Before the Assembly Committee on Real Property Taxation

December 10, 2009

Assemblywoman Galef, other members of the Committee on Real Property Taxation, thank you for giving me this opportunity to testify today — and for your sincere and unstinting efforts to gather a broad range of viewpoints on this very important issue.

Economic conditions have obvious implications for the work of this Committee and for the Legislature in general. We are in the midst of a potentially severe and long-lasting global recession. But for New York State, the recession is only part of the problem.

Fueled by the super-heated profits of the securities industry, mixed with gains from a now-popped real estate bubble, the surge in state tax revenues over the past five years was as big as anything New York has experienced during any previous five-year stretch in the last 35 years.

The Wall Street boom of the 1990s generated most of the tax revenues needed to finance the original STAR program along with significant increases in school aid, prior to the brief downturn of 2001 to 2003. The Wall Street and real estate booms of the past five years generated most of the revenues needed to finance yet another historic multi-year increase in school aid, along with the creation of the STAR rebate.

But Wall Street as we knew it is now gone. Even if the nation emerges from this recession by the end of 2009, as many economists predict, the fiscal trouble for New York State will not be over—not by a long shot. The industry that emerges from the ashes of the financial meltdown will be de-leveraged, more heavily regulated, and more risk-averse. It will not be generating bonuses and profits on the scale we saw over the past 15 years. The financial losses incurred by our surviving investment banks and their clients could clog the state tax pipeline for years to come. Moreover, the financial crisis has accelerated centrifugal forces that will tend to spin off business from New York to competing financial-center cities elsewhere, in the U.S. and abroad.

In short, this is not just another cyclical downturn for New York—not a one or two-year fiscal problem–but a tectonic shift in our state tax base, with profound long-term implications. The bottom line is that no one can approach this Committee with the pretense that the state treasury is a bottomless well of cash – or the assumption that the state can raise tax rates with impunity.

Adjusting to these new economic and fiscal realities will require fundamental reform and restructuring of every level of government in New York. Our state and local budgets have been growing at a fundamentally unsustainable rate, and we have major adjustments to make.

The kind of reforms New Yorkers needs will be hindered, not helped, by building on existing state-funded tax credits and exemptions that masquerade as “property tax relief.” This brings me to the basic point of my testimony:

Real “property tax relief” requires an actual reduction in property taxes.

Good intentions aside, anything else is merely a shell game that distracts from the underlying problem, which is the high cost of local government in New York, especially our high expenditures on public schools. But school spending hasn’t been constrained at all by STAR. Far from it, in fact: the phase-in of the original STAR homestead exemption accelerated the growth in school spending, and the STAR rebate does nothing to discourage it. This should come as no surprise. STAR, in both its forms, essentially subsidizes high taxes. When you subsidize something, you get more of it.

I will not repeat the familiar statistics about the extraordinarily high level of property taxes in New York. Suffice to say, the pressure on property taxes is about to get worse than ever. School budgets across the state now reflect the expectations created by a 27 percent increase in state aid over the last three years, and by the promise of continuing double-digit aid hikes over the next few years. But that promise is now clearly unsustainable. Instead of increasing next year by another $2.2 billion, or 10 percent, as would be required under current law, school aid must be cut below levels appropriated in 2009-10.

The implications are obvious: schools will want to turn to property owners to make up the difference in lost aid, at the worst possible time for taxpayers. Although this not reflected in assessment rolls, home values reportedly have dropped by 10 to 20 percent in most regions of the state. Businesses, apartment owners and homeowners alike are simply tapped out.

The shortcomings of the original STAR program have been aired before this Committee many times. But over 11 years, the STAR homestead exemption has become deeply ingrained in home values and household financial budgets; thus, any change in the program would be deeply disruptive. The same is true of its impact in New York City, where STAR serves mainly to finance an important reduction in marginal income tax rates.

However, the STAR rebate is still relatively new. Its continuation is much more difficult to defend in the face of the worst state fiscal crisis in more than 30 years.

Therefore, I would respectfully recommend the following:

First and foremost, pass the cap on property taxes proposed by Governor Paterson. The cap isn’t perfect, but it is a giant step towards real tax relief.

Second, eliminate the STAR rebate, which is scheduled to cost the state $1.4 billion in fiscal 2009-10.

Third, set aside at least $250 million of the resulting savings to finance a refundable school property tax circuit-breaker credit targeted at the most severely distressed homeowners — those New Yorkers who have been most affected either by sudden dramatic changes in underlying home values in their communities, or by a sudden drop in their personal incomes. Eligibility for the new credit should be based on adjusted gross incomes minus mortgage payments, to recognize that homeowners who fully paid off their homes are financially less stressed than those attempting to pay mortgages and taxes.

In addition to these changes, the Committee should recommend adoption of sweeping mandate relief and reforms that will enable school districts to manage more efficiently – including repeal of the so-called Triborough amendment, the sun-setting of the temporary moratorium on retiree health insurance changes, and pension reform that would shift newly hired teachers to more affordable and predictable retirement plans.

The fiscal crisis should not deter the state from seeking long-overdue reforms of property tax administration. To its credit, this Committee and its counterpart in the Senate have recognized that 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 school 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, including at a minimum a shift to countywide assessment, and a requirement that all property be assessed at full-market value on a three-year cycle.

The proposed tax cap has three attributes:

It is democratic, because it gives voters the ultimate right to raise or lower the cap, preserving local control in the process.

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 transparent — and, therefore, much simpler to administer and enforce than systems involving variations based on property classification; age, income or other characteristics of owners; or duration of ownership (which becomes an issue in acquisition-based assessment systems).

The financial impact of the cap on total school tax levies, compared to a continuation of the current system, is difficult to project with much precision. Overrides in some districts are inevitable, as is new construction growth excluded from the cap. Indeed, the growth exception will provide advocates of higher school spending with a strong incentive to favor commercial and residential development to fortify the local tax base. But this much is clear: thanks to the override vote, school districts residents also will have new power to veto tax increases they consider excessive.

Excluding overrides and tax base growth, the average individual property owner in New York would experience school tax increases no higher than the annual change in the consumer price index—which has averaged 2.8 percent over the past decade and 3.3 percent since 1987—or the ultimate cap of 4 percent. This would represent a significant improvement over the recent average levy growth of 6 percent a year.

I realize your hearing notice asks a number of specific questions about the STAR rebate, and about a proposed circuit-breaker. However, I respectfully suggest that the focus on these issues is misplaced. STAR is a form of fiscal Novocain, numbing the pain of high taxes without addressing the underlying source. The STAR rebate originated as an election-year gratuity that represented the same old Novocain injection in a new, easy-to-swallow pill form. “Middle-class” STAR merely adjusted the dosage level for different patients.

A legislative hearing on “property tax relief” that focuses solely on the comparative virtues of homestead exemptions, rebates and circuit-breaker credits is like a medical school seminar on brain tumors dedicated entirely to discussion of headache remedies – and of which patients deserve to receive them.

By all means, the state should do what it can to assist those homeowners whose tax burdens are, in effect, disabling migraines. But the current fiscal crisis should compel us to recognize, once and for all, that broader tax relief requires a cure for the underlying disease.

Thank you.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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