Cuomo flipping the “circuit breaker”

by E.J. McMahon |  | NY Torch

Circuit BreakerOver the past few days, Governor Cuomo has made it clearer than ever that his “tax cut” focus next year will be on something that can be more accurately described as a tax shift: the creation of a new property tax “circuit breaker” credit that homeowners could claim on their state income taxes. The credit would rebate a portion of local property taxes, to the extent that they exceed some set percentage of each homeowner’s income.  (For an example, see this Assembly bill.)

Cuomo also made it clear that he doesn’t want to touch the state’s largest revenue source–the personal income tax, or PIT– because, he said on the Capitol Pressroom radio show, “we just did the PIT last year … in the budget.” In fact, what Cuomo and the Legislature “just did” with the income tax in the 2013-14 state budget was to temporarilyextend, for three more years, a 29 percent tax hike on individuals earning more than $1 million and couples earning more than $2 million, which was previously due to expire at the end of 2014.

That income tax increase, a modification of the “millionaire tax” first temporarily enacted under Gov Paterson in 2009, was initiated by Cuomo in December 2011, only weeks after he reiterated that he would do no such thing. It raises about $2.5 billion a year, roughly $700 million of which is redistributed to middle-income households in the form of small temporary tax cuts. At this point, the three highest brackets in New York’s income tax are temporary—i.e., contingent on further renewal—as is a provision linking tax brackets to rise with inflation.  This does not send a reassuring signal to employers or residents. The PIT code is, in fact, unsettled.

And how, by the way, does Cuomo intend to finance any new tax reductions next year, given a Financial Plan that most recently projected annual budget shortfalls ranging from $1.7 billion in fiscal 2015 to nearly $3 billion billion in 2017?  The answer, it turns out, is easy.

“There will be what is, in essence, a surplus for next year if we hold the line on spending, which we have thus far,” Cuomo said in the radio interview.  ”If we continue our spending discipline we project that we’ll have revenue that we can use for a tax cut.”

Oh.

Indeed, the Mid-year Financial Plan Update from Cuomo’s Budget Division all but commits him to producing such a surplus:

Through the first half of FY 2014, the State has done an effective job in controlling spending, and tax receipts have been slightly above the levels expected in the Enacted Budget. In addition, the Governor will propose balanced budgets that limit annual growth in State Operating Funds to no greater than 2 percent, consistent with the spending benchmark adopted in FY 2012. The combination of effective budget management and adherence to the 2 percent spending benchmark is expected to further improve the State’s fiscal position. Based on current operating projections, if the State enacts balanced budgets that hold State Operating Funds disbursements to 2 percent, the State will have operating surpluses. [emphasis added]

Under current law, state operating funds expenditures are projected to increase by an average of nearly 4 percent a year over the next three years. However, if growth is capped at 2 percent a year, the resulting savings would be enough to close projected budget gaps and produce a “surplus” of at least $2.3 billion by 2017.

Interestingly, this is almost precisely the amount needed to reverse the PIT increase that Cuomo and the Legislature “just did [again] last year.” However, as noted, the governor says he doesn’t want to touch the PIT– in the process swatting down a trial balloon floated this week by former Governor George Pataki, who co-chairs Cuomo’s Tax Relief Commission, which is due to report next Friday.  Rather, the governor said he wants “to focus on the property tax again,” as a follow-up to the property tax cap enacted in 2011.

Cuomo presumably will design his circuit breaker to deliver significant savings to “average” homeowners, which would mean several hundred dollars, at least.  Any circuit-breaker worth the effort would probably cost well over $2 billion; the Assembly bill, for example, is priced at $2.3 billion.

But here’s the thing: New York already is projecting it will spend $3.6 billion next year on theSchool Tax Relief (STAR) program–initiated in 1998 by Pataki, co-chair of the commission that Cuomo now hopes will recommend yet another type of property tax break.

STAR is not a circuit-breaker but a state-financed homestead exemption.  It is budgeted as form of categorical state aid to school districts, which in turn use the money to pay for a discount on homeowner taxes. At the time of its enactment, there were two principal criticisms of STAR. First, it only benefitted homeowners, not businesses–and only primary residences, at that.  The same would be true of a circuit-breaker. The other criticism was that STAR was based primarily on home values rather than income.  (This is not entirely true, actually, since “basic” STAR is no longer available to homeowners with incomes above $500,000, and the larger “enhanced” STAR exception for seniors has an income limit of $81,900. At that level, very few seniors fail to qualify, though.)

So, does Cuomo want to propose a new multi-billion circuit-breaker in addition to STAR, or while retaining all of STAR?  This is a crucial question, which no one in the news media seems to have asked him.

If Cuomo were to reprogram STAR as a circuit breaker, perhaps phasing out the old program and phasing in the new one over three to four years, his commitment to a 2 percent spending cap would still free sufficient resources to simultaneously roll back the PIT surtax on high-income earner.  And he could afford to permanently enact those middle-income tax cuts, along with the inflation indexing provision, by accepting some of the recommendations of his Tax Reform and Fairness Commission to broaden the base of the sales tax.

The main problem with the notion of reprogramming STAR as a circuit breaker is a political one: There would be losers as well as winners.  The losers, mainly higher-income voters, would probably be less numerous than the winners, who would be lower-middle and middle-class homeowners, along with some seniors.

Circuit-breaker issues

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.

Under the current Assembly circuit breaker bill, the tax credit would be 70 percent of the amount of property taxes exceeding 6 percent of income.  In most of upstate’s most heavily taxed counties, where taxes typically come to less than 6 percent of median income, that would yield a savings of … zero.  In Nassau County, however, taxes on the median-priced home equated to nearly 9 percent of median household income. The circuit breaker would hand that homeowner over $1,000. Cuomo’s bill-drafters no doubt will dial their income and percentage limits up and down in an attempt to balance out the savings numbers without blowing out the cost of the bill.

This much is clear: under a circuit-breaker, the state will assume responsibility for a large percentage of future marginal increases in property taxes for a large number of homeowners — a number that will grow steadily, unless the income brackets used to calculate the credit are indexed to rise with inflation.  If Cuomo insists on enacting a $2 billion circuit breaker in addition to the existing STAR program, he will all but guarantee that the personal income tax increase is never rolled back, even if he doesn’t want to acknowledge as much.

Keep in mind, also, this iron rule: a subsidized price will increase faster.  When STAR was being phased in between 1998 and 2001, school tax levies surged — because the state was absorbing a portion of that rising cost.  In similar fashion, a big new circuit breaker will make it easier for local governments to exceed Cuomo’s 2 percent property tax cap.  It’s not farfetched to imagine local school districts advertising proposed tax increases in terms of their impact net of the credit, much as stores advertise appliance prices after subtracting mail-in rebates. Coming soon to a spring school newsletter near you: “Yes, our proposed 8 percent tax levy increase exceeds the state tax cap — but if you are an average homeowner in our district, it will cost you less than 2 percent more, thanks to Governor Cuomo’s new circuit breaker.”

The question about STAR is a crucial one.  Cuomo shouldn’t be too quick to answer it.  After all his talk about the need to decrease taxes, does he really mean to indefinitely rule out anyreduction in New York’s top income tax rate, in order to finance another multi-billion property tax subsidy?

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- E.J. McMahon is the Research Director at the Empire Center for Public Policy.