Judging by the budget proposal Governor Pataki unveiled on Tuesday, he has gotten at least part of the message from the conservative base as he’s been touring the country laying the groundwork for his expected presidential bid – tax cuts are good politics in addition to being good policy. But it appears he still has something to learn about spending restraint. While there is much to cheer in his proposal, especially the bold education proposals that our Jacob Gershman first reported from Albany and that we applauded yesterday in our editorial “The Education Governor,” other elements will give New Yorkers pause.

The tax-cutting, if the legislature approves all his proposals (always a big “if”), would save Empire State taxpayers an estimated $3.5 billion over four years. Individuals would see their income tax rates fall somewhat, to 6.75% from 6.85%. The plan would also reduce corporate income tax rates to 6.75% from 7.5%, and eliminate the alternative minimum tax. The governor proposes to end the state’s death tax and offers a slate of other, smaller, tax cuts, such as a $400 tax credit for homeowners in school districts that keep education spending increases under control – a way to encourage voters to discipline their local school boards – and a $500 tax credit for home heating oil costs, in addition to the $500 refundable tuition tax credit we described yesterday.

Up to $3.5 billion in tax relief sounds a step in the right direction for New York. Small businesses have long suffered under an oppressive tax burden, a problem that has rippled throughout the state’s economy considering that firms with fewer than 500 employees create nine out of 10 new jobs in the state. The governor’s agenda could go a long way to improving New York’s embarrassing 44th-in-the-nation small-business climate ranking which, as we noted in October, is largely a result of failed tax policies.

Although the governor proposes cutting tax rates, his cuts are not as deep as the cut proposed by the seven-member panel the governor appointed last year to study the state’s tax system. That commission had called for cutting individual and corporate rates to 5%. The governor would also increase some taxes, notably the cigarette tax, which he would hike to $2.50 a pack from $1.50 a pack outside the city. And instead of a perpetual $110 exemption from sales tax on clothing purchases, the governor only proposes a two-week tax holiday on clothing buys up to $250.

For the tax cuts to foster long-term economic improvement in the state, however, they will need to remain in effect for the long term, and unfortunately the governor has provided his successor and the assembly with too easy an excuse to increase rates. With spending increasing by 4.1% in the governor’s $110.7 billion proposal, Albany will be under constant pressure to contain what is expected to be a $4 billion budget gap by the 2009 fiscal year. Given Albany’s history of taxing and spending, lawmakers are all too likely to get out of that trouble by hiking taxes instead bringing spending under control. Protecting these tax cuts, if they are enacted, will require vigilance when the next governor takes office.

No doubt this budget proposal is based on a political calculation that voters care more about a quick “high” from tax cuts and spending and less about the long-term consequences. Increasing evidence suggests they don’t. A week before the governor boasted about boosting the level of per-student education spending in the state, a poll conducted for the Manhattan Institute found that 81% of New Yorkers would actually prefer better school spending instead of more school spending. New Yorkers understand the benefits of tax cuts and they understand the importance of spending responsibly instead of spending more. Governor Pataki has met them only half way in his last budget.