by E.J. McMahon

News coverage of Gov. Eliot Spitzer’s first State of the State message invariably highlighted his proposal for what has been widely billed as a $6 billion property tax reduction.

The governor himself was slightly more specific, saying his first budget would include “the first installment of a three-year, $6 billion property tax cut.” Assuming Spitzer intends to formally introduce the plan he unveiled during his gubernatorial campaign last June[1], that $6 billion figure represents the sum of three numbers:

$1.5 billion in fiscal 2007-08, plus
$2 billion in fiscal 2008-09, plus
$2.5 billion in fiscal 2009-10

But in New York State, property taxes are collected and expenditures budgeted one year at a time—not three. There is no suggestion that Spitzer expects his property tax initiative to expire after just three years, so describing the proposal in terms of its cumulative three-year impact makes the “cut” look bigger than it actually is.

In an annual budget context, state or local tax programs are best evaluated in terms of their projected annual impacts when fully implemented. By that standard, Spitzer is proposing a $2.5 billion expansion of a state-funded School Tax Relief (STAR) program now budgeted at roughly $3.4 billion, not including nearly $900 million in property tax rebates enacted just last year. Roughly 75 percent of the current STAR appropriation applies to homeowners’ school property taxes outside New York City, which now total $16.5 billion, so Spitzer’s proposal can be seen as a relatively large additional tax offset even without resorting to cumulative counting.

How STAR Works

Initiated by then-Gov. George Pataki as part of his 1997-98 budget, the STAR program finances a partial exemption from school property taxes on owner-occupied homes. The “basic” exemption is set at $30,000 of a home’s estimated full value, with no limit on the homeowner’s income. Senior citizens with incomes below $63,000 can receive an “enhanced” STAR exemption of $50,000 of full value. Significantly, commercial buildings, rental housing and non-primary residences (vacation and second homes) do not receive a STAR tax break. In New York City, which has no separate school property tax, most STAR aid is targeted to an across-the-board reduction of 0.2 percentage points in the city resident income tax, with a much smaller property tax offset.

For a house valued at $120,000, STAR reduces the taxable assessment to $90,000—effectively cutting the tax that would otherwise apply by 25 percent. The STAR exemption is larger—and the percentage tax break smaller—in areas where home values far exceed the median statewide home price.[2]

Spitzer would increase existing STAR exemptions by up to 80 percent on a “means-tested” basis. Homeowners whose incomes don’t exceed the “middle class” maximum, defined as ranging from $60,000 to $80,000 on a regional basis, would get the full 80 percent increase. Savings would average of $565 on a statewide basis. But the subsidy would be lower for homeowners with higher incomes, and no added STAR benefit would be available to the “wealthiest” two percent of homeowners, defined as those with incomes above $235,000.

Defining STAR

STAR requires an annual appropriation and thus is counted as an expenditure in the state budget. It does not require school districts to reduce their property tax levies—which increased at a somewhat accelerated pace during the period when STAR was originally phased in between 1998 and 2001, as shown in the chart below:

The STAR Effect: School Property Taxes* Per Pupil**
1990-2005
  * Excludes New York City
** Assumes no change in enrollment between 2004 and 2005
    Source: Office of the State Comptroller

Despite these characteristics, Pataki consistently described STAR as a “tax cut.” Spitzer is taking the same approach.

Nonetheless, STAR actually is less a tax cut than a tax shift. The state Comptroller’s Office made this point in an April 2006 research brief:

“Although often described as a tax cut, STAR exemptions are actually a transfer of tax burden, from homeowners paying local school property taxes to taxpayers statewide. While STAR indisputably provides property tax relief for those receiving it, its long-term impact may well be an overall increase in state and local taxes. The reason for this is that STAR lowers the effective tax rate on homeowners – the largest group of people who vote on and otherwise influence local school budgets. For many seniors, STAR effectively eliminated their school tax burden. By reducing the local tax share paid for greater school spending, STAR actually provides an incentive to increase school spending – an impact which has been described in several studies. This incentive is strongest, ironically, in the some of the highest spending areas – where high taxes and high home values combine to provide the highest STAR benefits.”[3]

STAR is financed by a share of the state’s personal income tax revenues, which are deposited in a special fund for this purpose. Thus, in choosing to expand STAR for New York homeowners, Spitzer effectively is choosing not to cut the income tax by the same amount for all New York taxpayers—including renters, who aren’t eligible for STAR.

New STAR in the heavens

The 2006-07 state budget, finalized by the Legislature and Pataki last June, added new “property tax rebates”[4] worth a total of $875 million. Unlike the main STAR program, which sends extra aid to school districts to reduce tax bills, the new program takes the form of direct payments to homeowners—initially timed for delivery in the weeks leading up to the November 2006 elections.[5] The rebate law stipulated that if Spitzer’s first budget doesn’t appropriate money for further rebates, the program automatically will be converted into an income tax credit in future years. This language was designed to ensure that Pataki’s successor would be forced to bargain with the Legislature on the issue of state-subsidized property tax breaks even if he had no proposal of his own in this area.

A few days before Spitzer took office, Senate Republicans proposed more than tripling the existing STAR rebate over two years—increasing it to $2.4 billion in 2007-08, and to $3.6 billion in 2008-09. Anticipating that Spitzer would follow through on his campaign proposal, they chose to highlight their plan’s cumulative value of $6 billion.

But the Senate plan includes two significant added wrinkles: it would give local voters the right to petition for ballot propositions limiting both school and municipal tax-rate increases, and it would create a blue-ribbon commission to study property tax reform statewide.[6]

The bottom line

Spitzer’s property tax initiative would be worth $2.5 billion a year to homeowners by 2009-10. The Senate Republican proposal would be worth $3.6 billion a year sooner—in fiscal 2008-09.

Strictly speaking, both the Spitzer and Senate plans can more accurately be described as tax shifts rather than tax cuts. Like Pataki’s original STAR program, Spitzer’s STAR expansion promises temporary added relief from rising school taxes while promoting higher school property tax levies in the long run. The Senate plan at least offers local property owners an outlet for direct control over spiraling taxes at the local level.

Originally Published: FISCALWATCH MEMO

Notes

  1. Pending release of more details in Spitzer’s first Executive Budget, which is due Jan. 31, the Empire Center for Public Policy has posted a copy of his campaign plan at https://empirecenter.org/wp-content/uploads/2014/11/Spitzer_Property_Tax_Relief_Plan.pdf.
  2. A county-by-county breakdown of STAR savings for median value homes is posted at http://www.budget.ny.gov/localities/star/avgSavings0607exec.html.
  3. See “Property Taxes in Focus,” part of the Local Government Issues in Focus series, published by the Comptroller’s Division of Local Government Services and Economic Development, posted online at http://nysosc3.osc.state.ny.us/localgov/pubs/research/propertytaxes.pdf.
  4. The rebate program was a response by the Legislature-spearheaded by Senate Republicans-to Gov. Pataki’s proposal to make an added $400 STAR rebate available to homeowners in any school district that held its annual spending increase within the contingency budget limit of 4 percent. The final bill bases the rebate on existing STAR payments, without limiting district spending.
  5. Further information on the STAR rebate program can be found at http://www.tax.state.ny.us/nyshome/starrebate.htm.
  6. See the Dec. 27 Senate Republican Majority news release, posted online at http://www.senate.state.ny.us/pressreleases.nsf/2e0e86fa9105ed5a85256ec30061c0be/
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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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