Today marks the moment of truth in the ongoing battle over the state budget and the separate bailout packages for New York City proposed by the Legislature and Governor Pataki. Any way one looks at it, taxpayers are set to lose. The Legislature is almost certain to override the governor’s planned veto of the state budget, which will raise taxes on both income and sales; and the Legislature’s bailout — if a permission slip for New York City to mortgage itself even further to the rich can be called that — is also almost certain to pass into law.

So, barring unforeseen circumstances, New York City’s highest income tax rate will soon be raised 16% to 12.15%, and the sales tax will soar 4.5% to 8.625%. For those who take comfort in politicians’ assurances that the income tax surcharges in the city will be temporary — i.e., that they sunset — consider that the last income tax surcharge, a 14% increase instituted under Mayor Dinkins that was supposed to sunset in the mid-1990s, is still with us, according to Manhattan Institute fiscal policy analyst E.J. McMahon.

So, where will it all end? Certainly not with this year’s budget. It’s not imprudent to say that New York City and State may well see more tax increases next year, on account of the city and state governments’ inability to rein in spending. And, as our William F. Hammond Jr. laid out on these pages on Monday, much of the money the Legislature is counting on is either from gimmicks or may not materialize. The Legislature’s budget will borrow $4.2 billion, increasing New York’s debt by 10%; the first payments are due next year. The Legislature is also counting on $186 million by requiring retailers on Indian reservations to pay state taxes; the last time the state tried this stunt, in 1997, we almost saw an Indian war. This isn’t to mention that one of the ways the Legislature’s budget saves $150 million this year is by shifting a week’s worth of Medicaid payments to hospitals by a day — from March 31, the last day of the fiscal year, to April 1, adding directly to the 2004–05 deficit.

The problem is that the state is spending like we’re still in the Internet bubble. As Mr. McMahon documented in these pages back in February, capital gains income in New York skyrocketed to $62 billion in 2000, from $12 billion in 1994, accounting for about a quarter of the increase in state tax collections during that period. It was generating about $3.6 billion a year in taxes. Now, capital gains are generating tax collections closer to $800 million. Even a resurgence in the stock market wouldn’t get the state that money back — some of the recent losses in the market will be deductible against gains for years to come.

The only thing that can be done to avoid further tax increases is to control spending. As next year is an election year, there isn’t much reason to hope that the Legislature will suddenly discover thrift. The logical hope would seem to lie with the governor, who has made a return to his conservative roots — for whatever reasons — the theme of his third term. As Mr. Hammond pointed out last week, one of the ways the governor can control spending is by way of a constitutional showdown with the Legislature over its spending plans. The governor can declare that certain changes the Legislature made to his proposed budget are unconstitutional, and then he can use his executive power to refuse to carry out the added spending. The matter would end up in the courts, but the governor launched similar lawsuits in 1998 and 2001 — and has been successful in the early rounds, though those are still being argued on appeal.

Mr. Pataki is at least partly responsible for bringing us into this budget crisis. The state had built up a budget surplus that peaked at more than $3 billion, but this was squandered after September 11, 2001, in an election-year spending spree that increased spending at twice the rate of inflation. New Yorkers are now paying for the governor’s re-election — the least he can do is pay us back.