Nervous in New York: the Legislature finally hammered out a budget with the governor, but the Empire State has plenty of red ink in its future.

• Author: Liu, Irene Jay

Over the past two and a half years, New York has faced tectonic shifts in the political landscape. A governor resigned in disgrace, Democrats seized control of the Senate for the first time in more than four decades and state leaders have struggled to find their footing during the worst economy since the Great Depression.

While Wall Street's collapse shocked the nation, the effect in New York was devastating, says economist Donald J. Boyd, a senior fellow at the Nelson A. Rockefeller Institute in Albany who tracks state revenues. New York coffers have shrunk as income and sales tax revenues sink, while unemployment and demand for social services grows.

"The financial services industry accounts for about 20 percent of New York's tax revenue, reflecting taxes on the incomes of investment bankers, securities brokers, portfolio managers and other high-earners in the industry, along with corporate taxes on the companies themselves and on banks," he says. "New Yorkers have far greater capital gains, on average, than U.S. taxpayers as a whole."

The result can be seen clearly in April's tax returns: New York's personal income tax fell by 48 percent from a year ago, Boyd says. "Largely as a result, New York's revenue fell about $239 million short of its cash-flow projection in April, and the state will face a new gap in the budget adopted in early April."

That was the fiscal mess that Governor David Paterson inherited after he took over the office in March 2008 after former Governor Eliot Spitzer resigned in the wake of a prostitution scandal.

Soon after taking office, Paterson warned of the impending state fiscal crisis. He cut his executive budget by more than 10 percent and persuaded Assembly Speaker Sheldon Silver, a Democrat, and Senate Majority Leader Dean Skelos, a Republican, to make $427 million in mid-year cuts in the summer of 2008.

He called the Legislature back for more cuts in November, after Democrats won the majority in the Senate. But Senate Republicans, who controlled the chamber until the new year, wouldn't negotiate.

Instead, Skelos said he would put the governor's draft budget bill to a vote in the Senate in November, but without the usual negotiation process aimed at producing a bill that could pass. Skelos made clear he would not vote for it. At a public leaders' meeting called by the governor in lieu of a special session to make the cuts, Skelos said he understood the need to cut spending, but that those decisions...