How Will New York Pay for Hochul's State of the State Promises?

Gov. Kathy Hochul made many promises in her State of the State address: expanding money for child care, lowering insurance costs, protections for landlords and a tax break for tipped income.

But all indications are that when she releases her budget proposal next week, Hochul will adopt the fiscal policy known as "kick the can down the road," deferring hard decisions until they can be delayed no longer.

And by ruling out an income tax increase, she set up a confrontation with Mayor Zohran Mamdani and other progressives who are mounting their most aggressive effort in years to raise New York's already steep taxes on the rich and corporations.

With the economy faltering and with the Trump administration finding new ways to defund blue states like New York, the risks keep piling up.

"The complexities are so broad and so deep and what we will see in this budget is just the first pass on what we need to do — and that is worrisome," said Maria Doulis, New York State deputy comptroller for budget and policy analysis.

Of course, with the governor running for reelection — as are all state legislators — it isn't a surprise that putting off tough decisions like raising taxes or cutting other programs is what seems most likely.

Delay is possible because Hochul is benefitting from much larger than expected tax revenues as Wall Street booms off the back of AI deals. A soaring stock market supercharges income tax revenues, and well off consumers increase their spending.

The Citizens Budget Commission, for example, estimates that Hochul will have about $8 billion to add to last year's budget of $254 billion.

She committed $1.7 billion to next year's budget to expand child care. The city will get $75 million for the 2026-2027 school year as it establishes a 2K program and $435 million next year.

She also said she was committed to providing more state money to fund the full rollout of 2K, which the Fiscal Policy Institute expects will cost about $1 billion a year. But she has offered no specific plan to dedicate money to the program.

The biggest threats to the budget come from measures in President Trump's One Big Beautiful Bill that reduce the nation's safety net. Six months after the bill was signed into law, Hochul has taken only the most modest steps to deal with the impact.

For example, the state is losing $2 billion from the convoluted Managed Care Organization (MCO) tax that actually increases federal Medicaid money. But she has announced no plans to replace it. The $2 billion was intended to be used to increase Medicaid payments to doctors and hospitals, so it is possible she intends to keep the current payment rates, a decision which will be met with pushback from health care interests.

Stricter work requirements now in effect for SNAP food aid, which helps 3.5 million New Yorkers or 18% of the population, is likely to result in hundreds of thousands of New Yorkers losing their benefits. The governor gave food banks $65 million during the recent federal government shutdown that interrupted SNAP and said there would be unspecified additional money for the next fiscal year. The Fiscal Policy Institute estimated that the state would need about $2 billion to fill the gap, but there is no plan to do so.

Hochul has, however, outlined a plan to address federal cuts to the Essential Plan, which provides no-cost Medicaid coverage to people who make too much to qualify for Medicaid. The state has been using the plan in part to provide health coverage for immigrants.

Some 450,000 residents will lose coverage early this year because the state is lowering the eligibility to 200% of the federal poverty line from 250%. Those people could seek coverage on the Affordable Care Act exchanges, but the cost of coverage there has risen as Biden-era subsidies have expired.

About 1 million Essential Plan recipients will be able to keep their coverage for the next three years since the plan has accumulated $10 billion in reserves. The hope appears to be that Democrats will regain control of Washington before those reserves are spent down.

Work rules for Medicaid are currently scheduled to begin in January 2027, with one study from the Fiscal Policy Institute projecting as many as 1 million New Yorkers being denied coverage as a result. If the state steps in to provide coverage, the impact would be seen in the last quarter of the budget that covers the next fiscal year beginning April 1.

"Given that we could see 1 million people lose health care coverage because of Medicaid work rules, it will be necessary to come up with a state public option so we don't have an explosion among the uninsured," said Nathan Gusdorf, executive director of the progressive Fiscal Policy Institute. "We have been consistently drawing attention to the issue but we won't see action until the crisis appears."

The only tax break Hochul endorsed in the address is a proposal to eliminate state income taxes on the first $25,000 in tipped income, following the federal tax break enacted in the One Big Beautiful Bill. But State Comptroller Tom DiNapoli has pointed out that the break is inherently unfair since it doesn't help other low-paid workers like home health care workers.

Progressive groups immediately demanded Hochul agree to tax hikes. During her speech, the Fiscal Policy Institute issued a press release noting that it estimates millionaires in New York will see their taxes reduced by $12 billion under the One Big Beautiful Bill, creating room for a state tax hike.

Our Time for an Affordable New York, a new advocacy group created to support Mamdani's agenda, called for higher taxes as well.

"Universal child care can't be built on unreliable 'existing revenues' — we need to tax the rich," said Jeremy Freeman, the group's executive director. "The way forward is crystal clear — we fight back against Trump by taxing the rich."

Wealthy New York City residents already pay the highest income taxes in the country; city residents with incomes higher than $2.1 million pay a combined rate of 14.8%. The second highest rate in the country is California at 13.3%.

Hochul has previously left the door open to raising corporate income taxes. Mamdani has proposed raising the state rate for larger companies to 11.5% from 7.25%, which is the same as what New Jersey imposes.

But the Citizens Budget Commission notes that downstate and city businesses also pay an MTA tax, and that the city imposes its own taxes, which brings the combined rate for city businesses to 17.44%.

The CBC says the state cannot fill in for the federal aid cuts, something the governor has also said, along with fiscal officials like former City Comptroller Brad Lander.

But the delaying tactic Hochul has adopted could backfire.

"Kicking the can down the road leads to self-inflicted wounds and could exacerbate a crumbling of the state budget,"said Andrew Rein, president of the CBC. "Easy choices today will cause greater pain tomorrow."

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