The $25 billion question

New Yorkers pay some of the highest taxes in the nation, but figuring out what to do about it can lead to some unintended consequences. A case in point is the property tax cap that Gov. Andrew Cuomo wants to make permanent in the upcoming state budget. The cap limits increases in local property taxes to 2 percent or the rate of inflation, whichever is lower. This limit presents a choice between finding alternative revenue sources or cutting government services – most of which are mandated by the state. Many localities have opted to do both following the 2011 passage of the cap. Yet Cuomo has said that he will not sign a state budget bill that does not make the cap permanent – with no other changes.

He is not alone in supporting this idea. State Senate Democrats have already passed a permanent extension of the property tax cap – which is set to expire next year – although the Assembly has yet to do the same. Republicans, fiscal conservatives as well as upstate and Long Island newspaper editorial boards also like the cap. It’s also politically popular, according to a Jan. 24 Quinnipiac University poll, with broad support across demographic and geographical lines. “I want to be able to say to the people of this state: It's permanent,” Cuomo said at a March 13 event in the Hudson Valley. “ It gives them stability, it gives them reliability. They're making a decision on where to live.”

It is clear that the property tax cap makes for good politics, but is it actually good policy?

The answer depends on how narrowly success is defined. The cap has curbed the rise of property taxes in some of the most heavily taxed areas of the country. Supporters say that this helps prevent outmigration from the state and instills a sense of fiscal discipline among local governments and school districts – which do have means to override the cap.

But while some critics agree that heavy taxation and declining populations are problems, they argue that the cap leads to a litany of unintended effects including greater inequality, fewer community services and even higher taxes and fees for poor people. “One of the things we’ve been saying for a long time is that the property tax cap is the wrong solution for the right problem,” said Ron Deutsch, executive director of the left-leaning Fiscal Policy Institute.

A March 2019 analysis from the Rockefeller Institute of Government – whose president, Jim Malatras, once served a top aide to Cuomo – compared actual tax rates since 2011 to what they might have been, based on the average of the previous seven years. The difference between these two numbers makes up the approximately $25 billion in savings that Cuomo has touted as proof of the effectiveness of the cap. About two-thirds of that number comes from slower increases in taxes earmarked for schools, while the rest comes from taxes meant for local governments and fire districts. Annual increases in property taxes, once as high as 6 percent, are now as low as 0.8 percent in some areas, according to the report. In that sense, the cap has achieved its prime goal.

The cap also affects the “psychology of budgeting,” argued E.J. McMahon, founder and research director at the fiscally conservative Empire Center for Public Policy. “It’s a negative only if you don’t like tax restraint,” he added. By limiting their ability to raise property taxes, the thinking goes, local officials have to be smarter with their money. Total spending has gone down among counties statewide, according to a 2018 study by the Center on Budget and Policy Priorities. While the national economy expanded between 2011 and 2016, county spending on education decreased by 5 percent, on social services by 8 percent, on health care by 21 percent and community services by 25 percent, according to the report.

Local governments can cut some services, but they cannot eliminate what the state mandates they fund. The costs of nine such state mandates now devour about 90 percent of local property tax receipts, according to a January report from the New York State Association of Counties. “This is no longer a local property tax,” said Stephen Acquario, executive director of the association. “This is a state-imposed state property tax because these decisions are out of our hands.” The state has made progress in the past eight years in limiting some mandates on local governments, including the growth of Medicaid costs, Acquario said. But until state policymakers offer more aid for costs like child welfare, legal defense for the poor, juvenile justice, pensions and other programming, local governments are going to have to find new ways to fund other priorities. “We want to invest more local resources in programs like 911 dispatches and veterans programs,” said Acquario, “(but) they’ve done nothing to address the underlying base costs of just those nine mandates.”

In response, local governments in New York have dealt with property tax caps by increasing sales taxes and government fees for services such as garbage collection, water and sewer maintenance – just like their counterparts in states like California, Massachusetts and Oregon, according to a 2014 Cornell University study. Since New York’s tax cap went into effect, 45 percent of counties have pursued this exact strategy. Property owners might be paying less, but lower-income people – many of whom do not pay property taxes – are picking up much of the tab. A sales tax, for example, disproportionately affects poor people because it costs them a greater percentage of their income compared to wealthier people. Unless the state alters the tax cap or increases its funding for local governments, these worrying trends will continue, said Deutsch. “The state has not been a good or reliable partner to local governments and our school districts,” he said. “We need to pony up and spend more state dollars to ease the burden on property taxes.”

Opponents of the tax cap have also argued it makes it harder for many local school districts to find adequate funding. The first reason is political. New York state politics is dominated by New York City interests – where the cap does not apply – and the surrounding suburbs. Some of these downstate districts have the political influence to get additional funding beyond property taxes that less-connected areas cannot, according to Brooklyn College Professor David Bloomfield. “The Legislature controls the Foundation Aid formula and historically that’s been a very heavy lift,” he said. “Suburban districts hold sway in the Legislature and are likely to use Foundation Aid to enrich their own districts over the greater good.”

The other reason that the tax cap exacerbates inequality among school districts is that the maximum 2 percent increase in an area with a large tax base will lead to more new money in absolute terms than the same percentage increase in a poorer or less-populated area. A richer district thus may find it easier to hire new teachers, construct more classrooms or buy more buses, assuming the costs are largely the same among districts.

Fire districts and local governments can override the cap through a 60 percent vote of their governing bodies, while school boards can do so through a 60 percent approval by voters. If this cannot be done, “then maybe it is not a vital need,” said McMahon. But this line of reasoning discounts the political concerns that elected leaders would have in pushing for tax increase, especially in places where voters are already facing economic challenges, according to the Center on Budget and Policy Priorities study. “Higher-income communities have a higher override success rate and approve much larger increases in property tax collections,” reads the July 2018 study. “This disparity can exacerbate the tendency for higher-income communities to provide better schools and services than low-income communities, potentially perpetuating inequality.” Given the political considerations, it is hardly surprising that only 2 percent of school districts plan to override the cap in the upcoming year, according to a March report from the Association of School Business Officials.

Cap supporters have also argued that helps the state reverse population decline. “We still continue to see property taxes increasing,” Republican state Sen. Pamela Helming told public radio station WAMC in January. “And until we stop that, we’re going to see people leaving the state.” While it is beyond dispute that New York state is one of just nine states that are losing population, Cuomo has argued that the property tax cap has incentivized more people to stay in upstate New York without providing much evidence to support this. “It's a different economic reality than it was a decade ago. Young people are moving back,” he said in a March 5 op-ed in the Rochester Democrat & Chronicle in support of making the cap permanent. But it is a matter of much dispute whether taxes have much to do with the state’s population decline. Cuomo himself argued during his reelection campaign that the New York’s weather was a key driver of out-migration.

While the tax cap does not apply to New York City, Cuomo has made the case that raising taxes on the wealthy and making the tax cap permanent serve the same goal. “When people complain about high taxes in New York state it's not the state income tax,” he said on March 11. “It's the property tax.” But there is little evidence to support his argument that his tax policies are reversing New York’s ongoing population decline, which Cuomo suggested two days later he had done. In meeting with Hudson Valley leaders in support of the tax cap, Cuomo said that the state population has increased “a little bit” since he took office. It is true that the U.S. Census Bureau estimates that New York had 19,378,124 people in 2010 and 19,542,209 as of last year. This selective sample, however, ignores a population decline from 2017 to 2018. People have left New York since the sweeping federal tax law took effect, but it remains unclear why.

New Yorkers pay less property taxes now than they likely would have if the cap had never went into effect. However, there is strong evidence to show that it has not reduced New Yorkers’ overall tax burden. For starters, it is a cap on tax increases – not taxes themselves. The cap has also resulted in state governments increasing sales taxes and fees so that they can fund services besides those mandates by the state and federal government, which take up about 80 percent of counties’ total budgets, according to the New York State Association of Counties. Unless the state pays a larger share of local government costs, critics say there is little reason to think local governments will reduce their dependence on sales taxes and fees without tweaks to the cap such as changing its formula or making it easier for local communities to override. Yet, Cuomo has said that he will not change anything about the cap and given his budgetary powers, it appears likely that he will get his way in the end. If the tax cap becomes permanent, it will be a great political victory for the governor – regardless of the unintended consequences.

Correction: An earlier version of this post incorrectly said that nine state mandates devour about 90 percent of local tax receipts. In fact, they account for 90 percent of local property tax receipts. An earlier version also said incorrectly that school districts – along with fire districts and local governments – can raise the cap either through a 60 percent vote of their governing body or 60 percent of voters. In fact, fire districts and local governments can override the cap through a 60 percent vote of their governing bodies, while school boards can do so through a 60 percent approval by voters.