A Citizens Guide
New York State has a new law capping annual increases in local government and school district property taxes. Effective in local fiscal years starting on or after Jan. 1, 2012, the law limits the annual growth of property taxes levied by local governments and school districts to 2 percent or the rate of inflation, whichever is less.
The cap applies to all counties, cities, towns and villages outside New York City, and to all fiscally independent school districts. It also applies to the property tax levies of special districts established to finance fire departments, libraries, sewer and water systems and other purposes.
This booklet lays out the basics of the tax cap and answers some common questions about how the cap will work. It concludes with a full text of the tax cap provisions passed by the Legislature and signed into law by Governor Andrew Cuomo in June 2011.
Several important aspects of the new tax cap law may need to be clarified for many New Yorkers. For example:
- The cap is not absolute. School budgets can exceed the cap if approved by at least 60 percent of school district voters. Tax caps for counties, cities, towns, villages and special districts can be overridden by a vote of at least 60 percent of the local governing bodies.
- The annual cap in your community will seldom be exactly two percent. It could be lower if the rate of inflation has been below two percent, which was the case in several recent years. However, as explained in the following pages, the law also includes several exceptions and allowances that can make the cap higher. These factors will vary from year to year and will differ in each taxing jurisdiction.
- A simple majority of voters will now have the power to block any tax increase in independent school districts. Districts that fail to win voter approval for their proposed budgets after two tries must freeze their property tax levies.
CALCULATING THE CAP
Annual growth in property tax levies will be capped at 2 percent or inflation, whichever is less. Inflation is defined as the average monthly Consumer Price Index for all urban consumers (CPI-U) for the 12-month period ending six months prior to the start of the next fiscal year, minus the average for the same period preceding the current fiscal year. For example, if a town fiscal year begins Jan. 1, the percentage change in the inflation rate is the average CPI-U for July 1, 2010, through June 30, 2011. For school district fiscal years, which commonly start on July 1, the inflation rate is the change in average monthly CPI-U for the 12 months ending the previous Dec. 31. The cap cannot be less than zero.
The basic cap of up to 2 percent is subject to the following exclusions or modifications:
- A growth factor reflecting the “quantity change” in taxable property values in the base year. This factor is based on actual physical changes to taxable property—such as new construction of homes, stores and offices—and not mere changes in the assessed value of existing, unchanged taxable properties. These taxes can be added to the allowable (capped) levy in the first year after the value of the change is reflected on the local tax roll.
- Tort settlements or awards whose costs exceed 5 percent of the tax levy in the base year. A tort is a type of lawsuit seeking damages for personal injuries caused by negligence. Tort settlements exceeding 5 percent of a jurisdiction’s tax levy are rare.
- Capital costs (including debt service) for school districts, which cannot borrow money for capital purposes without voter approval.
- Pension contribution increases that exceed two percentage points of covered payroll. (See below for details on how this amount is computed.)
- A carryover of up to 1.5 percent of unused tax levy growth to the following year. For example, if a city raises taxes by 2 percent in a year when its cap is 3 percent, 1 percent can be added to the subsequent year’s levy cap.
A proposed tax levy that does not exceed the cap will continue to require approval by more than 50 percent of the members of the governing body of a county, city, town, village or special district, or by a simple majority of voters participating in a school district or special district budget referendum.
The amount of property taxes that can be levied by a local government or school district without exceeding the cap can be calculated in this manner:
- Determine the total amount of taxes levied, not collected, in the prior fiscal year.
- Multiply the total amount of taxes levied for the prior year by the “tax base growth factor,” reflecting physical additions to the tax base, as reported to the local government by the state Department of Taxation and Finance.
- Add any payments in lieu of taxes (PILOTs) that were receivable from property owners in the base year. The total amount of PILOTs receivable is to be included in the calculation of the tax levy limit. No adjustment is permitted.
- Starting in fiscal year 2013, subtract the tax levy necessary to support expenditures for tort actions for any amount that exceeds five percent of the local government’s tax levy in the prior fiscal year. There is no subtraction for these expenditures in the calculation for the 2012 fiscal year.
- Multiply the result by the allowable levy growth factor—either 2 percent or inflation, whichever is less.
- Subtract any PILOTs receivable in the coming year. The total amount of PILOTs receivable is to be included in the calculation of the tax levy limit. No adjustment is permitted.
- Add pension costs exceeding two percentage points of payroll, explained below.
- Beginning with fiscal year 2013 budgets, add any available cap carryover from the prior fiscal year. There is no available carryover for the 2012 fiscal year.
Provisions for overriding the cap are summarized below
The Pension Exclusion
Pensions for employees of local governments covered by the tax cap are financed by annual tax-funded contributions to statewide public pension systems. Pension contribution rates are calculated as a percentage of total salaries paid to employees in each of the three pension plans — the New York State Employees Retirement System (ERS), the Police and Fire Retirement System (PFRS) and the New York State Teachers Retirement System (TRS). Taxpayer-funded pension contribution rates have been rising in recent years and will continue to rise in the next several years, mainly as a result of increases in pension benefits and market losses sustained by the pension funds since the late 1990′s.
Pension costs attributable to pension contribution rate increases of more than two percentage points in a given year are not subject to the new property tax cap.
During fiscal years starting in 2011, the system-wide average contribution rates were 16.3 percent for ERS, 21.6 percent for PFRS and 11.1 percent for TRS. For budgets covering fiscal years that start in 2012 — the first gorup subject to the tax cap — those rates rise by 2.6 percentage points for ERS employees and 4.2 percentage points for PFRS employees. (The TRS rate accrued by school districts in 2012-13 is esxpected to rise by no more than 1.4 percent, according to a preliminary projeciton, and so will fall under the cap.) Subtracting two percentage points from the ERS and PFRS figures, a jurisdiction can increase its tax levy by an amount equal to 0.6 percentage points of its ERS slaries and 2.2 percentage points of its PFRS salaries — in addition to the “capped” portion of the tax levy.
For a hypothetical employer with a $1 million ERS salary base and a separate $1 million PFRS salary base, the ERS exemption is claculated by multiplying 0.6 percent by the $1 million salary base ($6,000), and the PFRS exemption is calculated by multiplying 2.2 percent by the separate $1 million salary base ($22,000), for a total pension exemption of $28,000. All other pension costs fall under the basic cap.
The impact of the pension exclusion on a given jurisdiction’s net tax cap depends on th erelative size of its payroll in comparison with its property tax levy. The addition to the basic 2 percent cap will be greatest in jurisdictions where payrolls equal or exceed the tax levy, and least in jurisdictions where the payroll is smaller thatn the levy. In the example above, if the employer’s tax levy is the same as its total payroll of $2 million, a pension exclusion of $28,000 adds 1.4 percentage points to the basic cap, yielding a net tax cap of 3.4 percent before other exclusions. A budget holding taxes within the cap will still require approval by a simple majority of the governing board or school district voters.
A county, city, town, village or special district can exceed the tax levy limit if at least 60 percent of the members of its governing body vote in favor of a local law overriding the cap. Local laws, in turn, are subject to statutory requirements including advance public notice and public hearings.
As explained by the state Department of Taxation and Finance:
A budget officer, or chief executive, may prepare a tentative budget that requires a tax levy in excess of the levy limit. However, the governing body cannot, without first complying with override requirements, (i) adopt a budget that requires a levy in excess of the tax levy limit, or (ii) impose or cause the imposition of a tax levy to the extent that a budget requires a levy in excess of the levy limit.
In school districts, voters will continue to have a direct say on proposed school budgets—and a greater say than ever on taxes. Under the new law, a school budget that requires a tax levy above the cap must be approved by a supermajority of at least 60 percent of the district residents participating in the annual budget vote, held on the third Tuesday in May. A budgeted tax hike within the limit will continue to require approval by at least a simple majority of voters.
If a budget is defeated, the school board can resubmit it to district voters in original or revised form. However, if the budget is defeated a second time, or if the board chooses not to resubmit, the district must revert to a contingency budget.
Under a contingency budget, the school tax will be frozen—with no exceptions or allowances. The tax cap law is clear:
Notwithstanding any other provision of law to the contrary, if the qualified voters fail to approve the proposed school district budget upon resubmission or upon a determination not to resubmit for a second vote … the sole trustee, trustees or board of education shall levy a tax no greater than the tax that was levied for the prior school year.
QUESTIONS AND ANSWERS
Q: Does the property tax cap affect property tax rates?
A: Tax rates cannot be changed in any way that would raise the total amount of property taxes —the tax levy — above the cap. Localities cannot get around the cap by manipulating rates.
Q: Can I expect my own tax bill change at the same rate as the levy?
A: The cap will limit growth in your tax bill, but the specific level depends on assessments. To understand why, consider how the property tax rate is calculated:
(Tax Levy ÷ Assessed Value) x 1,000 = Tax Rate
So, for example, in a community with a tax levy of $1 million and a tax base with assessed value of $100,000,000, the tax rate is $10 per $1,000. Assuming no change in assessed values, a 2 percent increase in the tax levy will also drive up the tax bill by 2 percent, or 20 cents per $1,000 in the example used here. Your property tax bill could rise faster than the tax levy if, for example, there is a decrease in assessed property values during the same year. Possible causes of a decrease in property values include a flood or other natural disaster; the purchase of taxable property by a tax-exempt organization; eminent domain proceedings in which government acquires ownership of a private parcel; a general drop in market values; and successful challenges to assessed values.
If assessments change at a uniform rate, then the tax cap will have a uniform impact on individual tax bills. But if some assessments change more than others—rising faster, for example, in a section of town closest to a new school or highway—than taxes will increase more for some property owners than for others. A locality cannot circumvent the tax cap simply by manipulating assessments.
Q: In a given year, will the tax cap be the same for my county, town and school district?
A: The starting point in all cases will be a tax levy limit of 2 percent or the rate of inflation, whichever is less. But the net cap for each taxing jurisdiction may be slightly different, based on factors such as inflation rates in the prior year, pension contributions, growth factors and, on the school level, voter-approved capital construction expenses.
Q: A new strip mall was added to my town’s tax base. Would the increased property tax revenue offset a property tax increase?
A: Under the new tax cap, as under previous law, the addition of new taxable properties to the tax base through new construction or expansion of existing structures or facilities will make it possible to reduce taxes on other taxable property. But to avoid discouraging development, new taxes generated by new construction during a given year (also known as “quantity change” in the tax base) will not initially be subject to the levy limit, although it will be part of the capped tax levy in subsequent years.
Q: How does the “carryover” provision work? Can it be used by a property tax jurisdiction to exceed the tax cap?
A: When a local governments or school district holds its annual tax levy within the cap, it has the option of adding the difference to the cap limit in the following year (but only in the immediately following year). For example, if a locality increased its tax levy by 1.2 percent in a year in which the 2 percent tax cap applied, then up to 0.8 percent of the tax levy is therefore “unused” and can then be raised in the next year before hitting the cap. Up to 1.5 percentage points can be carried over in this way, hypothetically raising the basic tax cap to as high as 3.5 percent above the prior year. Of course, there is no requirement to carryover unused taxing authority, and all local budgets will continue to require approval from the governing body or school district voters.
Q: A big utility in our town just won a big court-ordered reduction in its assessment, and a court-ordered refund of some past taxes. Will this be excluded from the tax cap?
A: The exclusion for court awards applies only to tort cases, which involve personal injuries due to negligence. Localities that are found liable for having over-assessed some property cannot use that as an excuse for exceeding the tax cap.
Q: In the past, defeated school budgets could be replaced by contingency budgets that raised taxes even higher. Does the new tax cap change this?
A: Yes. Under the new tax cap law, a contingency budget cannot result in a tax levy increase. That means spending increases up to the limit are allowable only if financed by revenues other than the property tax; for example, state or federal aid, district fees or other sources.
Q: Can a school district circumvent the cap by having the public vote on separate referenda for expenditures, such as sports or music programs?
A: No. If separate referenda on budget items are put before the voters that necessitate a tax levy that exceeds the tax cap, then a 60 percent supermajority would be required for each individual referendum to be approved and go into effect. Bond issues for capital purposes will require a simple majority, however.
Q: I live in a city that does not have a separate school property tax. How does the tax cap apply, if at all, to my school district?
A: The school districts in Buffalo, Yonkers, Rochester and Syracuse are “dependent” on their city governments, which levy a single property tax to cover both municipal purposes and schools. Since residents of these cities do not vote directly on school budgets, they will not have the ability to directly control the share of the tax levy going to schools. But the total city tax levy, including the portion intended for the school district, is subject to the cap. Excluding these cities and New York City, which is completely excluded from the cap, all other school districts in New York State are independent property tax jurisdictions and are subject to the tax cap.
Q: In my town, the public directly votes on the budget for our fire and library districts. Do these budgets need 60 percent voter approval of their budgets to raise their tax levies above the cap?
A: Special district budgets will continue to require only simple majority approval from voters. A cap override in a special district will require approval from 60 percent of the members of the district’s governing body.
Q: My town tax bill lists a separate property tax for the highway department, which is headed by an independently elected superintendent. Would this be a special district subject to the tax cap?
A: No, not if the highway department is part of the town budget rather than an independent special district. It is not uncommon for individual municipal departments, particularly those headed by an elected official, to have their tax levies shown separately on a property tax bill, yet are legally part of the overall tax levy of the town or municipality. Accordingly, it would be possible for a town department to have a large increase in the tax rate above the tax cap, though in actuality it represents merely a portion of the larger town tax levy that remains within tax cap.
Property taxes levied by a town to fund the town budget under its taxing authority fall within the town’s tax levy limit. Property taxes levied by a town on behalf of another entity, such as a special district, fall within that other local entity’s tax levy limit.
Q: My sewer district imposes a bi-annual fee on my property. Is this subject to the tax cap?
A: Fees that are imposed by a special district are not subject to the property tax cap since they are not taxes.
A key distinction between a fee and a property tax is that a tax is imposed based on the assessed value of the property, whereas a fee is typically imposed uniformly on each property in the district, or according to service usage by each property (as measured by water meters, for example), or has a rate differential based on the type of property.
Q: My town is going through a reassessment to full value, which may result in higher taxes on my house and in my neighborhood. Does the tax cap restrict that potential tax increase?
A: Assessment changes may redistribute the tax burden within a given taxing jurisdiction, but localities cannot use reassessments to raise that tax burden to a level exceeding the cap. As was the case prior to the tax cap, a reassessment to full value within a taxing jurisdiction will vary in its impact upon individual properties. Some homes will face a higher tax, while others may face a lower tax due to changes in individual property values. The sum of these individual tax liabilities constitutes the tax levy, which is subject to the tax cap.
Q: What happens if a taxing jurisdiction exceeds the allowable tax levy by mistake?
A: Each property tax jurisdiction is responsible for determining its tax levy amount prior to formally approving the tax levy based on several calculations, including the rate of inflation, and any allowable exceptions such as a tort judgment or excess employee pension costs. If the tax levy exceeds the allowable amount due to “clerical or technical error,” the excess tax levy must be placed into an interest-earning reserve account to be applied to offset the next year’s tax levy. The state comptroller’s office will prescribe specific requirements for property tax jurisdictions that accidentally exceed their levy limits.
Q: What happens when two local governments or school districts merge? Does the tax cap still apply?
A: Yes. A new tax levy within the tax cap is calculated by the new taxing jurisdiction as a result of any change in the previous governmental arrangement. For example, the new school district that emerges from a consolidation of two or more districts would calculate the new tax levy based on the prior year’s levy amounts from the separate school districts, which would be overseen and determined by the state Education Department. Furthermore, if a local government dissolves and another assumes its debts, obligations and tax base, the new levy limit would be calculated by the remaining government.