He didn’t use the phrase himself, but the property tax credit unveiled yesterday by Governor Andrew Cuomo is of the type commonly known as a “circuit breaker.” Like an electrical switch designed to automatically prevent a power overload, a circuit breaker tax credit is supposed to kick in when homeowners’ property tax burdens overload their ability to pay.
Cuomo’s proposal would not represent a property tax cut but a means-tested state personal income break — available only to some homeowners, and not available to owners of commercial, industrial or multi-family properties, which pay a hefty share of local taxes.
As explained in the governor’s press release:
Taxpayers with incomes below $250,000 would qualify for this credit, and the credit is valued at up to 50 percent of the amount by which property taxes exceed the six percent burden threshold. The specific amount of the credit within that 50 percent is determined on a progressive income scale, so that New Yorkers with the highest tax burdens and lowest income levels will receive the greatest amount of relief.
When fully phased-in, more than 1.3 million State taxpayers will receive an average credit of $950. Outside of New York City, only the taxes levied by a tax cap-compliant jurisdiction are included in the credit calculation. The total taxpayer benefit from this new proposal will reach as high as $1.66 billion on an annual basis once the credit is fully phased-in in year four.
The key shortcomings of a circuit breaker are laid out here. The basic problem: it fails to reduce or restrain growth in the property tax burden, which is driven by spending. That spending, in turn, in part reflects state mandates, particularly labor-related mandates, that Cuomo and the Legislature have proven unwilling to address.
“Cut” to the quick
At his Long Island press conference, the governor declared: “This will be the first time there’s an actual cut.”
Actually, Cuomo is not the first governor to offer a plan purporting to cut local property taxes for homeowners. Former Governor George Pataki’s School Tax Relief (STAR) program, passed in 1997 and fully phased in by 2002, actually does reduce most homeowners’ tax bills, through the mechanism of sending added aid to school districts that are required to use the money to finance a partial homestead tax exemption. It’s a subsidy of a different kind, but not a solution. Indeed, because Pataki had withdrawn his own proposal for a tax cap, STAR had the perverse impact of driving up taxes faster during its implementation phase.
Accepted on its own terms, as a mechanism for actually reducing property taxes for almost all homeowners, STAR—which now costs $3.4 billion, fully double the value of Cuomo’s proposal—is superior to a circuit breaker. But if the goal is mainly to use state money to provide relief to homeowners with the heaviest taxes relative to income, then a circuit breaker is far better targeted and more efficient than STAR. In fact, one of the biggest unanswered questions surrounding Cuomo’s proposal, presumably to be answered when he issues more detailed budget legislation next week, is how the circuit-breaker will interact with STAR. Will Pataki’s program be preserved in its entirety, or will it ultimately be folded into the credit?
Cuomo’s circuit-breaker and the existing, twice-as-large STAR program share the same basic shortcoming: they treat a symptom (extremely high property taxes) rather than a disease (very high local spending).
There are about 3.3 million owner-occupied homes outside New York City, according to the Census Bureau. A different count, compiled by the state Department of Taxation and Finances, says there are about 2.7 million residential parcels in New York outside New York City. Either way, based on the governor’s estimate, no more than half the homeowners outside New York City will qualify for Cuomo’s proposed credit. In addition, about one million New Yorkers are expected to qualify for a “renter’s credit” averaging $400.
The biggest class of beneficiaries is likely to consist of senior citizens, who are most likely to have low incomes relative to the current value of homes purchased at lower prices decades ago. Yet seniors also are more likely to have paid off their mortgages, and are less likely to be supporting dependents. And seniors already qualify for a larger “enhanced” STAR benefit. Single homeowners, who pay the highest effective state income tax rates, also would stand to benefit disproportionately from a circuit breaker. This would be especially true upstate, where singles on relatively modest incomes can still buy affordable (but heavily taxed) homes.
Middle-class couples in their prime earning years who are supporting college-bound children might have less disposable income than their elderly neighbors in an identical house, but they are likely to qualify for a smaller credit, if any.
By adding complexity to an already complex and opaque tax structure, the circuit breaker also will create new opportunities for evasion or just plain confusion. Consider, for example, an apartment leased in the name of one of four single roommates. The guy on the lease gets to pocket the entire credit. Some married couples may find they have a new incentive to file separately and singly to qualify for the credit — or, then again, maybe not. It depends on the rules implemented along with the law.
Then there’s the regional issue. The circuit-breaker unavoidably delivers bigger average savings to downstate suburbanites than to upstate homeowners, as reflected in the governor’s estimate that the average savings will reach $1,200 on Long Island, compared to $781 upstate. As explained in this space when Cuomo was first toying with the tax credit idea, a little over a year ago:
Like STAR, a circuit-breaker would be complicated by New York’s large regional variations in household incomes, home values and tax levels. For one thing, there’s a New York City problem. Homeowners in the city already pay some of the lowest property taxes in the country, thanks to an arcane municipal tax structure that piles a disproportionate share of the burden on commercial, industrial and utility property. STAR dealt with this problem by delivering “relief” mainly in the form of a state-subsidized city resident income tax cut; a circuit breaker presumably would do the same thing.
Another challenge is the big differential in incomes and housing values between upstate New York and downstate suburbs. As shown in this Tax Foundation chart, downstate suburban homeowners pay a much larger share of income in property taxes than do upstate homeowners. Measured in as a percentage of home values, some of the most heavily taxed counties in the nation are in upstate New York. But when taxes are measured as a share of income, Long Island and the lower Hudson Valley are more heavily taxed.
This doesn’t mean the credit is unfair: after all, living costs are much higher downstate, and downstate residents also pay higher state income taxes.
Fiscal impact and tax choices
Although it affects a minority of taxpayers, the plan nonetheless would manage to be fairly expensive, in state budgetary terms. Proposals like this need to be evaluated in terms of the alternative uses for the money, a.k.a. their opportunity costs. For example, assuming for the sake of argument that there actually will be $1.7 billion in “surplus” cash waiting to be used by 2018, it would be enough to pay for an across-the-board personal income tax (PIT) cut of about 4 percent for all New York filers. To be sure, compared to the average circuit-breaker credit, a broad-based tax cut would generate much smaller average savings, ranging from $100 for a typical upstate family to about $260 for a typical family in the New York City suburbs. But a broad-based PIT cut would have the added virtue of benefitting the vast majority of the state’s small businesses — and, in general, of at least slightly chipping away current disincentives to make money, employ people and invest in New York.
The money Cuomo wants to spend on the circuit breaker might also be put to better use by permanently enacting all of the currently temporary middle-class PIT rate cuts he enacted in 2011, now due to expire at the end of 2017 — with enough left over to fund a bulked-up family benefit or the Education Investment Tax Credit, or to begin chipping away at the very high “millionaire tax” hike that is due to expire at the same time. Or it could be used to eliminate all of what’s left of the state’s death tax, which now causes many of the wealthiest New Yorkers to leave the state. There are many more options where those came from.
A smaller circuit breaker, targeting larger benefits to more needy homeowners, would be easier to justify, especially if funded with some of the money now spent on STAR.
The cap and the credit
The governor also is justifying the circuit-breaker credit on the grounds that, because it is linked to the tax cap, it will create an added incentive for localities to remain under the cap.
The tax cap has been a truly significant achievement, for which Cuomo fully deserves all the credit he claims. As the governor pointed out again yesterday, the cap is clearly having the desired impact, as evidenced by a sharp slowdown in property tax growth compared to the 2001-2011 average. This is particularly true of school districts, which account for the largest chunk of local taxes.
Under the tax cap law, a budgeted tax levy over the cap needs a supermajority of 60 percent to pass, and failure to pass a budget in two tries–even if the proposed tax is within the cap and requires only a simple majority–will force the district to subsist on a property tax increase of zero. Schools have responded with their smallest budget and tax increases in memory.
So why spend $1.7 billion in state tax money as an added incentive to hold down taxes when localities are already doing it?
Some questions will be answered, but more are sure to follow, once the governor unveils his detailed tax legislation with the rest of his budget’s “Opportunity Agenda” next Wednesday.