NY’s latest tax gimmick

by E.J. McMahon |  | NY Torch

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The second of two Election Eve check-in-the-mailbox tax credit gimmicks concocted by state officials in Albany is unfolding this week. 

Most New York State homeowners outside New York City have received or are about to receive a payment equivalent to roughly 1.5 percent of their 2014-15 school property taxes—which will typically range from an average of $60 upstate to $130 in downstate suburbs. This is on top of the $350 tax credit sent recently to families that had at least one child under 17 as of 2012. 

Governor Andrew Cuomo misleadingly calls this a “tax freeze,” but it’s really a conditional property tax rebate–and, like the family tax credit, it’s temporary, due to expire after 2016. Essentially, the first year of the rebate–the only one processed outside the annual income tax filing process–is couched as a sort of reward to residents of school districts that have stayed under the tax cap this year, which was almost all of them. In its second and last year, the rebate will be available only in those jurisdictions that have stayed under their caps again and demonstrated progress in saving money by merging or sharing services. The process of determining who qualifies will almost certainly be confusing and contentious.

While the policy is framed as an incentive for localities to spend less, it actually could accomplish the opposite in some cases by giving schools and municipalities an incentive to raise taxes right up to their levy limits even if they don’t really need to—because, after all, officials can argue the state is going to make up the difference. This was also a predictable if unintended consequence of the School Tax Reduction (STAR) program initiated by Governor George Pataki in the late 1990s. Two different academic studies found that as the STAR homestead exemption was being phased in, school tax levies actually increased faster.  This makes sense in light of what might be called the iron law of government: when you subsidize something, it gets bigger.

Cuomo’s property tax rebate/credit is especially illogical when applied to school property taxes. After all, thanks to the governor’s tax cap law, a simple majority of voters in any school district (outside the Big Five cities) can choose to truly, absolutely freeze school tax levies simply by voting against any school budget proposal that would raise taxes.  In effect, the state is now reimbursing school tax hikes that school district voters implicitly have shown their willingness to pay

This convoluted and wasteful plan will cost a total of $1.5 billion over the next three years.  There are any number of ways that money could be more effectively used: on much-needed infrastructure investments, for example. In the alternative, a more imaginative program, linked to Taylor Law changes, might have been crafted to help municipalities and school districts buy their way out of costly employee union contract provisions.  This could lead to permanent, recurring savings in what remains, by far, the largest category of local expenditures. But it would require a commitment to true structural reform and mandate relief–which clearly doesn’t exist in the governor’s office or the Legislature.

Finally, there’s a risk that today’s temporary credit will be tomorrow’s permanent entitlement. Get ready to hear calls from legislators, if not Cuomo himself, to make the tax credit permanent after 2016.

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