New York Gov. Kathy Hochul’s abrupt flip-flop on congestion tolling in Manhattan blew a multibillion-dollar hole in the MTA’s capital budget, sending state lawmakers scrambling behind closed doors to consider the governor’s proposed tax on city businesses to fill the gap.

Hochul has not publicly detailed her plan to make up the lost revenue after she ordered the public transit system to “indefinitely” abandon its congestion pricing program. It was slated to take effect on June 30 and would have charged a base daytime toll of $15 for drivers entering Manhattan below 60th Street.

But lawmakers and state officials briefed on the governor’s proposed funding plug said she’s looking to increase an existing payroll tax rate on New York City-based businesses with payroll expenses of more than $1.75 million annually, from 0.6% of expenses to 0.825% of expenses.

So far, state Senate Democrats in particular seem unwilling to go along with the plan, even as some of their counterparts in the state Assembly appear more open to it.

“I do not think we have an appetite for that in the Senate,” said Sen. Liz Krueger, a Manhattan Democrat who chairs the powerful Senate Finance Committee. “But I have other colleagues here and we haven’t officially said anything, it’s just me saying that right now.”

Democrats in both chambers huddled separately behind closed doors on Wednesday and Thursday, trying to figure out if there was a desire to support Hochul’s tax plan. They learned about it in the waning days of their annual session and with an election just months away.

It’s unclear whether state lawmakers will go along with the plan, considering that a sizable faction of Democratic members vehemently oppose it. The tax hike would not apply to businesses in New York City’s suburbs, which also currently pay the MTA payroll tax to help fund the transit system.

The increase would create about $1 billion in new revenue annually, replacing the amount that the MTA was counting on to get $15 billion in bonds to finance an array of improvements to transit stations and infrastructure throughout the city and surrounding region. If approved, it would mark the second time in as many years that Hochul and lawmakers in Albany raised the tax. At the start of 2023, it was 0.34%.

The MTA needs the state Legislature to approve some kind of recurring revenue source to replace the money that was supposed to come from congestion pricing. The tolls were required by law to bring in $1 billion a year to pay for mass transit upgrades.

MTA officials and Hochul have repeatedly said those upgrades are necessary to keep the subway from falling into disrepair. The proposed improvements include dozens of new subway elevators and the expansion of the Second Avenue subway to East Harlem.

If lawmakers don’t approve a new revenue source like the tax hike that Hochul is seeking, she could still tap into state’s reserve funds. But the reserves aren’t recurring revenue streams, which are required to issue the $15 billion in bonds needed to pay for the upgrades.

Hochul’s decision to freeze the congestion pricing program was welcomed by a faction of legislative Democrats who control majorities in both houses, even as many said her about-face was driven by a fear of angering suburban voters in toss-up congressional districts who oppose the would-be tolling. Those who support the delay held a news conference at the Capitol on Thursday praising the governor.

“I think the majority of, if not the entire [Assembly Democratic] conference, is focused on getting the MTA to be world class, right?” said Assemblymember Kenny Burgos, a Bronx Democrat who helped organize the press conference. “We all can agree. Where the difference lies is, do we implement congestion pricing today? Or do we find another alternative mode of funding the MTA and getting that capital plan?”

Some seemed open to the payroll tax hike as a way to fill the multibillion-dollar budget hole.

“The [payroll] mobility tax is one, we see that as a possibility,” said Assemblymember David Weprin, a Democrat from Queens. “There are other proposals.”

Others, including Sen. Krueger, said they oppose the measure. On Wednesday, she said a hike on New York City business taxes would be politically unpopular, and pointed to what she called the MTA payroll tax “debacle” when Democrats in the state Senate lost their grip on the majority in 2010 after first implementing the tax.

Among those pushing back against the proposed tax hike is the Partnership for New York City, an influential organization representing local businesses. The organization said it opposes the increase in part because it exempts suburban businesses in the MTA’s service area.

“The [payroll mobility tax] burden is entirely on New York City, which is already the most highly taxed city in the country,” according to a statement the partnership issued on Thursday morning. “The governor should allow congestion pricing to move forward.”

What comes next for the MTA?

The MTA board, which is responsible for the agency’s finances, could make the unprecedented move of overriding Hochul’s order to pause the rollout of congestion pricing.

Board members are nominated by the governor, mayor and county executives but are technically independent under the state’s Public Authorities Reform Act of 2009, which mandates that the board members “have an explicit fiduciary duty to the authority and not to the appointing entity.”

Despite the board’s independence, there’s no precedent where members bucked a governor’s orders on an issue as significant as congestion pricing.

Rachael Fauss, an analyst at the government watchdog group Reinvent Albany, said the MTA board’s independence is a “fiction.”

“They’re controlled by the governor, and she just directed them to do something that’s directly counter to their financial interests,” said Fauss. “So whether that crosses the line for the staff or board members, it’s up for them to decide.”

There are some signs of dissent on the board over Hochul’s decision. Each of the members nominated by New York City Mayor Eric Adams — who hold four of the 14 votes on the board — have already made critical statements on the governor’s announcement.

One of those members, Midori Valdivia, said in a statement that the board had approved the congestion pricing tolls two times with overwhelming majorities.

“The way I see it, today it was announced, without MTA Board consultation, the cancellation of projects such as the Second Avenue Subway Phase II, our accessibility program with elevators and escalators in our subway system, and a fully zero-emission bus fleet,” Valdivia said on Wednesday. “There is no plan B to fund the MTA.”

“The MTA Board Members have a purview on the future of congestion pricing, including any significant delays or pauses,” she added. “I believe it is within the MTA board’s authority to vote on such matters. Let’s let it come to a vote.”

The board is scheduled to meet on June 26. Any vote by the group would need to be on the meeting’s agenda, which is set by MTA Chair Janno Lieber.

Lieber and his representatives did not respond to multiple requests for comment.

If lawmakers are to approve Hochul’s proposed tax hike, they would have to ask fast. Thursday was supposed to be the last day of the legislative session in Albany, but both the Senate and Assembly are now slated to return on Friday.