OBSERVATIONS

Observation: A Tax Cap for New York: Impetus and Implications November 2010

A Tax Cap for New York: Impetus and Implications

By Robert B. Ward
Deputy Director/Director of Fiscal Studies, the Rockefeller Institute of Government

Robert B. Ward

Elections matter. Among the implications of Andrew Cuomo’s election as New York’s next governor: It’s now likely that, after years of debate, the state Legislature will impose some form of a cap on local property taxes in 2011. Why is this idea moving now, and what results might we expect?



Email a Friend

Bookmark and Share
Robert B. Ward is deputy director of the Rockefeller Institute, where he heads research on state and local finances. An earlier version of this commentary appeared in the Times Union of Albany, N.Y.

Attorney General Cuomo made a 2 percent cap on all property taxes a centerpiece of his campaign for governor. In the state Senate, both the Democratic and Republican conferences support a cap. The state Assembly opposed other recent proposals for property tax caps, but Speaker Sheldon Silver has said his conference is willing to take up the idea next year. While there are no guarantees at the Capitol, the Legislature tends to give new governors some deference on their top priorities.

Polls consistently show voters strongly favor property-tax relief, with support extending across the ideological spectrum. During community meetings in recent years, I’ve heard self-identified liberals say things such as: “I like paying my taxes — no, I love paying taxes! But I just can’t afford my property taxes any more.”

To be sure, this is a big issue all across the country. But, measuring tax bills relative to home values, the Washington, D.C.-based Tax Foundation calculates that nine of the 10 counties with the nation’s highest overall property taxes are in upstate New York.[1] (The rankings include only counties with populations of 65,000 or more.) This is a result of both tax bills that are higher than average in dollar terms, and home values that are relatively low because upstate economic growth has lagged the national pace for decades.[2]

The table below lists the 10 counties with the highest property taxes as a proportion of home value. Other New York counties that rank in the top 25 include Cayuga, Oswego, Schenectady, Cattaraugus, Oneida and Broome.

 

Highest Property Taxes on Owner-Occupied Homes
Ranked by property taxes as percentage of home value
(Includes property taxes levied by all taxing jurisdictions)


Rank County, State Median Home Taxes Median Home Value Taxes as Percent of
Home Value
 
  1 Monroe, NY $3,891 $134,500 2.89%
  2 Niagara, NY $2,867 $99,900 2.87%
  3 Wayne, NY $3,051 $109,700 2.78%
  4 Chemung, NY $2,434 $93,100 2.61%
  5 Chautauqua, NY $2,102 $80,600 2.61%
  6 Erie, NY $3,119 $119,900 2.60%
  7 Onondaga, NY $3,156 $126,100 2.50%
  8 Camden, NJ $5,668 $226,900 2.50%
  9 Steuben, NY $2,020 $81,200 2.49%
10 Madison, NY $2,712 $111,500 2.43%
 
U.S. average $1,917 $185,200 1.04%
 
Source: Tax Foundation

 

As a proportion of home values, property taxes are more than twice the national average in every one of those upstate counties. Downstate, property tax bills on Long Island and in Westchester, Rockland and Putnam counties are among the nation’s very highest in absolute dollar terms.

A sharp contrast can be seen in New York City. In each borough, residential taxes are substantially below the national average when compared to home values — which helps explain why the policy debate over property taxes generally focuses outside the city.

What drives property taxes in the Empire State so high? Among the multiplicity of local taxing jurisdictions, the biggest factor is school budgets. They represented 62 percent of property taxes outside New York City in 2008, and a disproportionate share of overall increases in recent years.[3]

Across all local taxing entities — school districts, counties, cities, towns, villages and fire districts — more than half of all spending goes to employee wages, salaries and benefits. Expenses for pension and health-care benefits, in particular, are among the fastest-growing costs.

The simple math of those numbers shows where reductions in spending growth must occur, if property taxes are indeed to become more affordable. Outside New York City, school-district expenditures, property-tax revenues and state aid all rose by around 5.5 percent from 1998 to 2009, according to the state comptroller.[4] If growth in school property taxes is to be held to 2 percent, either state aid increases must become larger, or annual spending increases must become smaller. (Federal aid totaled less than 5 percent of these districts’ revenues, before recent increases that are temporary in nature.)

It’s reasonable to argue that the state, with its broader-based tax base, should assume more costs from local schools and municipalities. Over the course of decades, that may happen. But the Legislature has already committed to taking over local governments’ administration of Medicaid, which may shift as much as $1 billion in costs to Albany. The state confronts large budget gaps each year in the foreseeable future. And if new state resources for education are available, New York City schools may have first claim by virtue of the Court of Appeals’ decisions in the Campaign for Fiscal Equity cases. [5]

So, in the near term at least, large infusions of aid from above are highly unlikely. If school districts and municipalities are forced to limit property tax increases, how can they avoid slashing services?

Some, including the incoming governor, suggest consolidation of local governments to cut costs. But major restructuring almost certainly will not happen anytime soon, given voter rejections of most merger proposals in recent decades. In any case, research indicates that overall savings from large-scale mergers may be moderate, at best. The Rockefeller Institute’s Donald Boyd concluded in a 2008 paper that eliminating a village, or merging a city and a county, would reduce expenditures in a typical New York State jurisdiction by only 1 to 2 percent.[6] Other research has concluded that, after an almost century-long process of school consolidations, most districts in New York would not realize significant savings from mergers with their neighbors. Relying on its own research and on work by scholars at Syracuse University, the New York State Commission on Property Tax Relief found that requiring all school districts with fewer than 900 students to merge into new districts of at least that size would reduce statewide K-12 spending by $159 million to $189 million.[7] Such savings could help limit property taxes in the relatively small number of communities that would be directly affected, but would not have a major impact generally.

If local officials must balance budgets under a tax cap such as that proposed by Governor-elect Cuomo, some will likely look for new sources of local revenue. For example, Schenectady Mayor Brian Stratton has already proposed a “curb fee” that would collect the functional equivalent of property taxes from currently exempt nonprofit entities — colleges, hospitals and social-service organizations among them.

Even with the option of such alternative revenue sources, research shows that tax caps tend to produce their intended effects of reducing growth in revenues and expenditures — though not always as much as their sponsors predict.[8] So in broad form the debate over a tax cap comes down to the question of which is more important — making property taxes more affordable, or continuing the historical rate of spending growth?

Cuomo’s proposed tax cap would limit annual increases by any school district or municipal entity to 2 percent or the inflation rate, whichever is lower. Residents could approve higher increases with a 60 percent vote.

Such a cap would indeed make property taxes more affordable over time — if at least three conditions are met. First, growth in the state’s economy would have to boost property owners’ incomes more than enough to offset the allowable growth in taxes. Generally, we can expect this, but there will likely be some upstate communities where incomes lag even a 2 percent annual tax increase.

Second, for the new cap to achieve its full effect, voters would have to refuse to allow regular overrides of the state-imposed cap. Currently, most annual school budgets call for tax increases, and New Yorkers approve more than 90 percent of such proposals in a typical year. Thus it seems likely that some communities would choose a different decision on the spending-versus-taxes question.

Finally, while exempting new revenue driven by growth in local property values may make sense, any additional exceptions to the cap would by definition make it less effective.

The most important question about a tax cap may relate to the impact of de facto spending limitations on school and municipal services. Ideally, schools and localities would respond to the new reality of a tax cap by cutting the unit cost, rather than the level, of essential services. For example, they could looks for ways to accomplish certain tasks with fewer workers and more technology. Or they might slow the growth in employee compensation by requiring all employees to pay a share of health care premiums (most municipal workers in New York, and many employed by school districts, now pay little or nothing).

There’s at least one other possibility. Local leaders may refuse to adjust to new fiscal realities, and instead squeeze spending in whatever ways are politically easiest. This approach would almost certainly degrade the quality of public services. Higher taxes have a painful cost. Depending on choices by elected leaders and voters, so might a tax cap.

[1]“Fiscal Facts: New Census Data on Property Taxes on Homeowners,” September 28, 2010; http://taxfoundation.org/news/show/26742.html.

[2] Useful background on upstate economic trends is available in, for example, Could New York Let Upstate BE Upstate?, Public Policy Institute of New York State, May 2004, http://www.ppinys.org/reports/2004/letupstate.pdf; Population Trends in New York State’s Cities, Office of the State Comptroller, December 2004, http://www.osc.state.ny.us/localgov/pubs/research/pop_trends.pdf; and Losing Ground: Income and Poverty in Upstate New York, 1980-2000, Rolf Pendall and Susan Christopherson, Brookings Institution Metropolitan Policy Program, September 2004, http://www.brookings.edu/~/media/Files/rc/reports/2004/09demographics_pendall/20040914_pendall.pdf.

[3]2010 Annual Report on Local Governments, Office of the State Comptroller, July 2010; http://www.osc.state.ny.us/localgov/datanstat/annreport/10annreport.pdf.

[4]Ibid.

[5]See www.cfequity.org.

[6]Donald Boyd, “Layering Local Governments & City-County Mergers,” report for the New York State Commission on Local Government Efficiency and Competitiveness, March 21, 2008; http://www.nyslocalgov.org/pdf/Layering_Local_Govts_City-County_Mergers.pdf.

[7]Final Report to Governor David A. Paterson, New York State Commission on Property Tax Relief, December 2008, http://www.cptr.state.ny.us/reports/CPTRFinalReport_20081201.pdf.

[8]For relevant research see, for example, The Effects of State-Level Tax and Expenditure Limitations on Revenues and Expenditures, Suho Bae and Thomas Gais, Nelson A. Rockefeller Institute of Government, May 21, 2007; http://www.rockinst.org/pdf/government_finance/2007-05-21-the_effects_of_state-level_tax_and_expenditure_limitations_on_revenues_and_expenditures.pdf.

About the Rockefeller Institute of Government

The Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York, conducts fiscal and programmatic research on American state and local governments. It works closely with federal, state, and local government agencies nationally and in New York, and draws on the State University’s rich intellectual resources and on networks of public policy academic experts throughout the country.