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The Case for a Cap - Page 2

Why and How It Can Work in New York

March 01, 2011

3. THE CAP NEW YORK NEEDS

In formulating his own property tax cap, Cuomo had several models to choose from. New York’s STAR program, like property tax rebates in other states, acknowledged the problem of excessive property taxes but failed to fix it—and probably made it worse in the long run. Efforts by some states to control property tax rates or assessments have also been ineffective and inefficient. The nation’s most dramatic property tax limitation measure, Proposition 13 in California, significantly reduced taxes but also undermined local governments and schools.

Cuomo, like his predecessors, chose the Massachusetts model, which has been effective at delivering broad restraint in tax growths while providing local voters with the flexibility to target higher taxes when convinced it is needed.

As summarized in Table 1 on page 2, Governor Cuomo’s proposed cap is almost as broad as the Massachusetts limit, and in some respects even tighter. Because Massachusetts has a single tax levy, over 50 percent of voters must agree to override the cap for any municipal or school purpose. In New York under Cuomo’s cap, approval by more than 60 percent of voters would be required only for an override of the separately levied school tax. The cap on county, city, town, village and special district levies could be overridden by a two-thirds vote of the governing body of a local government.

Proposition 2½ makes an exception for additional property taxes generated by new construction. This exclusion added an average of 2.6 percent a year to increases in local levy limits in Massachusetts between 2000 and 2007, boosting the average annual levy increase from 3.3 percent (including overrides) to 5.9 percent. A similar exclusion was included in the property tax cap first proposed by former Governor Pataki as part of the original STAR program. It was also part of the property tax cap recommended by the Commission on Real Property Tax Relief and supported by former Governor Paterson starting in 2008.

Cuomo’s proposal, however, does not make any allowance for taxes generated by new construction. This approach would significantly reduce the net growth in taxes—and, in some cases, result in outright tax cuts—for property owners in communities that experience significant development. However, local elected officials also would have less incentive to favor development, since it would add to demand for services without generating additional taxes.

Reforming tax administration

Massachusetts also reformed its property tax administration system, providing for reassessment of all property at market values every three years. By comparison, New York's current patchwork approach to property tax administration is both unfair and inefficient. The reliance on numerous local assessment districts, and the lack of a single assessment standard linked to a regular reassessment cycle, are glaring shortcomings of the system as it now exists.

A tax cap will not make these shortcomings any worse, or any more inequitable. But it will make them all the more glaring; for example, if assessment practices are not made more uniform, current differences in the full-value equalization rates of portions of different towns within the same school district will lead to disparities in the effective impact of the levy limit within the district. Reform of the property tax system will be all the more essential. At a minimum, changes should include a shift to countywide assessment, and a requirement that all property be assessed at full-market value on a three-year cycle.

Reform of state mandates is needed, too, to address the most obvious of the root causes driving up property taxes: state mandates on local governments, especially the rules controlling terms and conditions of public employment. Reform of the Taylor Law is necessary to restore leverage to the management side in teachers’ contract talks. School boards also need greater flexibility to restructure retirement health benefits. And state law should be changed to allow school districts to opt offer newly hired teachers a less expensive, more predictable and portable defined-contribution retirement plans.

Advantages of an across-the-board levy cap

An across-the-board tax levy cap has these distinct advantages:

It is fair because it treats all taxpayers alike, extending the same protection to every class of property based on assessed market values.
It is simple to understand, administer and enforce.
It is democratic, strengthening the accountability of county and municipal officials while giving voters direct control over school property taxes.

Exceptions to the cap, such as New Jersey’s allowance of tax increases to fund teacher pensions and health care, would undermine the basic premise of any limitation on school property taxes. School districts need to do a better job of controlling costs—and when the factors driving costs are due in whole or in part by state law, the governor and the Legislature need to be more forcefully and directly confronted with the fiscal consequences of failing to address the situation.

The “equity” issue

Discussions of school finance in New York often devolve into debates over the “fairness” of current school funding formulas and the “adequacy” of existing funding levels in a state that already leads the nation in per-pupil spending. If voters in affluent districts are more willing to support tax overrides to boost school funding, it is argued, the cap will exacerbate existing inequities in school funding.

Three points can be made in response to these claims:

Affluent school districts already receive minimal percentages of state aid, and their residents have been voting to tax themselves more heavily for years. The cap, linked to a supermajority override provision, will make it slightly more difficult for them to do so.
Leaving tax levies uncapped is ultimately least fair to residents of poorer districts. Absent a cap, as the tax burden continues to grow much faster than inflation even while the tax base stagnates or even shrinks, many struggling communities in upstate New York risk taxing themselves into oblivion.
The equity issue is best fought out at the state government level, through debates over the proper size and configuration of the state school aid budget.

The override provision is a safety valve, allowing residents of wealthier communities to indulge their appetites for higher spending without clamoring for state aid increases that would have economically damaging implications for the statewide tax base. At the same time, it will allow residents of poorer, more fiscally stressed communities to veto increases they cannot afford.

As illustrated in Figures 1 and 2, below, the proposed cap would have been substantially lower than actual tax levy increases since 2000. However, the financial impact of the cap on total school tax levies, compared to a continuation of the current system, is difficult to predict with much precision. The Massachusetts experience would suggest that overrides in New York will not be infrequent, especially since governing bodies of counties, cities, towns and villages will retain the right to override by a two-thirds vote of their members.

The proposed New York cap will give school district residents substantially greater power to veto tax increases they consider excessive. Excluding overrides, the average individual property owner in New York would experience school tax increases no higher than the annual change in the consumer price index or the ultimate cap of 2 percent. Even assuming numerous overrides, the average annual growth in school tax levies is likely to be significantly below the recent average of nearly 6 percent.⁵³

Turning a new leaf on an old approach

The adoption of a property tax cap would not be a departure from fiscal tradition in New York; in fact, as noted above, the state’s constitutional tax caps on counties, cities and villages date back to the late 19th century. More recently, just two years before Gov. Pataki proposed a levy cap in his original 1997 STAR bill, a cap on all property taxes in the state was proposed by Assembly Speaker Sheldon Silver and passed by the lower house of the Legislature.⁵⁴

CONCLUSION

Governor Cuomo’s proposal for a broad and tight cap on property tax levies, allowing for override only by “supermajority” votes, offers a promising way to control New York’s tax and spending burden. Common criticisms of the tax cap simply don’t stand up to scrutiny. In Massachusetts, Proposition 2½ restrained growth in tax burdens without compromising essential services. Far from eroding local control, Cuomo’s cap would give taxpayers new power to check the growth of school taxes.

Having taken a first step toward greater control of property taxes, the governor and tax cap supporters in the state Senate must avoid agreeing to exceptions or exclusions that would reduce such a cap to a mere symbol. For example, teachers’ pension costs alone are projected to rise by the equivalent of 3.5 percent of the school tax levy over the next five years,⁵⁵ and data from the state Conference of Mayors indicate that city and village tax levies would have to increase by more than 8 percent a year just to keep pace with projected increases in pensions and benefits for municipal employees.⁵⁶ Imitating New Jersey and excluding these fastest rising employee compensation costs from the New York cap would be tantamount to imposing no cap at all.

County, municipal and school officials have argued persuasively that they need relief from state mandates to manage expenses within a tight property tax cap. (See “12 steps to mandate relief for tax-capped localities,” page 19.) But in putting the cap first, Governor Cuomo and the Senate have kept their priorities in the right order. The tax cap is an essential catalyst for the changes in state mandates that local governments and school districts have been futilely seeking for decades.

In passing the cap, state officials also will have to stop passing the buck for generous pension benefits and collective bargaining rules tilted against the interests of taxpayers. The tax cap will have a twofold effect: it will instill greater fiscal discipline in local government and schools, and it will put tremendous added pressure on the Governor and the Legislature to finally get serious about mandate relief.

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Endnotes:

[1] Tax Foundation, “Property Taxes on Owner Occupied Housing by State,” http://www.taxfoundation.org/research/show/1913.html

[2]Testimony of Andrew Pallotta, Executive V.P., NYSUT, to the Senate Standing Committee on Local Government and the Senate Standing Committee on Education, Feb. 17, 2011. http://www.nysut.org/cps/rde/xchg/nysut/hs.xsl/legislation_16239.htm

[3] Ibid.

[4]For further background on this issue, see O’Neil, Terry and McMahon, E.J., Taylor Made: The Cost and Consequences of New York’s Public-Sector Labor Laws, Empire Center for New York State Policy, October 2007.

[5] New York State Office of Real Property Tax Services, Property Tax Monitor, June 2008. http://www.orps.state.ny.us/monitor/jun08/index.cfm

[6] Fisher, Ronald c. 2007. State and local public finance, 3^rd ed. Mason, OH: Thomson/South-Westerb College Publishing, 318, as quoted in The Property Tax Funding Dilemma, by Daphne A. Kenyon, a Policy Focus Report of the Lincoln Institute for Land Policy, 2007, 40.

[7]New York State Office of Real Property Tax Services, Countywide Average Residential Tax Rolls, at http://www.orps.state.ny.us.

[8] More specifically, all one-, two- and three-family homes, as well as condominium and coop apartments, and multi-use buildings that include a residence (such as an apartment above a store), are eligible for STAR if they are the taxpayer's “primary residence.”as condominium and coop apartments, and multi-use buildings that include a residence (such as an apartment above a store), are eligible for STAR if they are the taxpayer's “primary residence.”

[9] In the many communities that assess properties at only a portion of full value, the full value is estimated using the state equalization rate.

[10] In New York City, which has no separate school property tax, most STAR aid is has been used to finance an across-the-board reduction of 0.2 percentage points in the city resident income tax, which has been phased out for high-income residents starting in 2010.

[11] For example, in the Westchester County town of Rye, where the median home price approaches $1 million, the basic STAR exemption in 2010-11 is $96,350.

[12] Tae Ho Eom, William Duncombe and John Yinger, “Unintended Consequences of Property Tax Relief: New York's STAR Program,” October 2005, Abstract. Center for Policy Research, Maxwell School of Citizenship and Public Affairs, Syracuse University, http://www-cpr.maxwell.syr.edu/cprwps/pdf/wp71.pdf.

[13] Ibid., p. 29.

[14] Rockoff, Jonah E., “Community Heterogeneity and Local Response to Fiscal Incentives,” December 2003. Text posted at http://www0.gsb.columbia.edu/faculty/jrockoff/papers/rockoff_local_response_dec_03.pdf.

[15] The rebate program was a response by the Legislature—spearheaded by Senate Republicans—to Gov. Pataki's proposal to make an added $400 STAR rebate available to homeowners in any school district that held its annual spending increase within the contingency budget limit of 4 percent. The final bill bases the rebate on existing STAR payments, without limiting district spending.

[16] Office of State Comptroller, “2010 Annual Report on Local Governments,” http://www.osc.state.ny.us/localgov/datanstat/annreport/10annreport.pdf..

[17] City of New York, Independent Budget Office, “Twenty-Five Years After S.7000A: How Property Tax Burdens Have Shifted in New York City,” Dec. 6, 2006.

[18] Allen, Marcus T., “Identifying determinants of horizontal property tax inequity: Evidence from Florida,” Journal of Real Estate Research, September 1 2002.

[19] Two large states with property tax limitation laws the Commission rejected as models for New York were Florida and Texas, both of which have adopted convoluted tax cap plans tailored to the idiosyncracies of their state and local finance systems. In 1992, Florida voters approved the “Save Our Homes” amendment to the state’s constitution, limiting annual assessment increases on homestead property to 3 percent, or the rate of inflation, whichever is less. Homes are reassessed at market value when sold, and—unlike Proposition 13—the Florida limit does not apply to rental, second home and business properties. As local government spending increases, the total tax burden grows and is redistributed. A constitutional amendment passed by voters in late January 2008 allowed homeowners to transfer “Save Our Home” tax benefits from their old home to their new home, with a cap of $500,000. In 2006, the Texas Legislature approved a one-third reduction in a de facto maximum school property tax rate, backfilling the lost revenue with a state cigarette tax and business tax, and required voter approval for school tax rate increases of more than 4 cents per $100.

[20] Illinois General Assembly, Commission on Government Forecasting and Accountability, Property taxes in Illinois, 2005 Update.

[21] According to Tax Foundation calculations, state and local taxes were 10.8 percent of income in Illinois as of 2007, compared to 10.2 percent in 1991.

[22] Michigan’s combined state-local tax burden as of 2007 was 11.2 percent, compared to 10.4 percent in 1994, according to the Tax Foundation.

[23] California Taxpayers’ Association, “Proposition 13: Love it or Hate it, its Roots Go Deep,” November 1993.

[24] Michael J. New, “Proposition 13 and State Budget Limitation: Past Successes and Future Options,” Briefing Papers, Cato Institute, June 19, 2003.

[25] California Taxpayers’ Association, “Proposition 13: Love it or Hate it, its Roots Go Deep,” November 1993.

[26] Prop 13 also required that state tax increases be approved by two-thirds of the state legislature, and that local tax rate increases be approved by two-thirds of the voters.

[27] A similar situation was created in Michigan by Proposal A, where the cap based on acquisition value cap “creates situations where a new homeowner living next to a person who has owned an identical house for several years could pay substantially higher property taxes than his or her neighbor whose taxable value is below [market value],” according to a 2002 study by the Michigan Department of the Treasury (School Finance Reform in Michigan Proposal A: A Retrospective, available at http://www.michigan.gov/documents/propa_3172_7.pdf.)

[28] Data Source: U.S. Census Bureau, The Statistical Abstract of the United States, annual. Calculations by authors.

[29] Ibid.

[30] As explained in the official state “primer” on Proposition 2 ½, “a majority vote of a community’s selectmen, or town or city council (with the mayor’s approval if required by law) allows an override question to be placed on the ballot” and “override questions must be presented in dollar terms and must specify the purpose of the override.”

[31] The under-ride can be placed on a ballot by the municipality’s governing body, or voters can use an initiative procedure if one is already provided by local law.

[32] Robert Keough, “Back to Taxachusetts?” The Boston Globe, November 6, 2005.

[33]“Property tax hikes winning support,” The Boston Globe, June 12, 2009. http://www.boston.com/news/local/massachusetts/articles/2009/06/12/despite_economy_property_tax_hikes_okd_in_11_mass_communities/

[34] One homeowner whose taxes have risen faster than 2.5 percent a year is the tax activist who spearheaded Proposition 2 ½, Barbara Anderson. Thanks in part to recent overrides in her home town of Marblehead, Ms. Anderson calculates that her tax bill has risen by an annual average of 5.4 percent since the cap was enacted. Yet she still estimates she is saving $3,600 a year compared to what her payment had been if taxes had continued to increase at the pre-1980 level of 8.8 percent a year.

[35] “The Right Kind of Cap,” NYSUT Media Relations, Jan. 29, 2008, at http://www.nysut.org/cps/rde/xchg/nysut/hs.xsl/mediareleases_9409.htm.

[36] Cutler, David M., Elmendorf, Douglas W., and Zeckhauser, Richard, “:Restraining the Leviathan: Property Tax Limitation in Massachusetts,” National Bureau of Economic Research, August 1997.

[37] Wallin, Bruce A., “The Tax Revolt in Massachusetts: Revolution and Reason,” Public Budgeting & Finance, Winter 2004.

[38]U.S. Census Bureau, Public Elementary–Secondary Education Finance Data, 2008 data, at http://www.census.gov/govs/school/.

[39] States With the Smartest Kinds,” Daily Beast, http://www.thedailybeast.com/blogs-and-stories/2011-01-23/states-with-smartest-kids-from-massachusetts-to-mississippi/.

[40]College Board, “College-Bound Seniors 2010,” at http://professionals.collegeboard.com/data-reports-research/sat/cb-seniors-2010.

[41]College Board, “SAT Program participation and performance statistics,” at http://professionals.collegeboard.com/data-reports-research/sat.

[42]“Quality Counts 2011,” Education Week, Jan. 13, 2011, summary press release at http://www.edweek.org/media/ew/qc/2011/QualityCounts2011_PressRelease.pdf.

[43]Tax Foundation, Tax Foundation Special Report No. 189, “State-Local Tax Burdens Fall in 2009 as Tax Revenues Shrink Faster than Income,” http://taxfoundation.org/research/show

/22320.html

[44]One other noteworthy difference between Massachusetts and California: Combined with a state court decision requiring statewide equalization of school expenditures, Proposition 13 left California homeowners with much less incentive to support increases in their local school budgets; as a result, school spending in California fell sharply relative to national averages. Massachusetts, however, has sought to mitigate school spending differentials without depriving affluent property owners of the ability to tax themselves more heavily in support of higher spending in their local schools.

[45] State of New Jersey, Department of Community Affairs, Division of Local Government Services, Local Finance Notice (LFN) 2011-3, “2010 Levy Cap Law Guidance and CY 2011 Budgets,” http://www.nj.gov/dca/lgs/lfns/11lfns/2011-3.doc.

[46]Ibid.

[47]“Mayors press N.J. lawmakers for 'tool kit' reforms to help manage tight budgets,” Newark Star Ledger, Feb. 17, 2011, http://www.nj.com/news/index.ssf/2011/02/nj_mayors_press_lawmakers_for.html

[48]“New police arbitration limits likely to affect future contract negotiations,” NorthJersey.com, Jan. 13, 2011, http://www.northjersey.com/news/113436899_Police_raises_capped_at_2_percent.html

[49] The bill, A.6171 of 1995-96 session, was never taken up in the Senate.

[50]S.8736 of the 2007-08 session.

[51]S.67005 of the 2009-10 session.

[52]“The New NY Agenda: A Plan for Action,” at http://www.andrewcuomo.com/system/storage/6/34/9/378/acbookfinal.pdf

[53] During the 10 years prior to STAR’s enactment and phase-in period (school years ending 1988-1998), school property tax levies also increased by an average of 6 percent a year.

[54] The bill, A.6171 of 1995-96 session, was never taken up in the Senate.

[55]E.J. McMahon and Josh Barro, New York’s Exploding Pension Costs, Empire Center Special report, December 2010.

[56]Testimony of the New York State Conference of Mayors before the Senate Committee on Local Government and the Senate Committee on Education, Feb. 17, 2011. See chart attached to testimony, entitled “City Employee Benefit Costs Alone Would Exceed Capped Property Taxes.”