Cuomo’s Property Tax Plan

Lee Hachadoorian on Jan 11th 2011

Andrew Cuomo has taken the reins as New York State’s new governor. He has sounded some typical Republican themes of lower taxes and cost-cutting measures. But, while talking generally about how high New York State’s tax burden is compared to the rest of the country, and promising to “veto any increase in personal or corporate income taxes or sales tax,” the tax that he has chosen to really go after is the property tax, a tax which is not even collected by the state. Furthermore, the history of property tax limitation measures suggests that statewide constraints on the property tax will only increase the demands on state governments.

To begin with, what is Cuomo’s plan? The most famous property tax limitation measure in the nation, California’s Proposition 13 (passed in 1978), caps the property tax rate at 1%. New York State already has tax rate caps of 1½ to 2½% for certain local governments and special districts, but not for school districts (which in many suburban areas make up the majority of the tax bill), and because of overlapping governments, the total tax rate can still be quite high. In Nassau County, several villages have combined full value rates over 3% (a/o 2009). But upstate fares worse, with some Western counties like Allegany and Niagara with full value rates of 4 and 5%.

New York State also already has an assessment limitation law, which restricts increases in the assessed value of a property. A property in Class 1 (1 to 3-unit residential) may not have its assessment increase more than 6% in one year or more than 20% in any five-year period. (By comparison, California’s Proposition 13 includes an assessment limitation of 2%.) I’m tempted to say that it is needless to say that home prices have appreciated faster than New York’s assessment limitation law allows, but readers might doubt that that would be true following the collapse of the real estate bubble, so I checked the Case-Shiller Index of repeat home sales. In spite of the real estate downturn, single-family homes in the New York MSA have appreciated an average 27% every five years (5.47% per annum) over the last 23 years. (There’s nothing magical about 23, that’s just how far back the Case-Shiller Index goes.) This results in assessments which violate the basic ideal of horizontal equity. That is, similarly-priced homes may pay very different tax bills.

Cuomo’s plan is neither of these. While calling his plan a “property tax cap” implies (at least to me) a rate cap, his plan is a levy limitation measure, which limits levy increases to the lesser of 2% or the rate of inflation. The tax levy is the dollar value a local government or special district must collect in property taxes in order to meet expenses (taking into account any other revenue the locality might have, e.g. sales taxes, state and federal aid, etc.). The levy is divided over all real property (not including exempt property such as that owned by religious organizations) weighted by assessed value. If the budget increases, and other revenue doesn’t increase, the levy must go up. Cuomo’s plan would prevent the levy (or levy limit, see below) from increasing more than 2% or the rate of inflation, whichever is less. This is similar to Massachusetts’ Proposition 2½ which keeps levy limit increases at or below 2½% per annum without regard to inflation. (Proposition 2½ also includes a rate cap of 2½%). Since inflation typically exceeds 2% (although it was negative in 2009 and looks like it will come in below 2% for 2010), in most years local governments will be forced to cut their budgets in real dollars. I assume any such plan would, like Massachusetts’, have an allowance for new construction. I don’t know whether New York will make a distinction between the levy and the levy limit. In Massachusetts the levy limit, which represents the maximum allowable levy, increases 2.5% each year automatically, but the local government doesn’t have to raise the levy to this maximum amount. But the maximum keeps increasing each year based on the previous year’s maximum, and in future years the local government could raise the levy, that is, the actual total property tax bill, by more than 2.5%.

What would the effect of this be on the finances of New York’s local governments? Almost undoubtedly, decreases in local tax capacity will be at least partially offset by increases in state aid. Bradbury, et al. (2001) reports that Massachusetts increased state aid more than 70% between 1980, when Proposition 2½ was passed, and 1987. Shadbegian (2003) [gated] looks at local public education and determines that state aid entirely offsets reductions in local education expenditures. There may also be a shift to non-tax revenue such user charges (Galles & Sexton 1998 [gated]). But New York State’s budget is not in great shape, so where would this money come from? Of interest, then, is Bradbury’s analysis of local government behavior during the period 1990-1994, when a recession forced Massachusetts to reduce aid to local governments by 30%. She finds that local governments that were more constrained (i.e. at or near their levy limits) saw losses in property values, while less constrained communities (i.e., those whose levies were significantly below their limit, and could therefore increase spending in response to lowered state aid) saw increases in property values. She attributes this to a “scarcity premium to the demand for housing in communities that were willing and able to raise their school spending.”

In general, public finance researchers like the property tax because of its visibility, which encourages citizens to pay attention and make sure they are getting value for their tax dollar. But it is precisely this visibility which contributes to its unpopularity. This conundrum is unfortunate, because the property tax is subject to much more democratic control than other taxes in New York State. School district budgets (outside of the big cities) are submitted directly to the voters for approval. Compare this to New York’s infamous “three men in a room” method of determining the state budget. Would voters (if they had a say) support Cuomo’s plan? Cutler, et al. (1999) find that Massachusetts voters in communities with higher per capita property tax bills were more likely to support Proposition 2½. But surveys at the time seemed to indicate that voters thought they could reduce property taxes without reducing spending by cutting “waste” in government. Cutler finds that by the early 1990s, voters may have regretted their choice, as communities which supported Proposition 2½ in 1980 were more likely to vote to override their local levy limit. (Cuomo’s plan also includes an override provision, albeit one requiring a 60% supermajority of the electorate, while Proposition 2½ only requires a simple majority.)

The one glimmer of hope in Cuomo’s plan is that there is a chance that it will succeed in finding “waste” to cut in that it specifically encourages local governments to find cost-savings through consolidation. A few years ago the Rauch Foundation commissioned a study comparing Long Island’s local government structure to two counties in Northern Virginia. Their conclusions were that Long Islanders paid higher taxes and were less satisfied with their local governments than the more consolidated counties in Virginia. In theory there could be economies of scale in consolidating some local government services, though I have my doubts about whether school districts, even if they were willing to consolidate, could realize the kinds of cost savings necessary to offset the revenue losses that the property tax cap will cause.

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