 2002, the looming threat of war has led to decreased demand for credit as companies cut back on capital spending. Additionally, industry analysts have stated that some of New York State's largest banks continue to be plagued by loan losses resulting from Enron, WorldCom, Argentina and Brazil40. Finally, incremental tax cuts and the Federal Job Creation and Worker Assistance Act of 2002, which provided tax relief by allowing a 30 percent bonus depreciation, account for $70 million in tax savings. This estimate is $22 million lower than that of the Executive.

The Committee Staff forecast for SFY 2003-04 is $443 million, representing growth of 3.7 percent. This forecast takes into account a rebound in profits for many of New York State's largest banks in spite of an expected decline of 4.0 percent in financial profits for the industry as a whole. Refunds are expected to slow down as the effects of the economic downturn become more distant. This forecast is $25 million lower than that of the Executive.

All Funds

Article 32 taxpayers also pay a Regional Business Tax Surcharge, which is levied at the rate of 17 percent on business activity carried on within the Metropolitan Commuter Transportation District (MCTD). The district includes the City of New York and seven surrounding counties (Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester).

Collections from the surcharge are deposited into the Mass Transportation Operating Assistance Fund, associated with the Metropolitan Transportation Authority.

All Funds receipts for SFY 2002-03 are expected to be $496 million, which is the sum of the General Fund estimate and the estimate of the Article 32 portion of the Regional Business Tax Surcharge. This estimate represents a decline of 13.9 percent over SFY 2001-02. The Committee Staff estimate is $22 million lower than the Executive estimate.

The Committee Staff All Funds forecast for SFY 2003-04 is $514 million, representing growth of 3.7 percent. The All Funds forecast is the aggregate of the Article 32 General Funds forecast and the forecast of the Article 32 portion of the Regional Business Tax Surcharge. The Committee Staff forecast is $29 million lower than the Executive forecast.

Proposed Legislation

Legislation proposed by The Executive would permanently extend Article 32 of the Tax Law (Franchise Tax on Banking Corporations), and would extend transitional provisions related to the Federal Gramm-Leach-Bliley Act for one additional year.

Recent Legislative History

Legislation enacted in 2002 changed the types of assets qualifying for the 60 percent asset test used in determining thrift bad debt deduction eligibility. Assets now eligible for purposes of the test include interests in Financial Asset Securitization Investment Trusts (FASITs), and community development loans.

  • Changed the order in which tax credits are applied so that non-carryover credits that are not refundable are used first, followed by limited duration carryover credits, then by unlimited duration carryover credits, and finally by refundable credits.

  • Increased the mandatory first installment of estimated tax to 30 percent for taxpayers whose preceding year's tax paid exceeds $100,000. For taxable years beginning on or after January 1, 2006, the first installment amount reverts to 25 percent of the previous year's tax paid.

  • Extended the qualifying period of the Investment Tax Credit for financial services, making property placed in service before October 1, 2008 eligible. The previous cut-off for eligibility was October 1, 2003.

  • Amended provisions pertaining to ITC recapture. Taxpayers who owned property that was destroyed or ceased to be in qualified use due to events directly related to September 11 were provided an election to:

    • Not face recapture provisions if they maintained 75 percent of their base employment number.

    • Follow the normal recapture rules, but not reduce the cost basis of ITC awarded for replacement property.

Legislation enacted in 2001 extended until December 31, 2002 the provision of the 1985 Bank Tax Reforms and of the 1987 and 1988 Bad Debt Decoupling Legislation.

Legislation enacted in 2000 changed the allocation rules for Bank Mutual funds to match the corresponding rules for Mutual Funds operated by non-banking corporations. This method sources receipts to the location of the customer. In addition, financial services companies may elect to be held under their current article of taxation while the State studies the implications of the 1999 Federal Financial Services Modernization Act.

Legislation enacted in 1999 reduced the Entire Net Income (ENI) tax rate on banks from nine percent to 7.5 percent over three years.

In 1998, the ITC, which had been available to manufacturing corporations, was extended to banks that are brokers or dealers in securities. The credit can be taken for equipment used in broker/dealer activity. To be eligible for the credit, employees using the eligible equipment must be located within New York.

In 1997, legislation was enacted allowing banks, beginning in the year 2001, a Net Operating Loss deduction similar to that afforded to other corporations.


40 www.valueline.com


Cigarette and Tobacco Taxes
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual 532 0.8% 532 0.8%
2002-2003 Estimate 460 -13.5% 451 -15.2%
2003-2004 Forecast 446 -3.0% 446 -1.1

The Cigarette Tax, Article 20 of the Tax Law, is levied at a rate of $1.50 per package of 20 cigarettes on the sale of cigarettes within the State. Of the total Cigarette Tax levied, currently 53.2 cents of the receipts are deposited into the General Fund and the remaining 96.8 cents are dedicated to fund the HCRA program.

The State levies a tax on all other tobacco products equal to 37 percent of the wholesale price of such products. In addition, there is an annual license fee of $100 for all retail establishments and $25 for every vending machine that sells cigarette and/or tobacco products.

General Fund

The Committee Staff estimates that Cigarette and Tobacco Tax receipts will total $460 million in SFY 2002-03, a decline of 13.5 percent. This decline in receipts is attributable to decreased cigarette sales as a result of the tax increase in 2002, and increasing health concerns related to the use of tobacco products. This estimate is $9 million higher than that of the Executive.

The Committee Staff forecasts revenue of $446 million in SFY 2003-04, which represents a 3.0 percent decrease from SFY 2002-03. This forecast is the same as that of the Executive.

Recent Legislative History

Legislation enacted in the 2002 legislative session changed the distribution rates used to fund the HCRA programs. Effective on and after February 1, 2002, the HCRA dedication rate was changed from 49.55 percent to 43.7 percent. Effective on and after May 1, 2002, the HCRA dedication rate was changed to 64.55 percent and then to 61.22 percent effective on and after April 1, 2003. As a result of this legislation, General Fund distribution rates will change respectively.

In addition, the SFY 2002-03 Executive Budget increased the excise rate on tobacco products from 20 percent to 37 percent of the wholesale price effective July 2, 2002. This legislation also provides for a floor tax on all tobacco products possessed on or before such effective date.

Chapter 1 of the Laws of 2002 increased the Cigarette Tax rate from $1.11 to $1.50 per package of 20 cigarettes effective April 3, 2002. The additional 39 cents per pack increase was intended to be used to help fund the shift of various health care programs into the HCRA pool.

Chapter 262 of the Laws of 2000 contained various enforcement provisions in an effort to reduce cigarette bootlegging and reduce youth and adult smoking by banning Internet sales. A portion of this legislation, which prohibited carriers from delivering cigarettes to persons who are not licensed or registered cigarette dealers or agents, was ruled unconstitutional by the U.S. District Court of the Southern District of New York and was enjoined from going into effect. However, Executive filed an appeal to this ruling, and the 2nd U.S. Circuit Court of Appeals overturned the ruling of the lower court. The Appeals Court concluded that this legislation did not discriminate against interstate commerce and New York consumer's access to cigarettes.

Chapter 1 of the Laws for 1999 enacted broad health care legislation known as HCRA 2000. A key component was a 55 cents per pack of cigarettes increase with all proceeds of the increase devoted to health care programs.

Chapter 629 of the Laws of 1996 enacted strict Cigarette and Tobacco Tax enforcement measures, which were aimed at curbing the sale of bootlegged cigarettes in New York State. The increased enforcement provisions were estimated to increase SFY 1997-98 revenues by $13 million.


Corporate Franchise Tax
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual 1,703 1,515 -35.1% 1,703 1,515 -35.1%
2002-2003 Estimate 1,674 1,475 -2.6% 1,684 1,485 - 2.0%
2003-2004 Forecast 1,807 1,601 8.5% 1,796 1,591 7.1%

The Corporation Franchise Tax is comprised of Articles 9-A and 13 of the Tax Law. Article 9-A imposes a tax on corporations for the privilege of operating a business in a corporate form in New York State. The tax had been assessed at a rate of nine percent of Entire Net Income (ENI), but was recently phased-down over a three-year period to the current rate of 7.5 percent. One of the three alternative bases (allocated capital, alternative minimum income, or fixed dollar minimum) must be used if any of the three results in a greater amount of tax owed. Article 13 authorizes the tax on unrelated business income (UBT). The UBT is a tax on the unrelated business income of not-for-profit corporations and other organizations whose activities are otherwise tax-exempt.

General Fund

The Committee Staff estimates that receipts for SFY 2002-03 will total $1.475 billion, which is a decline of 2.6 percent from SFY 2001-02. Corporate profits are expected to have declined by an estimated 1.5 percent in calendar year 2002, while other factors contributed to an overall decline in receipts. The Federal Job Creation and Worker Assistance Act of 2002 allows a 30 percent depreciation bonus write-off for properties placed in service after September 10, 2001 and before September 11, 2004. This provision is expected to reduce Corporate Franchise Tax revenues by $105 million in SFY 2002-03. This federal legislation also extends the Net Operating Loss carry-back period to five years from the previous limit of three years. In addition, various other statutory changes and rate cuts will have an incremental impact of approximately $132 million. This estimate is $10 million less than that of the Executive.

The Committee Staff forecast for SFY 2003-04 is $1.601 billion, representing growth of 8.5 percent over the current fiscal year. Corporate profits are expected to see a strong rebound in calendar year 2003, growing by an estimated 10.0 percent over the current calendar year. Additionally, business inventory investment is expected to regain some steam in 2003. This forecast is $10 million higher than that of the Executive.

All Funds

Corporate Franchise taxpayers pay an additional Regional Business Tax Surcharge, which is levied at the rate of 17 percent on business activity conducted within the Metropolitan Commuter Transportation District (MCTD). This district includes the City of New York and seven surrounding counties (Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester).

Collections form the surcharge are deposited into the Mass Transportation Operating Assistance Fund, associated with the Metropolitan Transportation Authority.

All Funds receipts for SFY 2002-03 are expected to be $1.674 billion, which is the sum of the General Fund estimate and the estimate of the Article 9-A portion of the Regional Business Tax Surcharge. This estimate represents a decline of 1.7 percent over SFY 2001-02. The Committee Staff estimate is $10 million lower than the Executive estimate.

The Committee Staff All Funds forecast for SFY 2003-04 is $1.807 billion, representing an increase of 7.9 percent. The All Funds forecast is the aggregate of the Article 9-A General Funds forecast and the forecast of the Article 9-A portion of the Regional Business Tax Surcharge. The Committee Staff forecast is $11 million higher than that of the Executive.

Proposed Legislation

Legislation proposed by The would require that any additional expense claimed pursuant to Sec. 179 of the I.R.C. for a passenger vehicle with a gross vehicle weight in excess of 6,000 pounds be added back in the calculation of Entire Net Income (ENI) under section 210 of the Tax Law. However, these provisions would not apply to an eligible farmer as defined by section 210 of the Tax Law. This proposal would have no impact in SFY 2003-04.

Recent Legislative History

Legislation enacted in 2002:

  • Amended the Empire Zones program to clarify certain provisions and implement new components for several credit calculations. The three major changes were;

    • The five-year "new business" definition was clarified and simplified for the purpose of claiming refunds of credits. The new language clarifies that a new business can receive an ITC refund in each of its first five years.

    • Technical amendments were made pertaining to the interaction of the effective date of the QEZE program with the General Municipal Law statutory provisions. This affects the real property tax credit calculation, the treatment of payments in lieu of taxes, the employment test, the definition of "employment number," and the sales and use tax exemption related to receipts from the retail sale of certain tangible personal property used in or on motor vehicles.

    • Finally, for a related business to claim a wage tax credit, the employee for which the credit is being claimed must not have been employed by the related business within the preceding 60 months. This requirement can be waived if the individual had never previously generated a wage tax credit. The wage tax credit allowance period is five years from the date of original certification.

  • Expanded the Empire Zones program by a total of ten new Empire Zones. Four zones were previously approved, but not yet designated. Of the six new zones, four will each contain two square miles, and two will each contain one square mile. Additionally, for any new zones it is required that 75 percent of all unused zone acreage designated after January 1, 2003 must be limited to three non-contiguous areas. The remaining 25 percent of acreage can be designated outside of three primary areas only if certain specific job creation criteria are met.

  • Changed the order in which tax credits are applied so that non-carryover credits that are not refundable are used first, followed by limited duration carryover credits, then by unlimited duration carryover credits, and finally by refundable credits.

  • Increased the mandatory first installment of estimated tax to 30 percent for taxpayers whose preceding year's tax paid exceeds $100,000. For taxable years beginning on or after January 1, 2006, the first installment amount reverts to 25 percent of the previous year's tax paid.

  • Extended the qualifying period of the Investment Tax Credit for financial services, making property placed in service before October 1, 2008 eligible. The previous cut-off for eligibility was October 1, 2003.

  • Amended provisions pertaining to ITC recapture. Taxpayers who owned property that was destroyed or ceased to be in qualified use due to events directly related to September 11 were provided an election to:

    • Not face recapture provisions if they maintained 75 percent of their base employment number.

    • Follow the normal recapture rules, but not reduce the cost basis of ITC awarded for replacement property.

  • The statewide limitation on the Low Income Housing Credit was doubled from $2 million to $4 million.

  • OTC Derivatives dealers have been included in the definition of "registered securities or commodities broker or dealer." This includes OTC Derivatives dealers in the changes to the sourcing of principal transactions. For tax years beginning on or after January 1, 2003, an election is provided that allows each firm to decide to source principal transactions to either the location of the customer, or to the branch to which production credits were awarded for the transaction.

  • Extended the Alternative Fuels Vehicle Tax Credits and sales and use tax exemption for new alternative fuel vehicle refueling property. The credit was also amended to retroactively add a definition for qualified hybrid vehicles and establishes the credit amount as $2,000. Additionally, the Sales and Use Tax exemption for qualified hybrid vehicles was amended to provide that $3,000 is the incremental cost used in the event that one could not be determined otherwise.

In addition to legislation that moved certain utility companies to Article 9-A, a number of other measures were enacted in 2001:

  • Entire Net Income (ENI) rates for small businesses were lowered from 7.5 percent to 6.85 percent, to match the rate paid by unincorporated businesses under the Personal Income Tax. The rates for subchapter S corporations were also lowered;

  • Empire Zones were created out of Economic Development Zones as places where businesses creating jobs can operate virtually tax-free;

  • A Green Buildings credit was created for the construction of environmentally sound buildings;

  • Homeowners associations that are incorporated were made exempt from the Corporate Franchise Tax fixed minimum tax if they had no taxable income;

  • ITC was made transferable in certain cases if the property on which the credits were earned is transferred to a spin off company;

  • Provisions limiting the use of ITC for businesses being acquired were retroactively eliminated to January 1, 1997;

  • A Transportation Access Credit was created to provide a wage credit incentive to businesses that make significant contributions to improving access to transportation from their facilities;

  • Credits for the manufacture of alternative fuel vehicles, originally set to expire in 2001, were extended through 2003. Additionally, the $2.5 million program cap was converted to an annual cap;

  • A new Low Income Housing Tax Credit (LIHTC) was created. Modeled after the Federal LIHTC, it provides an incentive for the construction of housing for needy populations. The criteria for the State credit were modified from the Federal criteria in order to target more middle-income households; and

  • The allocation rules for securities brokers were modified. Instead of sourcing receipts from services performed based on the location of such performance, they will now be sourced to the customer's mailing address.

In 1999, legislation was enacted to:

  • Lower the Alternative Minimum Tax (AMT) rate from 3.0 percent to 2.5 percent and created additional credits against 9-A taxes:

  • Provide a credit for the manufacture of alternative fuel vehicles made within the state. The amount of the credit is half the incremental cost of manufacturing the vehicle, up to $5,000;

  • Extended the credits available to Qualified Emerging Technology Corporations to include companies engaging in the remanufacture of certain commodities; and,

  • Excluded the Subsidiary Capital Tax for subsidiaries paying taxes under Articles 32 or 33 of the Tax Law.

In 1998, the Legislature enacted to:

  • Reduce the rate imposed under the Entire Net Income base of the Corporate Franchise Tax over a three-year period, beginning July 1, 1999;

  • Reduce the Alternative Minimum Tax rate and the Fixed Dollar Minimum Tax;

  • Lower the Subchapter-S differential so that S-Corporations benefit from the Corporate Franchise Tax rate reduction;

  • Extend the ITC to the financial services and banking industry for investment in equipment used for security trading practices, including computers and telecommunications technology; and,

  • Provide tax credits to emerging technology companies. These included an employment credit equal to $1,000 for each employee hired above the base employment level and a capital investment credit equal to ten percent of any investments made which are held for at least four years (or twenty percent for investments held for at least nine years).

Estate & Gift Tax
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual 768 1.2% 768 1.2%
2002-2003 Estimate 722 -6.0% 726 -5.4%
2003-2004 Forecast 732 1.4% 736 1.4%

Articles 26 and 26-A of the Tax Law impose taxes on the transfer of property among individuals. Transfers of property upon death are taxed under the Estate Tax Law (Article 26), and transfers of property during an individual's lifetime are taxed under the Gift Tax Law (Article 26-A). All of the receipts are deposited into the General Fund.

General Fund

The Committee Staff estimates that SFY 2002-03 receipts will total $722 million, a decrease of 6.0 percent. Collections year-to-date are down 4.9 percent over the same period a year ago, after showing strong signs earlier in the year. The closeout is based on collections to-date and prior year collections history. In addition, the estimate assumes that increased collections resulting from the Tax Amnesty Program will total $4 million. Congressional action to gradually phase-out the Estate Tax increased the threshold to $1 million for 2002, and is estimated to have lowered receipts by $31 million in SFY 2002-03. The Committee Staff estimate is $4 million below that of the Executive.

The Committee Staff forecast for SFY 2003-04 is $732 million, which represents an increase of 1.4 percent in overall Estate Tax receipts. The increase reflects a forecasted rebound in equities prices, which are correlated with increases in the value of taxable estates. The forecast assumes no receipts from the Gift Tax since it was repealed as of January 2000, and is $4 million below the Executive.

Recent Legislative History

In 1999, legislation was enacted that conforms the New York State Estate and Gift Tax Law to Federal law providing a qualified family-owned business interest deduction. This allows heirs to exempt a total of $1.3 million form the New York State Estate Tax. This change was expected to reduce revenues by $8.0 million when fully implemented.

In 1998, legislation was enacted that conforms the Estate Tax to the effective Federal exemption of $1.3 million if the value of a family-owned farm or business constitutes 50 percent of the gross value of the estate.

In 1997, legislation was enacted which phased-in a reduction of the Estate Tax making the tax liability equal to the Federal credit for state estate taxes paid. New York automatically conformed State law to the unified credit provisions specified in Federal Law, but capped the maximum credit at $1 million. In addition, as of January 1, 2000, the Gift Tax was repealed. For 2002, the Federal exemption is equal to $1 million.

Impact of Federal Legislation

Federal Legislation enacted in 2001 effectively exempts the first $1 million of the value of an estate in 2002. In addition the legislation phases out the Federal credit for state death taxes over four years, by 25 percent per year. However, since the New York Estate Tax law conformed with the Federal Law as it existed on July 22, 1998, this phase out of the unified credit will have no impact on New York Estate Tax liability.


Highway Use Tax
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual $148 $0 0.0% $148 $0 0.0%
2002-2003 Estimate 147 0 0.0% 146 0 0.0%
2003-2004 Forecast 152 0 0.0% 149 0 0.0%

Article 21 of the Tax Law imposes a Highway Use Tax for the privilege of operating a motor vehicle on the highways of New York State. This tax exempts mail trucks, government, farmers', volunteer fire department, and vehicles transporting household goods.

Three component taxes are imposed upon the operation of trucks, tractors, trailers and semi trailers for their use of the highways:

  • Truck Mileage Tax;
  • Permits; and
  • Fuel Use Tax.

Monthly returns and payment are required where a carrier's total tax liability under highway use tax for the preceding calendar year exceeded $4,000, otherwise returns and payments are be due quarterly. In addition to the Highway Use Tax, a supplemental tax is imposed equal to 40 percent of the Highway Use Tax. However, the supplemental tax is not imposed on any mileage on the Thruway when payment has been made to the Thruway Authority.

In addition, the supplemental tax does not apply to:

  • any vehicular unit used almost exclusively to transport boltwood, logs, pulpwood or woodchips; or
  • any vehicular unit used almost exclusively to transport raw, unprocessed milk in bulk. However, these exclusions do not apply to any carrier or owner that operates more than three such vehicular units.

General Fund

All Highway Use Tax receipts are earmarked to the Dedicated Highway and Bridge Trust Fund.

All Funds

The Committee Staff estimates that receipts in SFY 2002-03 would total $147 million, a decrease of $1 million. This estimate is $1 million higher than that of the Executive.

The Committee staff forecast for Highway Use Tax receipts is $152 million for SFY 2003-04. This forecast is $3 million above that of the Executive.

Recent Legislative History

The supplemental highway use tax was reduced by 20 percent. This rate reduction is effective April 1, 2001.

In 1998, the supplemental portion of the Truck Mileage Tax was reduced by 50 percent, effective January 1, 1999. This resulted in a 25 percent overall rate reduction in the Truck Mileage Tax. This legislation also transferred revenues from General Fund Motor Vehicle Fees to hold the dedicated transportation funds harmless.


Insurance Tax
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual 696 633 8.4% 696 633 8.4%
2002-2003 Estimate 741 677 6.9% 737 670 5.8%
2003-2004 Current Law 743 673 -0.6% 745 660 -1.5%
2003-2004 Proposed Law 917 831 22.7% 903 818 22.1%

Insurance Taxes are authorized by Articles 33 and 33-a of the Tax Law, and Articles 11 and 12 of the Insurance Law. Article 33 of the Tax Law imposes an income and premium tax on insurance companies. Article 33-a imposes a tax on independently procured insurance. Articles 11 and 12 impose retaliatory taxes and a tax on excess line brokers (brokers authorized to procure insurance from out-of-state carriers not authorized to do business in New York). The Franchise Tax on insurance corporations consists of a tax measured by allocated Entire Net Income (or one of three alternative bases, if a higher tax will result), plus a tax on subsidiary capital and an additional Franchise Tax based on gross premiums less certain deductions.

General Fund

The Committee Staff estimates that SFY 2002-03 receipts will total $677 million, an increase of 6.9 percent. High payouts resulting from the catastrophic losses associated with the WTC disaster significantly lowered money held in reserve and invested until needed to cover future significant losses. Investment income is often the principal source of profit for insurance companies, but numerous Fed cuts have lowered bond yields and lessened short-term income on this surplus. However the ability of some insurance companies to borrow short term at low rates and invest the funds long term at higher rates was made more profitable by a steep yield curve. As a result, the profits portion of the Insurance Tax is relatively weak this year, while the premiums portion is strong enough to support significant growth. This estimate is $7 million higher than that of the Executive.

The Committee Staff forecast for SFY 2003-04 is $831 million, representing an increase of 22.7 percent. This forecast represents a restructuring of the Insurance Tax to one based only on premiums, which is expected to increase collections by $158 million in SFY 2003-04. Additionally, premiums growth is expected to continue in calendar year 2003. This forecast is $13 million higher than that of the Executive.

All Funds

Article 33 taxpayers also pay a Regional Business Tax Surcharge, which is levied at the rate of 17.0 percent on business activity carried on within the Metropolitan Commuter Transportation District (MCTD). The district includes the City of New York and seven surrounding counties (Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester).

Collections from the surcharge are deposited into the Mass Transportation Operating Assistance Fund, associated with the Metropolitan Transportation Authority.

All Funds receipts for SFY 2002-03 are expected to total $741 million, which is the sum of the General Fund estimate and the estimate of the Article 33 portion of the Regional Business Tax Surcharge. This estimate represents growth of 6.4 percent over SFY 2001-02. The Committee Staff estimate is $4 million higher than the Executive estimate.

The Committee Staff All Funds forecast for SFY 2003-04 is $917 million, representing growth of 23.8 percent. The All Funds forecast is the aggregate of the Article 33 General Funds forecast and the forecast of the Article 33 portion of the Regional Business Tax Surcharge. The Committee Staff forecast is $14 million higher than that of the Executive.

Proposed Legislation

Insurance Tax Restructuring

Legislation proposed by the Executive would amend the Insurance Tax primarily by eliminating the income portion of the tax. The proposal would also change the premiums base of the tax so that premiums would be taxed at the following rates:

  • 2.0 percent for property/casualty premiums written by non-life insurers;
  • 1.75 percent for accident/health premiums written by non-life insurers; and
  • 1.5 percent for premiums written by life insurers, regardless of premium type.

Life insurers would also calculate a tax liability based on current law, and use that amount if it resulted in a higher tax.

This proposal would result in a revenue increase of $158 million in SFY 2003-04.

CAPCO Program IV

A separate proposal would create a CAPCO Program IV, which would authorize tax credits of $125 million in total for insurance companies who invest in certified venture capital companies (CAPCOs). Investors receive credits equal to 50 percent of their investment up to $10 million per investor. Starting in 2005, credits are taken 10 percent a year.

The proposed Program IV would require that the CAPCOs invest in companies that have a minimum relationship with a research center that has received financial support from the State through the Centers of Excellence Program, the Gen*NY*sis Program, the Centers for Advanced Technology Program, or the Capital Facilities Program. A company involved in a high technology or biotechnology project authorized by the RESTORE New York program would also qualify.

Program funds could be used for the purpose of relocation costs as long as the company receiving funding relocates to New York State within one year.

Finally, the proposal would expand eligibility to any subsidiary of the New York State Urban Development Corporation, and would establish that the Insurance Department, in consultation with the UDC and the Office of Science, Technology and Academic Research would promulgate the rules and regulations for determining the minimum relationship requirement.

This proposal would have no fiscal impact in SFY 2003-04.

Recent Legislative History

In 2002, legislation was enacted to:

  • Provide a tax credit for attorneys-in-fact operating with reciprocal insurance groups in New York State. The credit reduces the income that an attorney-in-fact receives above their cost of doing business, with the intent of the law being to tax reciprocal groups the same as stock or mutual insurers.

  • Change the order in which tax credits are applied so that non-carryover credits that are not refundable are used first, followed by limited duration carryover credits, then by unlimited duration carryover credits, and finally by refundable credits.

  • Extend the qualifying period of the Investment Tax Credit for financial services, making property placed in service before October 1, 2008 eligible. The previous cut-off for eligibility was October 1, 2003.

  • Amend provisions pertaining to ITC recapture. Taxpayers who owned property that was destroyed or ceased to be in qualified use due to events directly related to September 11 were provided an election to:

    • Not face recapture provisions if they maintained 75 percent of their base employment number.

    • Follow the normal recapture rules, but not reduce the cost basis of ITC awarded for replacement property.

In 2000, legislation authorizing an additional $150 million in tax credits for the Certified Capital Corporations (CAPCO) program was enacted. CAPCOs are venture capital companies that are certified by the Insurance Department as meeting certain investment requirements and are required to invest in small New York based companies. Insurance companies that invest in CAPCOs will be able to claim a credit for 100 percent of their investments. In addition, the Investment Tax Credit (ITC) was extended to insurance companies engaged in securities trading.

In 1999, legislation was enacted to reduce the Entire Net Income (ENI) rate from nine percent to 7.5 percent over a three-year period. In addition, the cap of the tax as a percentage of premiums was reduced from 2.6 percent to 2.0 percent for property and casualty insurers. These changes will reduce insurance tax revenues by $50 million, when fully implemented, $30 million in credits were added to the CAPCO program.

In 1997, three Insurance Tax measures were instituted to help maintain the competitiveness of this industry in New York State. First, beginning in 1998, life insurance companies received a reduction in their premiums tax rate from 0.8 percent to 0.7 percent, and an increase in their March estimated payment from 25 percent to 40 percent. In addition, two other provisions enacted allowed for the formation of captive insurance companies and allow for investment in CAPCOs. The CAPCO program was established with $100 million in credits. A captive insurance company is a company that primarily insures the risks of a parent or its parents' affiliated companies. Captive insurers will be subject to a special premium tax in lieu of the premiums and "income-base" tax that applies to other insurance companies.


Lottery
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual 1,561 12.1% 1,561 12.1%
2002-2003 Estimate 1,803 15.5% 1,829 17.1%
2003-2004 Forecast 1,830 1.5% 1,835 0.3%

The New York State Lottery is currently comprised of the Instant, Daily Numbers, Win 4, Pick 10, Take 5, Quick Draw, and Lotto games. A percentage of the revenue derived from the sale of each game, ranging from 10 to 45 percent, depending on the game, is dedicated to fund education. In addition, 15 percent of Lottery sales are placed into a Special Revenue account to cover the administrative expenses of the Lottery. The remaining revenues from each game's sales are the prize payouts to Lottery players. The administrative expenses are appropriated by the Legislature each year as part of the State Operating Budget. Any revenue remaining, after paying the administrative costs of the Lottery, is then transferred back to the Lottery receipts account and dedicated to education.

General Fund

The Committee Staff expects SFY 2002-03 revenues to total $1.803 billion, which falls short of the current Lottery Aid Guarantee of $1.843 billion by $40 million, and represents growth of 15.5 percent. This estimate is $26 million lower than that of the Executive. The Committee Staff forecast for SFY 2003-04 is $1.830 billion, representing growth of 1.5 percent over SFY 2002-03. This forecast is $5 million lower than that of the Executive.

SFY 2002-03 Lottery revenues have increased by $137 million, or 12.2 percent, through January 2003. Most of this increase is due to the introduction of a new multi-state lottery game, Mega Millions, for which sales began May 15, 2002. Excluding Mega Millions, lottery revenues would have increased by only 2.8 percent through January 2003. Instant Game sales have also been strong, growing by 27.0 percent year-to-date. Some of this increase is the result of recently enacted legislation allowing for a 75 percent prize payout for up to three Instant Games each year.

Legislation enacted in 2001 authorizes the Lottery Division to license the operation of video lottery gaming at Aqueduct, Monticello, Yonkers, Finger Lakes and Vernon Downs. Certain other racetracks may also be licensed pursuant to local law. In 2002, several legislative enhancements were made to address some concerns that were raised by some of the tracks. These enhancements included an extension of the original sunset provisions, provisions for the subordination of debt for the New York Racing Association (NYRA), a conditional extension of the NYRA franchise, and temporary authorization for racetracks to negotiate with horsemen's organizations regarding the shares to be allocated to purses.

The Executive submitted legislation to address some additional concerns raised by the tracks regarding their percentage of the revenues, hours of operation, and the ability to obtain financing to construct the facilities that will house the VLTs. The Executive proposal would extend the hours of operation and make them more flexible by allowing facilities to run for a maximum of 126 hours per week, an average of 18 hours per day. The proposal would also remove the current sunset and reduce the amount that the tracks would be required to enhance purses and share with the horsemen.

Although the Executive proposal attempts to address some of the basic concerns raised by the tracks, there has been no confirmation that the tracks would accept the proposal as currently drafted and begin the operation of VLTs if the legislation were enacted. Additionally, although the Executive included $61 million in last year's financial plan for the operation of VLTs, there is no revenue included in this year's financial plan even though the RFP process has essentially been completed and the justification for this proposed legislation is that tracks would begin operating VLTs.

Recent Legislative History

Legislation enacted in 2002 extended authorization to the Division of the Lottery to operate the Quick Draw game through May 31, 2004, and to offer up to three instant games with a prize payout equal to 75 percent of sales in any given fiscal year. In addition, several provisions were enacted with regards to the operation of Video Lottery Terminals (VLTs), including the following:

  • The sunset provisions authorizing the operation of VLTs at certain racetracks was changed to December 31, 2007 from the previous three years from the first date of operation.

  • Provisions for the subordination of debt were made for the New York Racing Association (NYRA) based on certain capital improvements at the Aqueduct racetrack for the purpose of installing VLTs, and for capital improvements at certain other NYRA racetracks.

  • An extension of the NYRA franchise was provided, which is currently set to expire December 31, 2007, for a period of five years, contingent upon certification by the Lottery Division that VLTs are operational at the Aqueduct racetrack as of April 1, 2003.

  • Temporary authorization was extended to racetracks to negotiate with horsemen's organizations regarding the shares to be allocated to purses.

Legislation enacted in 2001 authorizes the Lottery Division to license the operation of video lottery gaming at Aqueduct, Monticello, Yonkers, Finger Lakes and Vernon Downs. Certain other racetracks may also be licensed pursuant to local law. This legislation expires three years after the first racetrack begins operating video lottery terminals.

Legislation enacted in 2001 also authorizes the Division of Lottery to enter into a multi-state lottery game. The Lottery Division introduced Mega Millions on May 15, 2002, which was based on a multi-State game previously known as the Big Game.

Recent Administrative History

In December 2001, the Lottery Division began a second drawing at noon for Daily Numbers and Win 4.

In September 2000, the Lottery added two Take Five drawings per week to the existing five drawing per week in order to boost sales. This has resulted in a large increase in sales since implementation.

In addition to the recent legislative authorization to increase the prize payout for Instant Games to 65 percent, sales for these games have increased due to the implementation of a Retailer Management Plan. Under the plan, the Lottery sends representatives every two weeks to most retailers that sell Instant Games tickets in order to help them manage their inventory of tickets.

Because the necessary legislation authorizing a multi-state lottery game like Powerball was not enacted in 2000, the Lottery announced the re-introduction of a promotional Millennium Millions game, tickets for which were sold starting in October 2000. The jackpot for this game rolled twice, producing revenues of $54.4 million, excluding the unused administrative surplus.

In March 1999, the Lottery offered a new Regional Lotto game to combat the perception that winners are always from another part of the State. This game ended in November 1999, and was replaced by a special Millenium Millions Lotto game. Excluding the administrative surplus, the Regional Lotto game produced $17.6 million in revenues dedicated to education, and the Millenium Millions game contributed $29.2 million for SFY 1999-00.


Miscellaneous Receipts
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual 1,625 4.6% 1,625 4.6%
2002-2003 Estimate 2,185 34.5% 2,185 34.5%
2002-2003 Proposed Law 4,085 151.3% 4,085 151.3%
2003-04 Current Law 1,680 -23.1% 1,680 -23.1%
2003-2004 Proposed Law 3,580 -12.4% 3,580 -12.4%

Miscellaneous Receipts are different from the other Taxes in that they are not collected pursuant to any specific Article in the New York State Tax Law. Miscellaneous Receipts are derived from a wide range of revenue sources. There are currently six categories comprising the collections of these receipts: Abandoned Property, Federal Grants, General Fund Refunds and Reimbursements, Investment Income, Licenses and Fees, and Other Transactions. This report focuses on Miscellaneous Receipts that are deposited in the General Fund only.

General Fund

The Executive is proposing to use $1.9 billion in Tobacco Securitization Bonds to help close the SFY 2002-03 budget gap. This action raises total Miscellaneous Receipts to $4.085 billion, an increase of $2.46 billion from SFY 2001-02 and $1.900 billion above the Enacted Plan. Absent this action, total Miscellaneous Receipts are expected to total $2.185 billion, or $37 higher than the Enacted Plan.

Aside from the addition of Tobacco Bond receipts, some of the main items in the Other transactions category include:

  • Bond Issuance Charges: $158 million;
  • Fines Received from Wall Street Firms: +87.1 million, including $48 million from Merrill Lynch, $30.5 million from other Wall Street Firms (not specified) and $8.6 from Western Union;
  • Power Authority of New York (PASNY): $67 million for Power For Jobs Tax Credit reimbursement;

The Committee Staff estimate is the same as that of the Executive.

The Committee Forecast for SFY 2003-04 is identical to the Executive's. The proposed law forecast is $3.580 billion, a decrease in $505 million from the proposed law forecast in SFY 2002-03. The decline represents the absence of several non-recurring revenue actions contained in the SFY 2002-03 Enacted Plan that are not expected to recur in the upcoming fiscal year. Excluding the Tobacco Proposal, Miscellaneous Receipts are expected to total $1.80 billion, a decline of $505 million from the current law in SFY 2002-03.

Article VII proposals in the Executive Budget

Securitization of Tobacco Settlement Payments

The Executive has proposed Article VII legislation that would authorize the State to securitize revenues form the 1998 Master Settlement Agreement, which is an agreement between tobacco companies and 46 States, the District of Columbia and five U.S. territories. The remaining four states (Florida, Minnesota, Mississippi and Texas) have settled in earlier agreements.

Under this legislation, a portion of the State's share of revenues from the tobacco companies will be secured through the issuance of bonds from the Tobacco Settlement Financing Corporation, a proposed new subsidiary of the Municipal Bond Bank Agency. The Corporation would issue bonds amounting to $3.8 billion to reimburse the State's General Fund for a any of the following purposes: any capital purpose or programs; payment of debt service for any of the state's obligations; grants to local governments, school districts or public benefit corporations; or as a revenue source for other state expenditures. If the Executive proposal were to be adopted, General Fund Miscellaneous Receipts would receive Tobacco Bond receipts of $1.9 billion in SFY 2002-03 and $1.9 billion in SFY 2003-04.

In addition to the Tobacco Securitization proposal, the Executive is proposing a series of fee increases and one-time revenue actions to close the expected SFY 2003-04 budget gap. The total amount attributable to fee increases, additional fines, abandoned property and indirect costs are expected to total $137.1 million. Other transactions include a contribution from the Power Authority for the Power for Jobs program of $58 million. PASNY will be contributing $125 million over a two-year period, which is the statutory limit on contributions for this program from PASNY. Other transactions also include Bond Issuance Charges of $71 million, and Wireless Surcharge collections of $62.7 million.

Recent Legislative History

The Enacted Budget in SFY 2002-03 contained $523 million in one-time and recurring revenue enhancements. These included $300 million from the sale of abandoned securities and a $42 million transfer from the New York State Power Authority to cover tax revenue forgone from the Power for Jobs tax expenditure program. In addition, the restructuring of the bond issuance charges paid by certain public benefit corporations and industrial development agencies is expected to generate approximately $116 million annually.

Legislation in 2000 provided amnesty on interest and penalties for private health care facilities that settled outstanding assessments by the end of SFY 2000-01. This measure increased revenues by $16 million in SFY 2002-01.

Legislation in 1999 accelerated the scheduled elimination of assessments imposed on hospitals, nursing homes and home care providers by one quarter, from April 1, 2000 to January 1, 2000. This measure reduced revenues by $41 million in SFY 1999-00.

Legislation in 1997 enacted a five-year phase-out of the Health Care Provider Assessments. The assessments levied on hospitals and nursing homes began phasing-out during SFY 1997-98 and will be completely phased-out in SFY 2001-02. The estimated impact is $540 million when fully implemented.


Motor Fuel Tax
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual $489 $0 -90.6% $489 $0 -90.6%
2002-2003 Estimate 537 0 0.0% 535 0 0.0%
2003-2004 Forecast 533 0 0.0% 538 0 0.0%

Article 12 A of the Tax Law imposes a tax on motor fuel imported, sold or produced in the state by a distributor. Except kero-jet fuel imported by an airline for use in its airplanes, or by a federal or state organization or a hospital exempt from sales and use tax for its own use or consumption. The tax rate is 8 cents per gallon for both motor fuel and diesel.

Payment by electronic funds transfer is required for distributors if a taxpayer was liable for more than $5 million of total motor fuel and petroleum business taxes during the June 1 through May 31 period that immediately precedes.

General Fund

Receipts for SFY 2002-03 and SFY 2003-04 are entirely earmarked by law to the dedicated transportation related funds.

  General Fund DHBTF 1 EHF 2 DMTTF 3
Effective Date Gasoline Diesel Gasoline Diesel Gasoline Diesel Gasoline Diesel
Prior to April 1, 1993 78.10% 78.10% 0.00% 0.00% 21.90% 21.90% 0.00% 0.00%
Prior to April 1, 2000 28.10% 78.10% 50.00% 0.00% 21.90% 21.90% 0.00% 0.00%
Prior to April 1, 2001 0.00% 28.10% 67.70% 31.50% 21.90% 21.90% 10.40% 18.50%
Prior to April 1, 2003 0.00% 0.00% 67.70% 49.20% 21.90% 21.90% 10.40% 28.90%
After April 1, 2003 0.00% 0.00% 81.50% 63.00% 0.00% 0.00% 18.50% 37.00%
1 Dedicated Highway and Bridge Trust Fund.

2 Emergency Highway Reconditioning and Preservation Fund and the Emergency Highway Construction and Reconstruction Fund.

3 Dedicated Mass Transportation Trust Fund.


All Funds

Motor fuel receipts are earmarked to the Dedicated Highway and Bridge Trust Fund (67.7 percent), the Dedicated Mass Transportation Trust Fund (10.4 percent) and the Emergency Highway Reconditioning and Preservation Fund and the Emergency Highway Construction and Reconstruction Fund (21.9 percent).

Diesel motor fuel receipts are earmarked to the Dedicated Highway and Bridge Trust Fund (49.2 percent), the Dedicated Mass Transportation Trust Fund (28.9 percent) and to the Emergency Highway Reconditioning and Preservation Fund and the Emergency Highway Construction and Reconstruction Fund (21.9 percent).

Beginning April 1, 2003, motor fuel receipts will be earmarked to the Dedicated Highway and Bridge Trust Fund (81.5 percent), and the Dedicated Mass Transportation Trust Fund (18.5 percent). While diesel motor fuel receipts will be earmarked to the Dedicated Highway and Bridge Trust Fund (63 percent), and the Dedicated Mass Transportation Trust Fund (37 percent).

The Committee Staff estimates that in SFY 2002-03 Motor Fuel Taxes funds will total $537 million. This amount would be distributed as follows: Special Revenue Fund: $68 million, Capital Projects: $351 million and Debt Service: $118 million.

This estimate is $2 million higher than the Executive on an All Funds basis, $1 million lower than the Executive's estimate for Special Revenue Funds, $2 million higher than the Executive's estimate for Capital Projects Funds and $1 million higher than the Executive's estimate for Debt Service Funds.

The Committee Staff estimates that in SFY 2003-04 Motor Fuel Taxes funds will total $533 million, a 0.7 percent decrease. This amount would be distributed as follows: Special Revenue Fund: $111 million and Capital Projects: $422 million.

This estimate is $5 million lower than the Executive on an All Funds basis, $2 million lower than the Executive's estimate for Special Revenue Funds and, $3 million lower than the Executive's estimate for Capital Projects Funds.

Recent Legislative History

Beginning April 1, 2001, the last portion of General Fund receipts from these taxes go to the Emergency Highway Fund Accounts. Receipts from gasoline taxes are dedicated as follows:

The Dedicated Funds will receive 100 percent of Article 12-A taxes beginning April 1, 2003. The new distribution would be as follows: 82 percent to the Dedicated Highway and Bridge Trust Fund and, 18 percent to the Dedicated Mass Transportation Trust Fund. Receipts from the tax on diesel would be dedicated as follows: 63 percent to the Dedicated Highway and Bridge Trust Fund, and 37 percent to the Dedicated Mass Transportation Trust Fund.

Diesel motor fuel excise tax was reduced by 2 cents per gallon, effective 1/1/96. The combined diesel motor fuel excise tax is 8 cents per gallon.


Motor Vehicle Fees
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual $583 $185 -45.1% $583 $185 -45.1%
2002-2003 Estimate 614 74 -60.0% 619 76 -58.9%
2003-2004 Current Law 617 36 -51.4% 615 38 -50.0%
2003-2004 Proposed Law 653 72 -2.7% 651 75 -1.3%

Revenue from Motor Vehicle Fees comes from over 50 different license, registration, service, and penalty receipts. Passenger and commercial vehicle registrations and licensing fees are the largest components.

Registration fees are weight based for passenger vehicles, commercial vehicles, trailers, and ambulances. Buses, taxis, livery vehicles, and rental cars are charged registration fees based upon their seating capacity. Other vehicles such as semi trailers, motorcycles, MOPEDS, farm vehicles, snowmobiles, and all terrain vehicles are charged a flat fee. Motorboat registration is based upon the length of the boat.

Other fees include in-transit permits, certificates of title, manufacturers, dealers and repairmen also paid fees for miscellaneous licenses and permits.

Resident drivers are required to obtain a New York driver license within 90 days of becoming a resident. This license is issued by the Department of Motor Vehicles with fees based on various classifications.

Other items included in motor vehicle receipts are business permits for driving schools, repair shops, and car dealerships, special plate fees, penalty fees for driving without insurance or refusing a chemical test, and various sticker fees.

General Fund

The Committee Staff projects receipts in State Fiscal Year 2002-03 will total $74 million. Revenues from registrations are 100 percent earmarked to dedicated funds (Dedicated Mass Transportation Trust Fund and Dedicated Highway and Bridge Trust Fund). The first one receives 20.2 percent and the latter 79.8 percent. Other motor vehicle fees are also dedicated as well. For Fiscal Year 2002-03, $10.5 million from other motor vehicle fees will go to the Dedicated Mass Transportation Trust Fund and $189.5 million to the Dedicated Highway and Bridge Trust Fund.

Chart

The Committee Staff's closeout for Motor Vehicle Fees is $2 million lower than that of the Executive for General Fund, $1 million lower that the Executive's estimate for Special Revenue Funds and $2 million lower than the Executive's estimate for Capital Projects Funds.

The Committee Staff's forecasts for Motor Vehicle Fees (current law) is $36 million for General Fund, $96 million for Special Revenue Fund and $485 million for Capital Projects. The Committee Staff's forecasts is $2 million lower than that of the Executive for General Fund, $1 million higher that the Executive's estimate for Special Revenue Funds and $4 million higher than the Executive's estimate for Capital Projects Funds.

The Committee Staff's forecasts for Motor Vehicle Fees (proposed law) is $72 million for General Fund, $96 million for Special Revenue Fund and $485 million for Capital Projects. The Committee Staff's forecasts is $3 million lower than that of the Executive for General Fund, $1 million higher that the Executive's estimate for Special Revenue Funds and $4 million higher than the Executive's estimate for Capital Projects Funds.

All Funds

The Committee Staff anticipates receipts of $614 million for Fiscal Year 2002-03, representing a 5.3 percent growth over Fiscal Year 2001-02.

The Dedicated Mass Transportation Trust Fund would receive $77 million dollars, while the Dedicated Highway and Bridge Trust Fund would receive $463 million dollars.

The Dedicated Mass Transportation Trust Fund is a Special Revenue Fund while the Dedicated Highway and Bridge Trust Fund is a Capital Projects account.

In State Fiscal Year 2003-04, All Funds receipts (under current law) are estimated to total $617 million, a 0.5 percent increase.

The Committee Staff's forecasts for Motor Vehicle Fees (under proposed law) is $653 million. General Fund would account for $72 million, $96 million for Special Revenue Fund and $485 million for Capital Projects. The Committee Staff's forecasts is $3 million lower than that of the Executive for General Fund, $1 million higher that the Executive's estimate for Special Revenue Funds and $4 million higher than the Executive's estimate for Capital Projects Funds.

Article VII Proposals

The Executive is including four fee increase proposals that would increase General Fund receipts for Fiscal Year 2003-04, certificate of sale $6 million, title application $7.3 million, license plates $21.7 million, and boat registration at $1.3 million. These fees would total $36.3 million during Fiscal Year 2003-04.

Registration Fees to the Dedicated Trust Funds
(millions of dollars)
  Chapter 189 2000 Chapter 63 2000 Chapter 85 2002 Total
Fiscal Year Fund 72 Fund 72 Fund 73 Both Funds Fund 72 Fund 72 Fund 73 Both Funds
2001-02 169 - - - - 169 - 169
2002-03 - 17.9 10.5 28.4 171.6 189.5 10.5 200
2003-04 - 42.8 25.1 67.9 152.7 195.5 25.1 220.6
2004-05 - 107.2 62.9 170.1 - 107.2 62.9 170.1
Fund 72: Dedicated Highway and Bridge Trust Fund
Fund 73: Dedicated Mass Transportation Trust Fund

Recent Legislative Changes

License Plates reissuance. The first reissuance of license plates since 1986 began January 2001. The cost remained at $5.50 per set. Motorist paid an additional $20 to retain their current plate number. This change can be made by administrative authorization. Fiscal estimate: $18.2 million.

Eight-year license renewal. The duration of a driver's license renewal was increased from five years to eight years. The annual rate ($5 dollars for most drivers) remained the same, an eye test is required at each renewal. This change can be made by administrative authorization. Fiscal estimate: $5.0 million.

Auto Registration Fee Reduction. Reduces passenger auto registration fees by 25 percent, and holds county clerks harmless. Increases earmarked percentage to the dedicated transportation fund to hold this fund harmless from the fee reduction. ($49.0) million in State Fiscal Year 1998-99, ($66.0) million when fully implemented. Took effect July 1, 1998.

Auto Registration Refunds. Repeals last year's provision, which disallowed second-year refunds of registration fees. Provides for a retroactive refund to any individual who had a refund of the registration fee withheld. Requires the Department of Motor Vehicles to notify individuals who would be eligible for a refund. ($17.0) million in State Fiscal Year 1998-99, ($9.0) million in future years. Effective September 1, 1997.


Other Taxes
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual 1 0.0% 1 0.0%
2002-2003 Estimate 1 0.0% 1 0.0%
2003-2004 Forecast 1 0.0% 1 0.0%

Article 19 of the Tax Law imposes a three percent tax on gross receipts from boxing and wrestling exhibitions, including receipts from broadcasting rights. Article 2 of the Racing, Pari-Mutuel Wagering and Breeding Law levies a State tax of four percent on admissions charges to racetracks and simulcast theaters. All of the receipts are deposited in the General Fund.

General Fund

The Committee Staff estimates that receipts from Other Taxes in SFY 2002-03 will total $1 million. This estimate is the same as that of the Executive.

The Committee Staff forecast for SFY 2003-04 is also $1 million.

Recent Legislative History

Legislation enacted in 2001 extended the time from 48 hours to 10 days within which a promoter of a boxing or wrestling match or exhibition has to file a return or remit the gross receipts tax from ticket sales, effective December 1, 2001.

Legislation enacted in the 1999 reduced the rate of the gross receipts tax for boxing and wrestling exhibitions to 3 percent from 5.5 percent effective October 1, 1999. This legislation also imposed a cap on the total tax at $50,000 per match for gross receipts from ticket sales, and $50,000 per match for gross receipts from broadcasting rights.


Pari-Mutuel
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual $30 1.0% $30 1.0%
2002-2003 Estimate 30 0.0% 30 0.0%
2003-2004 Current Law 30 0.0% 30 0.0%
2003-2004 Proposed Law 36 20.0% 32 6.7%

The Racing, Pari-Mutuel Wagering and Breeding Law imposes a Pari-Mutuel Tax on bets placed at racetracks, simulcast theaters and Off-Track Betting (OTB) facilities. For-profit and not-for-profit racing associations, as well as OTB Corporations, are taxed a percentage of their total betting pools for the privilege of conducting pari-mutuel wagering. All of the receipts are deposited in the General Fund.

The tax is to be paid on the last business day of each month for the period from the 16th day of the preceding month through the 15th day of the current month (payments required to be made on March 31 must include all taxes due and accruing through the last full week of racing in March).

General Fund

The Committee Staff estimates that receipts will total $30 million in SFY 2002-03, which is the same amount as collected in SFY 2001-02. This estimate is the same as the Executive.

The Committee Staff forecast for SFY 2003-04 is $36 million, representing a $6 million increase over SFY 2002-03. The increase is attributable to Article VII proposals that would expand simulcasting statewide and impose a new 0.5 % fee on total handles.

Article VII Proposals

The Executive is proposing major changes in the Racing and Wagering Law (not in Pari-Mutuel taxes) that are expected to increase total wagers, thereby increasing the amount of money collected in Pari-Mutuel taxes. Among the proposals are:

  • Removal of all restrictions on simulcasting currently in law to permit simulcasting from within and without the State.
  • Removal of all existing minimum balance requirements for off-track telephone betting accounts.
  • Imposition of a 0.5 percent regulatory fee on total handle at on or off-track licenses.

The removal of simulcasting restrictions is expected to generate an additional $2 million in Pari-Mutuel receipts. The imposition of the 0.5 percent regulatory fee is expected to generate $16.1 million. Of this $12.2 million is to be used to finance the expenses of the Racing and Wagering Board (off General Fund receipts). The remaining $3.8 million is unaccounted for and therefore should flow back to the General Fund. The difference in the Ways and Means Committee and Executive forecast therefore is due to fact that the Executive does not treat the extra $3.8 million as General Fund money. Instead, the Executive proposes to maintain the overage as surplus money in the Special Revenue Fund.

Recent Legislative History

In 2001, the takeout on New York Racing Association (NYRA) was lowered, the percentage of takeout going to purses was decreased, a "pick six" wager was allowed, provided two out-of-state simulcasts on those days that NYRA is conducting racing at Saratoga Race Course and added an additional thoroughbred simulcast from out-of-state during the winter months from January 15 through April 15, and lowered tax rates for the additional simulcasting racing.

In 2000, the Pari-Mutuel Tax was eliminated on races taking place at NYRA racetracks for 3 days surrounding the Breeder's Cup event. This provision sunsets in December 31, 2002.

In 1999, the budget legislation reduced the tax on "on track" wagering at NYRA facilities from 3.7 to 2.6 percent effective September 10, 1999, and provided for a further reduction to 1.6 percent effective April 1, 2001. These rate reductions expire on December 31, 2007. The provisions also direct money to NYRA purses and the NYS Thoroughbred Breeding and Development Fund.

In 1998, the Legislature extended for four years through June 30, 2002, provisions affecting various statutes relating to takeouts, tax rates, and the purse payments of non-profit racing, as well as authorizations for on-track and off-track simulcast wagering.

In 1997, NYRA was authorized to conduct racing at Belmont, Aqueduct, and Saratoga through December 31, 2007. Furthermore, various simulcasting provisions were extended for an additional one-year, including in-home experiment, telephone wagering and out-of-state harness simulcasting.

NYRA was also required to use the first $2 million in annual profits for increasing purses. Any additional profits are to be used to reduce debt obligations.


Personal Income Tax 41
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual 27,414 25,853 9.7% 27,414 25,853 9.7%
2002-2003 Estimate 23,834 16,941 -34.5% 24,005 17,070 -34.0%
2003-2004 Current Law 23,090 15,207 -10.2% 23,019 15,154 -11.2%
2003-2004 Proposed Law 23,179 15,344 -9.4% 23,059 15,254 -10.6%

Article 22 of the Tax Law imposes a Personal Income Tax on the income of New York State individuals, estates, and trusts. Tax collections are received through employee withholding, estimated tax payments, payments accompanying tax returns, late payments, and assessments.

Personal Income Tax Revenue Profile

Personal Income Tax collections are based on Adjusted Gross Income (AGI), which consists of four main components. The first component, wages, includes salaries, which are fixed, and bonus payments, stock options and other forms of compensation that vary based on individual performance and economic conditions. The other three components are capital gains, interest or dividends, and other income, which includes business and partnership income and taxable pensions.

The following table details the components of AGI through 2000, the most recent year for which data is available. Wages, for example, consist of more than two-thirds of AGI, and fluctuate the least in terms of growth from year to year. The other components, most notably capital gains, are more volatile from one year to the next, and their contribution to AGI as a whole can vary quite dramatically based on economic conditions. For example, in the mid 1990s, capital gains represented roughly 4.0 percent of AGI. When the economy grew faster in the late 1990s, capital gains represented a larger share, comprising 10.2 percent of AGI in 1999 and 11.5 percent in 2000.

Table

General Description

Personal Income Tax receipts contribute roughly two-thirds of all tax receipts, excluding reserve transactions and transfers, collected in the General Fund. Withholding is the single largest component, comprising roughly 90 percent of Personal Income Tax receipts, excluding reserve transactions and transfers.

New York State's definition of income closely mirrors federal rules, which include wages, salaries, capital gains, certain business and partnership income, and interest and dividend income. The sum of these sources is Federal Adjusted Gross Income. New York Adjusted Gross Income is calculated starting with Federal Adjusted Gross Income, from which certain income is added or subtracted to arrive at New York Adjusted Gross Income.

The New York standard deduction or itemized deductions, and a dependent exemption are subtracted from New York Adjusted Gross Income, which yields New York State Taxable Income. Taxes are calculated based on this amount. Certain credits are then subtracted from the calculated tax to determine total Personal Income Tax liability.

General Fund

For accounting purposes, General Fund Personal Income Tax collections include certain reserve transactions and transfers to other funds. The amount of Personal Income Tax collections that have been dedicated for specific purposes, and moved out of the General Fund as a result, has grown significantly over the past few years.

Each year, refund reserve transactions to and from the Personal Income Tax Refund Reserve Account are used as administrative adjustments to transfer General Fund surpluses from one fiscal year to the next. In addition, revenues from the Personal Income Tax are diverted to the School Tax Relief (STAR) Fund to help finance school tax reductions under the STAR program, and to the newly created Revenue Bond Tax Fund (RBTF), which is used for debt service. As of May 2002, 25 percent of Personal Income Tax receipts, excluding reserve transactions, are deposited into the RBTF. In total, these reserve transactions and transfers will effectively reduce General Fund Personal Income Tax collections by $5.643 billion in State Fiscal Year (SFY) 2002-03, and by $7.876 billion in SFY 2003-04.

The Committee Staff estimates that SFY 2002-03 receipts will total $16.941 billion, which reflects a decline of $8.912 billion, or 34.5 percent, from SFY 2001-02. This includes a Refund Reserve adjustment of $1.250 billion, a STAR transfer of $2.667 billion, and a RBTF transfer of $4.226 billion. This estimate is $129 million lower than that of the Executive. Excluding the reserve transactions and transfers, Personal Income Tax collections are estimated to total $22.584 billion, a decline of $2.990 billion, or 11.7 percent over SFY 2001-02.

The SFY 2002-03 Personal Income Tax receipts estimate includes approximately $175 million in incremental tax cuts resulting from the continued phase-in of the enhanced Earned Income Tax Credit (EITC), College Tuition Deduction/Credit, and Marriage Penalty reduction. The estimate also includes an exemption worth $25 million granted to the families of the Victims of the attack on the World Trade Center, an increase of $25 million for changes to the Electronic Funds Transfer (EFT) filing program, and an increase of approximately $181 million for the Tax Amnesty program. Additional details about the two most important components of the Personal Income Tax, withholding and quarterly estimated payments, are provided below.

Withholding receipts are expected to total $19.900 billion for the fiscal year, representing a decline of $361 million, or 1.8 percent. This estimate is based on preliminary collections through January 2003, coupled with an expected decline in variable wages of 19.5 percent and expected growth in base wages of 1.7 percent in the first quarter of 2003. This estimate is $145 million lower than that of the Executive.

Quarterly estimated payments are projected to total $3.828 billion, representing a decline of $857 million, or 18.3 percent from last fiscal year. Quarterly estimated payments are typically made by taxpayers with high income or realize significant capital gains. The continued decline of the financial markets in 2002 is estimated to have lowered capital gains realizations by approximately 32.6 percent over 2001. This estimate is $2 million lower than that of the Executive.

The Committee Staff forecast for Personal Income Tax collections is $15.344 billion in SFY 2003-04, representing a decline of $1.597 billion, or 9.4 percent, over SFY 2002-03. This forecast includes a negative Refund Reserve adjustment of $41 million, a STAR transfer of $2.707 billion, and a RBTF transfer of $5.128 billion. This estimate is $90 million higher than that of the Executive. Excluding the reserve transactions and transfers, Personal Income Tax collections are expected to total $23.220 billion, an increase of $636 million, or 2.8 percent over SFY 2002-03.

The SFY 2003-04 Personal Income Tax forecast includes about $195 million in incremental tax cuts, again resulting from the continued phase-in of the enhanced Earned Income Tax Credit (EITC), College Tuition Deduction/Credit, and Marriage Penalty reduction. In addition, this forecast includes approximately $89 million resulting from legislation proposed by the Executive to double the filing fees required by certain Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs), and to require certain organizations to pay estimated tax to New York on behalf of non-resident members.

Withholding receipts are forecast to total $21.011 billion in SFY 2003-04, an increase of $1.111 billion, or 5.6 percent over SFY 2002-03. This forecast includes $89 million resulting from legislation proposed by the Executive. Excluding adjustments, withholding collections are expected to grow by 4.9 percent over SFY 2002-03. Expected wage growth of 3.9 percent in SFY 2003-04 translates to an elasticity of withholding growth to wage growth of slightly more than 1.2. This forecast is $94 million lower than that of the Executive.

The Committee Staff forecasts that quarterly estimated payments will total $3.765 billion, representing a decline of $63 million, or 1.6 percent, from SFY 2002-03. The Committee Staff forecasts that capital gains will fall by 16.6 percent in 2003, after an estimated 32.6 percent decline in 2002.

All Funds

All Funds Personal Income Tax collections include Personal Income Tax receipts and refund reserve adjustments, but do not include transfers to STAR or RBTF. The Committee Staff estimates that All Funds Personal Income Tax collections will total $23.834 billion in SFY 2002-03, representing a decline of $3.580 billion, or 13.1 percent from SFY 2001-02. This estimate is $171 million lower than that of the Executive. In SFY 2003-04, All Funds Personal Income Tax collections are forecast to total $23.179 billion, a decline of $655 million, or 2.7 percent, from SFY 2002-03. This estimate is $120 million higher than that of the Executive.

Recent Legislative History

In 2002, the Legislature enacted Personal Income tax provisions which:

  • Clarified that the petroleum storage tank income tax credit applies to only those taxpayers that remove or permanently close a fuel oil storage tank and replace it with another one, and extended the credit for an additional year through 2003.

  • Reduced to $100,000 from $400,000 the aggregate annual withholding tax liability that triggers required participation in the Electronic Funds Transfer (EFT) program.

  • Exempted income for tax years 2000 and 2001 of the victims who perished in the terrorist attack of September 11, 2001.

  • Established a broad-based tax amnesty program for taxpayers with outstanding liabilities through December 31, 2000.

In 2001, the Legislature enacted Personal Income Tax provisions which created the Revenue Bond Tax Fund (RBTF) to be used for debt service. This legislation requires a deposit of 25 percent of Personal Income Tax receipts, excluding reserve transactions, into the RBTF.

In 2000, the Legislature enacted Personal Income Tax provisions which:

  • Increased the amount of the State Earned Income Tax Credit (EITC) from the current 25 percent of the federal credit to 30 percent, phased-in over a two-year period. Beginning in Tax Year 2002, the State credit will be 27.5 percent of the federal credit. Beginning in 2003, the State credit will be 30.0 percent of the federal credit;

  • Enhanced the current Child and Dependent Care Credit to 110 percent of the federal credit for taxpayers with income of less than $25,000 beginning in Tax Year 2000. The credit will be phased-down from 110 percent to 100 percent of the federal credit for taxpayers with income between $25,000 and $40,000. The credit will equal 100 percent of the federal credit for incomes between $40,000 and $50,000. The credit will be phased-down to 20 percent of the federal credit at $65,000;

  • Provided taxpayers with a choice of an itemized deduction or a refundable credit for qualified college tuition expenses. The itemized deduction will be 100 percent of qualified tuition expenses up to $10,000. For qualified tuition expenses of up to $5,000, the credit will be the lesser of $200 or tuition paid. For qualified tuition expenses between $5,000 and $10,000, the credit will be equal to four percent of tuition paid. This proposal will be phased-in over a four-year period beginning in Tax Year 2001;

  • Increased the standard deduction for married taxpayers filing joint returns and widowers from $13,000 to $14,600 over a three-year period. Beginning in Tax Year 2001, the standard deduction will be raised to $13,400. Beginning in Tax Year 2002, the standard deduction will be increased to $14,200. Beginning in Tax Year 2003 and thereafter, the standard deduction will be increased to $14,600;

  • Provided taxpayers with an income tax credit equal to 10 percent of their long-term care insurance premiums beginning in Tax Year 2002. Both individuals and businesses that purchase this insurance for their employees will qualify for the credit;

  • Provided taxpayers with an income tax credit equal to 20 percent of the cost of purchasing and installing a fuel cell to supply power to their homes, up to a maximum of $1,500; and,

  • Provided homeowners who replace a residential fuel oil storage tank with a $500 income tax credit. The credit will be available for only two years beginning in Tax Year 2001, and homeowner will be eligible to receive this credit only once.

In 1999, the Legislature enacted Personal Income Tax provisions which:

  • Increased the EITC from 20 percent of the federal credit to 22.5 percent in Tax Year 2000, and to 25 percent in tax years beginning in 2001;

  • Extended the emerging technology tax credits to businesses who pay tax under the Personal Income Tax;

  • Enhanced the farmer school tax credit to expand the definition of qualified agricultural property to include land set aside or retired under a federal supply management or soil conservation program; and

  • Amended the State's innocent spouse relief measures to conform to that provided by the federal government.

In 1998, the Legislature enacted Personal Income Tax provisions, which:

  • Enhanced the Child and Dependent Care Credit to 100 percent of the federal credit for taxpayers with incomes of $35,000 or less. The credit will be phased-down to 20 percent of the federal credit for taxpayers with incomes between $35,000 and $50,000;

  • Accelerated the date for which the base acreage amount used when determining the Agricultural School Tax Credit increases from 175 to 250 acres from Tax Year 1999 to Tax Year 1998;

  • Created an exclusion from the Personal Income Tax for income and assets derived from assets stolen from, hidden from, or otherwise lost to Holocaust victims and their families; and

  • Allowed for the one-time deferral of capital gains taxation if the gain is reinvested in an emerging technology company.

In 1997, the Legislature enacted Personal Income Tax provisions which:

  • Increased the Child and Dependent Care Credit to 100 percent of the federal credit for taxpayers with adjusted gross income of $17,000 or less;

  • Created the New York State College Choice Tuition Savings Program. New York State residents and non-residents can establish savings accounts to pay for qualified higher education expenses;

  • Enhanced the Farm School Property Tax credit by exempting up to the first $30,000 of non-farm federal gross income in the determination of eligibility for the credit. It also provides for subtracting principal payments on farm debt when calculating the income limit for the phase-out of the credit;

  • Extended the Employment Incentive Credit and Economic Development Zone Employment Incentive Credit to businesses whose owners are taxable under the Personal Income Tax; and,

  • Established a new solar credit for residential investment in solar electric generating equipment.

In 1996, the Legislature enacted Personal Income Tax provisions which:

  • Enhanced the Child and Dependent Care Credit by increasing the credit to 30 percent of the federal credit in 1996, and to 60 percent in 1997, for taxpayers with incomes less than $10,000. The credit is phased down to 20 percent for taxpayers with income greater than $14,000. The credit was also made refundable; and,

  • Established a tax amnesty program in 1996, which was provided to taxpayers with outstanding liability for tax years up to and including 1994. Penalties, but not interest, were waived. Gross Personal Income Tax revenues collected exceeded $130 million under the program.

In 1995, the Legislature enacted a three-year Personal Income Tax reduction plan which:

  • Reduced the top rate from 7.875 percent in 1994 to 6.85 percent in 1997;

  • Accelerated the increase in the EITC for 1996 to a fully phased in level of 20 percent of the federal credit;

  • Reduced the EITC in 1996, and every year thereafter, by the amount of the Household Credit used by the taxpayer;

  • Introduced an Excess Deductions Credit for 1995 only, to ensure that middle income itemizers will not experience a tax increase due to the change from the 5-bracket to the 4-bracket structure; and

  • Maintained the scheduled increases in the standard deduction from $9,500 for married couples filing jointly in 1994 to $13,000 in 1997.



41 These estimates include a Refund Reserve Transaction of $1.250 billion in SFY 2002-03 and of ($41) million in SFY 2003-04; a STAR Transfer of $2.667 billion in SFY 2002-03, and $2.707 billion in SFY 2003-04; and RBTF Transfer of $4.226 billion in SFY 2002-03, and $5.128 billion in SFY 2003-04.


Petroleum Business Taxes
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual $1,003 $0 -99.9% $1,003 $0 -99.9%
2002-2003 Estimate 1,029 0 0.0% 1,034 0 0.0%
2003-2004 Forecast 1,041 0 0.0% 1,001 0 0.0%

Article 13-A of the Tax Law imposes the Petroleum Businesses Tax (PBT) on every petroleum business for the privilege of engaging in business, employing capital, owning or leasing property, or maintaining an office in this state. It is based on the volume of fuel imported or produced, refined, manufactured or compounded in the state. Imposition of the tax occurs at different points in the distribution chain, depending upon the type of petroleum product.

The tax is determined monthly and is the sum of a motor fuel component, an automotive-type diesel motor fuel component, a nonautomotive-type diesel motor fuel component, and a residual petroleum product component. On each January 1st the tax rates are indexed based on the producer price index for refined petroleum products published by the Bureau of Labor Statistics, rounded to the nearest 1/10 of one cent.

Returns are due on or before the 20th day of each month. Filing of returns from distributors on a quarterly basis by persons registered as distributors of kero-jet fuel is permitted. Larger taxpayers are required to make monthly payments by electronic funds transfer or certified check.

General Fund

All revenues from the basic tax are earmarked to the dedicated funds (Dedicated Mass Transportation Trust Fund and Dedicated Highway and Bridge Trust Fund) and to the Mass Transportation Operating Assistance Fund. The dedication is as follows: 19.7 percent to the Mass Transportation Operating Assistance Fund42 and 80.3 percent to the Dedicated Mass Transportation Trust Fund and the Dedicated Highway and Bridge Trust Fund43. The supplemental tax is also totally earmarked to the dedicated funds.

All Funds

The Committee Staff anticipates receipts of $1.029 billion for Fiscal Year 2002-03, representing a 2.6 percent growth over Fiscal Year 2001-02. Revenues from this tax are split between various dedicated funds. Of the total expected in SFY 2002-03, $334 million will be deposited in the Dedicated Mass Transportation Trust Fund, and $126 million will be deposited into the Mass Transportation Operating Assistance Fund. The remaining $569 million is deposited into the Dedicated Highway and Bridge Trust Funds.

In State Fiscal Year 2003-04, All Funds receipts are estimated to total $1,041 million, a 1.2 percent increase from SFY 2002-03. The Committee expects a 5 percent increase in PBT rates next January 2004.

Of the total expected in SFY 2003-04, $338 million will be deposited in the Dedicated Mass Transportation Trust Fund, and $128 million will be deposited into the Mass Transportation Operating Assistance Fund. The remaining amount $575 million is deposited into the Dedicated Highway and Bridge Trust Fund.

Pie Chart

Recent Legislative History

In 2000, legislation reduced by 33 percent the tax rate for commercial heating oil, effective September 1, 2002. Also, the PBT minimum tax was repealed effective March 1, 2001.

In 1997, additional refunds and credits were created for the Petroleum Business Tax and Motor Fuel Taxes for commercial vessels where the purchases of fuel exceed consumption of fuel in the State.

In 1996, legislation was enacted that: reduced the tax on "railroad diesel" by 7 cents per gallon; eliminated the Petroleum Business Tax on non-automotive diesel motor fuel and residual used in manufacturing; increased the basic credit or reimbursement on residual petroleum products or diesel fuel for utility companies by 0.5 cents per gallon; reduced the automotive diesel motor fuel component by 1.75 cents per gallon; and changed the distribution of revenues from the Petroleum Business Tax to hold the transportation funds and MTOAF harmless from these reductions. Furthermore, other provisions included: the reimbursement of the Petroleum Business Tax on aviation and kero-jet fuel purchased in-state but consumed out-of-state; expanded the time for which taxpayers may claim a refund for taxes paid on fuel purchased in-state but consumed out-of-state; and allowed taxpayers to file for refunds for taxes paid up to four years after the tax was paid.


42 This fund is comprised of the Public Transportation System Operating Assistance Account and the Metropolitan Mass Transportation Operating Assistance Account.

43 The money is split 37 percent and 63 percent respectively between the two funds.


Real Estate Gains Tax
  Ways and Means Executive
  General Fund Percent Change General Fund Percent Change
2001-2002 Actual 5 -16.7% 5 -16.7%
2002-2003 Estimate 4 -20.0% 4 -20.0%
2003-2004 Forecast 2 -50.0% 2 -50.0%

The Real Estate Gains Tax is imposed, pursuant to Article 31-B of the Tax Law, at a rate of 10 percent. This tax is placed on the gains from certain large realty transfers, where the consideration is $1 million or more and that took place prior to June 16, 1996. All of the receipts are deposited into the General Fund.

General Fund

The Committee Staff estimates that Real Estate Gains Tax collections will exceed refunds by $4 million in SFY 2002-03. This estimate reflects the repeal of this tax effective for transfers that occurred after June 15, 1996. Collections totaled approximately $3.6 million for the first three quarters of this fiscal year. Receipts primarily reflect collections from transactions that occurred prior to June 15, 1996.

The Committee Staff forecasts net receipts of $2 million for SFY 2003-04. Revenues from this tax will diminish as taxpayers begin to complete payments on existing installment agreements.

Recent Legislative History

Chapter 309 of the Laws of 1996 repealed the Gains Tax, retroactive to all conveyances of property that took place after June 15, 1996.


Real Estate Transfer Tax
  Ways and Means Executive
  All Funds Percent Change All Funds Percent Change
2001-2002 Actual 371 -8.4% 371 -8.4%
2002-2003 Estimate 455 22.6% 449 21.2%
2003-2004 Forecast 420 -7.7% 404 -10.0%

The Real Estate Transfer Tax, Article 31 of the Tax Law is levied on real property transfers where the value of the interest in the property exceeds $500. The rate is $2 for each $500, or a fraction thereof, of net consideration. An additional tax of one percent is levied on residential transfers where the consideration is over $1 million. The party that sells the property pays the tax.

General Fund

Real Estate Transfer Tax revenues are entirely dedicated to environmental programs.

All Funds

The Committee Staff estimates Real Estate Transfer Tax receipts of $455 million in SFY 2002-03, a 22.6 percent increase. In SFY 2002-03, collections benefited from an active real estate market in New York City. Under current law, $112 million in Real Estate Transfer Tax revenue is dedicated to the Environmental Protection Fund, and all remaining revenue is dedicated to pay debt service on the Clean Air/Clean Water Bond Act.

The Committee Staff forecast for SFY 2003-04 is $420 million, a 7.7 percent decrease. This forecast is based upon a weakening real estate market within New York City. Specifically, the current decline in asking rents and increases in vacancy rates in Manhattan are expected to continue into SFY 2003-04.

Recent Legislative History

In the 2002 legislative session, the Executive extended the tax rate reductions for the State and New York City Transfer Taxes for conveyances of real property to existing real estate investment trusts (REITs) for three years, until September 1, 2005. These rate reductions were originally scheduled to expire on September 1, 2002. Tax rates are reduced by fifty percent, from $2 to $1 per $500 of conveyance for qualifying transfers. This legislation is expected to generate a $0.4 million State revenue loss in 2002-03 and a $0.8 million loss in SFY 2003-04.

Legislation enacted in 1999 extended the reduced rate for the State and New York City Transfer Taxes for Real Estate Investment Trusts (REITs) through September 1, 2002. The current rates are reduced for these transfers from $2 to $1 per $500 of conveyance under the New York State Real Estate Transfer Tax Rate and it was estimated that it will cost the State $1.3 million in SFY 1999-00.


Sales Tax
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual 8,540 6,131 -2.2% 8,540 6,131 -2.2%
2002-2003 Estimate 8,791 6,312 2.9% 8,773 6,303 2.8%
2003-2004 Current Law 9,025 6,480 2.7% 9,038 6,492 3.0%
2003-2004 Proposed Law 9,400 6,752 7.0% 9,413 6,765 7.3%

The Sales and Compensating Use Tax, imposed by Article 28 of the Tax Law, is a four percent broad-based consumption tax levied on the sale of tangible personal property, excluding items such as food and products used in manufacturing. A limited number of services such as trash removal and interior design services are also subject to the Sales and Compensating Use Tax.

General Funds

State Fiscal Year (SFY) 2001-02 saw a drop in Sales Tax receipts of 2.2 percent to $6.131 billion due to the national recession, rising unemployment and the terrorist events of September 11. This was the first drop in Sales Tax receipts in over a decade. Sales Tax receipts through January 2003 are $5.278 billion, representing a year to date growth of 2.7 percent. Inflation for the New York metro area for the 12 month period ending December 2002 is 2.5 percent. After accounting for inflation, real growth in Sales Tax receipts is mostly flat.

Strong auto sales in the last two quarters of 2002, which were the result of low interest rates and aggressive dealer incentives, contributed to the growth in Sales Tax receipts. In addition, low mortgage rates led to a surge in home refinancing, lowering payments and freeing cash to be used for other household needs such as home improvements. A one-time injection of receipts, $50 million from the Tax Amnesty and $38 million from lowering the threshold for vendors to submit Sales Tax receipts via Electronic Funds Transfer, also contributed to the growth in Sales Tax receipts.

Growth during the remainder of the fiscal year is expected to be anemic due to the continued decline in consumer confidence, uncertainty about a possible war with Iraq, and a slow down in new car sales. The Committee Staff estimate for SFY 2002-03 is $6.312 billion. This represents an increase of $181 million, or 2.9 percent, from SFY 2001-02. This estimate is $9 million higher than that of the Executive. Of this 2.9 percent, growth in the base contributed 1.8 percent and receipts from enacted legislation contributed 1.1 percent.

The Committee Staff forecast for SFY 2003-04 is $6.480 billion, which represents a growth of $168 million, or 2.7 percent from SFY 2002-03. This forecast is based on the expectation that personal income and employment in New York, two of the primary factors driving consumption, will experience a modest growth in SFY 2003-04.

Legislation submitted with the Executive budget proposes to replace the year-round Sales Tax exemption on clothing and shoes with an exemption during four seven-day periods each year. In addition, the legislation proposes to raise the dollar limit on the price of an exempt item from $110 to $500. If enacted, this proposal is estimated to generate $363.4 million in total collections in SFY 2003-04, raising the Committee Staff forecast to $6.752 billion.

All Funds

The All Funds category is comprised of the General Fund, the Local Government Assistance Tax Fund, and the Mass Transportation Operating Assistance Fund (MTOAF). The Committee Staff estimates that All Funds receipts in SFY 2002-03 will total $8.791 billion, representing a 2.9 percent growth rate from SFY 2001-02. This estimate is $18 million higher than that of the Executive. All Funds receipts in SFY 2003-04 are projected to total $9.025 billion. If the Executive's proposed amendments to the clothing and shoes Sales Tax exemption are enacted, the All Funds forecast becomes $9.4 billion.

One quarter of the receipts generated from the State Sales Tax is dedicated to the Local Government Assistance Corporation (LGAC) which was created in 1990 to eliminate annual Spring borrowing. Once the LGAC debt service obligations are paid, any remaining excess revenues are transferred back to the General Fund along with certain other transfers. Excluding Personal Income Tax transfers in excess of Revenue Bond Debt Service, $3.070 billion is expected to be transferred back to the General Fund in SFY 2002-03. This estimate is $12 million higher than that of the Executive. A total of $2.5 billion is forecasted to be transferred back to the General Fund in SFY 2003-04, excluding Personal Income Tax transfers in excess of debt service. This forecast becomes $2.59 billion if legislation proposed in the Executive's budget is enacted.

In 1981, MTOAF was created to help finance the State's public transportation system. A portion of the revenue is derived from the 0.25 percent Sales Tax that is imposed in the Metropolitan Commuter Transportation District. In SFY 2002-03, the Committee Staff estimates that $375 million will be deposited into the MTOAF. Revenues dedicated to MTOAF are expected to total $385 million in SFY 2003-04 under current law and $397 million under proposed law.

Recent Legislative History

In 2002, the Legislature enacted the following provisions:

  • A Tax Amnesty on Sales and Use Tax liabilities for periods ending on or before February 28, 2001 was enacted;

  • The sourcing requirements for charges from mobile telecommunication services was changed to the taxing jurisdiction where the customer's place of primary use is located, effective August 2, 2002;

  • Taxing jurisdictions that impose segmented Sales and Use Taxes on consumer utility services are no longer permitted to apply these taxes to prepaid telephone calling services, deemed to have been in effect on and after March 1, 2000;

  • Temporary Sales and Use Tax holiday periods were enacted in June, July and August of 2002 in lower Manhattan's Liberty and Resurgence Zones;

  • The interest rate applied to underpayments of Sales Tax increased by two percentage points, effective April 1, 2003;

  • A new index was introduced for adjusting the base retail price of cigarettes for inflation for the purpose of calculating the prepaid Sales Tax on cigarettes, effective September 1, 2002. This tax amendment also requires that the tax be rounded to the nearest whole cent per package;

  • The threshold for requiring Sales Tax vendors to make payments via certified check or EFT was lowered from $1 million of annual Sales Tax liability to $500,000, effective September 1, 2002;

  • Energy service companies that operate in an area where use of a single retailer model has been approved by the Public Service Commission were granted a reduced Sales Tax rate on certain charges for the transmission and distribution of gas and electricity, deemed to have been in effect on and after September 1, 2000;

  • The Sales and Use Tax exemption for alternative fuel vehicles and alternative fuel vehicle refueling property was extended by one year and applies to property purchased on or before February 29, 2004.

In 2001, the Legislature enacted the following provisions:

  • The souring requirement for Sales and Use Tax on vessels was changed from the place of delivery to purchaser's place of residence, effective March 1, 2001;

  • Sales of certain foods and drinks sold by a senior citizen independent housing community became exempt from the Sales and Use Tax, effective December 1, 2000;

  • Limited Liability Companies that are formed for a qualifying exempt purpose became exempt from the Sales and Use Tax, effective September 5, 2001;

  • All tangible personal property and services used or consumed by qualified businesses within an Empire Zone became exempt from Sales and Use Tax, effective March 1, 2001.

In 2000, the Legislature enacted the following provisions:

  • Machinery and equipment utilized by the cable industry to upgrade to digital television and applicable services became exempt from the Sales and Use Tax for the period September 1, 2000 through September 1, 2003;

  • Sales and Use Tax on the unbundled transmission and distribution of energy will be phased-out over a three-year period, fully effective September 1, 2003;

  • Certain types of pollution control equipment became exempt from the Sales and Use Tax, effective September 1, 2002;

  • The Sales and Use Tax exemption for farmers was expanded to include plumbing and electrical systems and became applicable to commercial horse boarding operations, effective September 1, 2000;

  • A broad-based exemption from the Sales and Use Tax was granted to web hosting facilities, effective September 1, 2000;

  • All sales of food and drink costing seventy-five cents or less became exempt from the Sales and Use Tax, effective September 1, 2000;

  • The Sales and Use Tax exemptions provided to the telecommunications industry were enhanced and modernized, effective September 1, 2000;

  • Machinery and equipment used in television broadcasting of live and recorded programs became exempt from the Sales and Use Tax, effective September 1, 2000;


Utility Tax
  Ways and Means Executive
  All Funds General Fund General Fund Percent Change All Funds General Fund General Fund Percent Change
2001-2002 Actual 1,218 972 19.0% 1,218 972 19.0%
2002-2003 Estimate 1,050 809 -16.8% 1,063 868 -10.7%
2003-2004 Forecast 1,086 880 8.8% 993 805 -7.3%

The Corporations and Utilities Tax, Article 9 of the Tax Law, imposes a gross receipts and franchise tax on regulated utilities and industries. The major industries subject to this tax are utilities (gas, electric, water and steam), telecommunications (telephone and telegraph), and transportation industries (trucking and railroad). The majority of revenue from Article 9 is deposited into the General Fund. However, a portion of the tax imposed on the capital stock of telecommunications and transportation companies is dedicated to the Mass Transportation Operating Assistance Fund (MTOAF).


General Fund

The Committee Staff estimates receipts for SFY 2002-03 to total $809 million, a decrease of 16.8 percent. Year-to-date collections through January are down by 19.7 percent. A portion of the revenue decline is explainable by the continued phase-in of tax cuts, which, including deregulation, amount to approximately $150 million incrementally. This estimate is $59 million lower than that of the Executive.

The Committee Staff forecast for SFY 2003-04 is $880 million, representing an increase of 8.8 percent. While incremental tax cuts are expected to reduce collections by approximately $146 million in SFY 2003-04, industry analysts expect the telecommunications industry to see revenue improvement from growth in 3G (third generation wireless) services in 2003. Additionally, expected growth in the consumption of both natural gas and electricity, at rates of 8.9 percent and 4.7 percent respectively, should serve to increase collections. This forecast is $75 million higher than that of the Executive.

All Funds

Through a Special Revenue Fund, the Metropolitan Transportation Operation Assistance Fund (MTOAF) receives 80 percent of collections from Sections 183 and 184 of the Tax Law. In addition, businesses operating in the Metropolitan Commuter Transportation District (MCTD) are subject to a 17 percent surcharge on their liability attributable to the MCTD to be deposited in the MTOAF. The total amount deposited to the dedicated fund is estimated to total $241 million in SFY 2002-03 and $206 million in SFY 2003-04.

The sum of the General Fund amount and the MTOAF deposits constitutes the All Funds amount. In SFY 2002-03 this amount is estimated to be $1.050 billion, representing a decline of 13.8 percent. This estimate is $13 million lower than that of the Executive.

The All Funds forecast for SFY 2003-04 is $1.086 billion, which is an increase of 3.4 percent. The Committee Staff forecast is $93 million higher than the Executive forecast on an All Funds basis.


Proposed Legislation

Legislation proposed by the Executive would rededicate MTOAF collections resulting from Sections 183 and 184 of the Tax Law, to the Dedicated Highway and Bridge Trust Fund. This proposal would have no fiscal impact in SFY 2003-04.

Recent Legislative History

In 2002, Legislation was passed that:

  • Changed the order in which tax credits are applied so that non-carryover credits that are not refundable are used first, followed by limited duration carryover credits, then by unlimited duration carryover credits, and finally by refundable credits.

  • Increased the mandatory first installment of estimated tax to 30 percent for taxpayers whose preceding year's tax paid exceeds $100,000. For taxable years beginning on or after January 1, 2006, the first installment amount reverts to 25 percent of the previous year's tax paid.

  • Amended the Section 186-e Excise Tax on Telecommunication Services to conform to the sourcing rules of the Federal Mobile Telecommunications Sourcing Act relating to sales occurring on or after August 2, 2002. The tax is imposed on gross receipts of services provided by a home service provider if the customer's primary use is within New York State. This is true irrespective of where the service originates, terminates or passes through.

In 2001, Section 189 was amended to create credits for taxes paid to other states where natural gas is purchased.

During 2000, the Gross Receipts Taxes (GRT) on utility companies was eliminated. Such companies will now be subject to the Corporate Franchise Tax instead. The GRT on energy used in manufacturing was eliminated and other portions of the tax were phased down. Additionally, 300 more megawatts were made available under the Power for Jobs Program.

In 1999, two measures were enacted. First, independent power producers who import natural gas for the production of electricity will be exempt from the gas import tax, effective January 1, 2001

In addition, local telecommunications companies with fewer than one million access lines will be exempt from the excess dividends base under Section 183 of the Tax Law effective January 1, 2002. This exemption is expected to reduce revenues by $2 million when fully implemented.

In 1997, legislation that was enacted included:

  • A rate reduction for Section 186-a and 186-e of Article 9 from 3.5 percent to 3.25 percent on October 1, 1998. A further reduction of the rate to 2.5 percent occurred on January 1, 2000;

  • A rate reduction for the Gross Earnings Tax in Section 184 from 0.75 percent to 0.375 percent. For transportation companies the rate reduction is from 0.6 percent to 0.375 percent, effective July 1, 2000;

  • For the purpose of computing the MTA Surcharge on the above, Sections 184, 186-a and 186-c, the tax shall be computed as if the rate reduction had not occurred; and,

  • The formula for the distribution of revenues from Sections 183 and 184 will be changed to maintain the required funding level for the MTOAF.

In 1996, the tax rate on trucking and railroad industries, under Section 184 of Article 9, was reduced from 0.75 percent to 0.6 percent of gross receipts starting in Tax Year 1997. Further, these industries have the option of converting from taxation under Article 9 to Article 9-A beginning in Tax Year 1998 and thereafter. There was no fiscal impact for SFY 1996-97, and a reduction of $6 million was estimated for SFY 1997-98.

In 1995, Telecommunications Tax reform was enacted in response to a Court of Appeals decision. The major implications involved the moving of the access charge deduction from long distance companies to local telephone companies, updating the computation of the tax (Goldberg methodology) for providing telecommunication services, and the agreement that long distance companies will forgo refunds due to them.