In a Long Island speech yesterday, Governor Eliot Spitzer suggested for the first time that he might be willing to consider a state-imposed cap on property taxes. If the governor is serious, it could be a turning point for heavily burdened New York property owners.

During last year’s gubernatorial campaign, both Spitzer and Republican candidate John Faso endorsed a large expansion of Governor George Pataki’s School Tax Relief (STAR) program, which targets state-subsided tax savings to single-family homeowners.  But while Faso proposed linking his STAR expansion to a cap on tax levies, Spitzer flatly rejected the cap idea.

Spitzer and the Legislature this year agreed to expand the existing STAR program by a $1 billion in the current fiscal year, growing to $1.5 billion by 2009-10, with the enhanced “relief” flowing in the form of rebate checks to homeowners.  This purportedly new and improved add-on to STAR, like the existing program, does not impose any limit on the underlying local school tax bill.

However, Spitzer seemed to change his tune on the subject, at least slightly, in his Long Island remarks.

As reported in today’s Newsday:

The Democratic governor didn’t endorse a property-tax cap, but said it warranted debate in the face of cries from hard-pressed homeowners — even after years of the state’s School Tax Relief program, or STAR. He expressed frustration that school districts and local governments continue to raise taxes substantially, blunting STAR’s impact.

[snip]

“We still have to deal with the pressure [on homeowners] that comes from the local community through the increases in local government costs, in education costs … that are pushing back against that,” he said, referring to a $1.3-billion increase in STAR rebates for 2007-08.

“We are going to have to figure out how we can solve that problem — whether we put caps on those increases or not is something we are going to have to debate, because I will not stand for the notion that we at the state are finally doing what we have to do to cut the property-tax burden merely to see localities pushing back in the other way,” Spitzer told union leaders meeting at Hofstra University.

In effect, the governor acknowledged the key problem with STAR: by providing tax relief to some homeowners in the short run, it actually results in higher taxes for everyone in the long run.  This was further explained in recent Empire Center legislative testimony:

“The STAR experience confirms the wisdom of a long-standing axiom in public finance: when you subsidize something, you get more of it. With no tax levy limit in place, spending billions of state tax dollars to dull the pain of high local property taxes simply resulted in higher spending – and ultimately, even higher school property taxes. STAR provided temporary tax stabilization, not permanent tax relief. It was not a tax cut but a ‘tax shift,’ as then-Comptroller Hevesi’s office pointed out in a report last year.”

Compared to the original STAR program, which is delivered in the form of school aid that must be used to provide reduction on school tax bills, the new rebate checks are less likely to promote “stealth” property tax hikes by school districts.  However, in both forms, STAR remains a costly form of fiscal Novocain–treating the symptoms and not the underlying problem.

The real solution

In the final analysis, the most direct way to bring down New York’s excessive property tax burden is to cap the annual rate of growth in property tax levies–an approach pioneered by Massachusetts voters when they adopted Proposition 2-1/2 in 1980.

If Spitzer is looking for a tax-cap measure to embrace, he should consider the Assembly Minority’s Property Taxpayers Protection Act, which would cap school tax-levy increases at 4 percent a year or the rate of inflation, whichever is less.  The cap would make allowances for new construction, and local voters could override the statewide limit for specific purposes.  The bill also includes much-needed mandate relief to help school districts cut costs.

The Assembly bill is based largely on the tax cap that Pataki included as part of his original STAR proposal in 1997.  The Republican governor took the cap out of the bill at the insistence of legislative leaders, mainly because it was opposed by the New York State United Teachers union — although an even broader, stronger tax cap had been proposed just two years earlier by Assembly Speaker Sheldon Silver. (It was A.6171 of the 1995-96 session, for which there is no free online link.)

Contrary to the Newsday report, Pataki did not revive the tax cap idea late in his tenure.  Instead, he proposed added STAR subsidies for residents of districts that agreed to cap their annual spending increases.  But, for a variety of reasons, spending caps are more complicated and less effective than the more direct approach of capping tax levies.  Spending caps also can result in unintended consequences: for example, taxpayers in some school districts have discovered that voting down a proposed budget calling for high tax levies can result in a “capped” contingency budget that forces taxes even higher. To no one’s surprise, Pataki’s spending cap proposal was rejected by the Legislature.

New Jersey is the one state with property taxes rivaling those found in New York’s suburbs.  But having witnessed the political failure of their own costly STAR-style state homestead exemption, New Jersey’s Democratic governor and Legislature recently agreed to impose a 4 percent cap on school, municipal and fire district tax levies in the Garden State.

The combined state and local tax burden in Massachusetts was well above average, nearly as high New York’s throughout the 1970s.  But today, after nearly three decades of Prop. 2-1/2, it is well below average.  A tax cap worked in Massachusetts — and it can work here as well.

ADDITIONAL EMPIRE CENTER RESOURCES:

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

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