NY property tax cap puts pressure on growing municipalities

On one of the coldest nights of the year, with wind chills well below zero, the HarborCenter in downtown Buffalo buzzed with activity even as the clock neared midnight.

That weekend night, the massive, two-story sports bar in the complex, 716, was about half full of Buffalonians and visitors swilling ales and munching on pub grub as they took in games from around the country and sports highlights. At the HarborCenter’s Marriott hotel, which opened last summer, about 85 percent of the 205 rooms were full. And on the twin ice rinks – the centerpiece of the sports and entertainment complex – men’s league hockey games went on well into the night.

While municipalities in Western New York are enjoying a recent wave of development and the associated increases in property values, rising assessments tied to the improvements have also caused headaches for local budget offices as they work within the confines of Gov. Andrew Cuomo’s oft-touted tax levy limit law, commonly referred to as the 2 percent property tax cap, officials say. The cap limits the annual growth of property taxes levied by local governments and school districts to 2 percent or the rate of inflation, whichever is less.

“The problem with the law is that the law doesn’t allow a carve-out for areas that are having assessment growth,” said Tim Callan, Erie County’s deputy director of budget.

Three years ago, the HarborCenter was nothing more than a few architectural renderings. When Buffalo Sabres and Buffalo Bills owners Kim and Terry Pegula bought the land from the city to build their recreational megaplex, it was a surface parking lot that serviced the First Niagara Center, the home of the Sabres, and the nearby watering holes that filled up on game nights but were largely empty on other weekday evenings.

Predictably, given the nearly $200 million investment it took to erect the Pegulas’ hockey Taj Mahal, the city’s assessment office took another look at the value of the plot.

The land went from a valuation of $1.5 million in 2014 to $75.2 million last year. The previous owners were paying about $42,000 in property taxes annually. The Pegulas paid about $2.5 million last year. Even after their lucrative payment-in-lieu-of-taxes agreement kicks in this year, reducing their property taxes by a full 90 percent, they will still be paying about $360,000 a year, as the assessment is set to rise again to $105 million. 

This sort of increase in land values has been happening throughout Western New York as both large- and small-scale development, fueled by state investments and other market forces, encourages private development and boosts home values throughout the region.

While this sort of economic growth is exactly the type of progress many politicians and residents have celebrated in recent years, the tax cap can make for a tough puzzle for municipalities trying to balance community needs with the law.

In Erie County Executive Mark Poloncarz’s budget division, for example, administration officials have been maneuvering to squeeze in under the cap, which in recent years has been exceedingly low. The latest inflation measure was 0.7 percent, limiting the county’s tax revenue growth to well below 2 percent.

Callan said that they barely were able to make last year’s spending plan work. This year they are expecting to be held to a 0.3 percent increase in the levy, perhaps lower. 

“As we’re having all this commercial development you’re seeing equalized full-market tax value base go up,” Callan said.

As long as construction continues at a fast clip, as analysts are predicting, the county will have to find a way to stay under the cap while property value assessments continue to rise. One option will be to lower tax rates, as they did in last year’s budget, reducing them by 4 cents per $1,000 of assessed value to make the math work.

Peter Baynes, the executive director of New York Conference of Mayors, said his group raised concerns over the potential of rising property values tied to economic development when the law was being put together, but lawmakers did not include an adequate carve-out.

“Our concern was that if assessments rose because of either new construction or physical improvements to property or the land that, all else being equal, including the tax rate, it’s going to force the levy up automatically and will put pressure on the tax cap even though it shouldn’t,” Baynes said.

The politics

There is one simple way for municipalities to take advantage of the growth in the tax rolls driven by economic development. As many proponents of the cap will point out, local lawmakers can always vote to exceed the limit.

However, in a state with some of the highest property taxes in the nation, voting for a measure that raises property taxes in any way – even if it will not actually cause homeowners to see an increase in their bills – is often a big political risk.

Still, the number of municipalities exercising that option is on the rise, with more than a quarter of state municipalities voting to override the cap in 2015, up from 19 percent the year before.

Figures from state Comptroller Tom DiNapoli’s fiscal stress monitoring system have shown that the number of financially struggling or at-risk localities has remained relatively steady. There were 40 such municipalities in 2012, the first year DiNapoli’s office issued the report. That number fell to 35 in 2013 but rose to 44 in 2014.

DiNapoli said low inflation has forced municipalities to make difficult choices, but most have been able to come in under the line. 

However, if market conditions remain steady and low inflation continues, the state may see more municipalities and districts exceeding the cap, he said.

“I don’t know that we’re seeing that at this point,” DiNapoli said. “The cap is what it is, but there is, in fact, a mechanism to exceed it.”

While officials and advocates have made it known that they want to see carve-outs added or additional funding, the law has worked the way it was intended to, he said.

“Local officials have expressed their concerns, appropriately so,” DiNapoli said. “But at the end of the day they are, by and large, displaying the kind of fiscal responsibility to keep their school district or local government within an appropriate range, from our perspective, when we’re measuring fiscal health and budget strength.”

Not enough

While a carve-out does exist, known as the quantity change factor, Erie County officials say it does not go far enough.

With major construction or renovations that require a permit, the quantity change factor offers tax cap exemptions to any increase in the total assessed value of property. However, it does not account for increase in values to the building overall or the value of surrounding properties.

The New York State Association of Counties last year sent a letter to Jerry Boone, the state commissioner of the Department of Taxation and Finance, urging him to apply the exemptions more widely under the provision in order to allow the counties to use the growth in the tax base to pay for the infrastructure and services such developments require.

“Counties believe this language provides a critical opportunity to improve the administration of the local property tax/revenue cap, while correcting an unintended consequence of the existing law that we believe is counterproductive to the state’s economic development and job creation goals,” Stephen Acquario, NYSAC’s executive director, wrote in the letter.

Robert Keating, the director of budgeting and management for Erie County, said that his department has found that the criteria for a building to fall under the quantity growth factor carve-out are so restrictive that the only projects that seem to fall under the category are new builds on vacant lots, and even then only some are counted as such.

In 2015, where the county saw a total assessment growth of 5 percent, one contributing factor toward the total tax cap calculation – the quantity change factor, or the portion exempt from the cap – was only 0.67 percent.

“That lags far, far behind the assessment growth,” Keating said.

The view of downtown Buffalo from the Marriott hotel at the HarborCenter. (Photo: Nancy Parisi)

Expanded services

In the years since the property tax cap was instituted, in a pattern that mirrors Cuomo’s Buffalo Billion investments in the region, Erie County has gone from a small contraction in assessed value to steady growth.

The combination of land values and tax exemptions that make up that assessed value is likely to rise even more next year, as there are a number of big projects still under construction or in the pipeline.

Meanwhile, county residents, who see the growth and feel the excitement in Buffalo, want to see the improved services that should accompany a growing tax base, Callan said.

“It’s really a problem, because the public is still demanding more money for libraries, more money for parks, more money for roads, new bridges, new highways, having more snow plowing services and all the other things that county government does,” Callan said.

Erie County is far from the only municipality feeling the pinch. Town supervisors and mayors from around the state – not to mention school superintendents who saw their calendar year levy growth rate set at a paltry 0.12 percent this year – have been making their concerns known to the governor’s office and the state Legislature since the bill was being formulated.

And advocacy groups that represent them, like the New York Conference of Mayors and the New York State Association of Counties, have been in Albany to lobby for adjustments to the law and additional funding to make up for the low rate of inflation for several years now.

Mark Lavigne, NYSAC’s deputy director, said that the counties are “100 percent in favor of economic development,” but that the growth without the benefit of additional tax revenue puts municipalities in a tough spot. Additional economic development requires more infrastructure upgrades, maintenance and services. With many big development projects being largely tax exempt and with counties forced to lower tax rates to come in under the cap, municipalities are not getting the cash they need to pay for those things.

“These properties that are tax exempt, they still need the services we provide, whether those are law enforcement, sheriffs or police or emergency service or fire service or infrastructure service, connecting these properties to water and sewer,” Lavigne said. 

Not this year

With the law thoroughly reviewed and extended last year, locking it in place for four years, as well as the popularity of the tax cap with constituents, most advocates concede that major changes to the law itself are not likely to come through this session.

Cuomo’s office expressed no interest in seeking changes to the law.

“We make no apologies for enacting a tax cap that broke the cycle of skyrocketing property tax increases, saved property taxpayers $4.5 billion alone in 2015 and helped ensure that New York is no longer the high tax capital of the world,” Rich Azzopardi told City & State. “Also, as enacted, districts are able to exceed the cap with the consent of their residents.”

Azzopardi did not directly comment on the fiscal challenges faced by municipalities with rapidly rising property values due to new development.

Geoffrey Gloak, a spokesperson for the state Department of Taxation and Finance, added that increased value to a taxing jurisdiction’s property due to real estate trends is not linked to that community’s need to spend more money on services.

"The property tax cap is adjusted upward annually to reflect increases in the tax base, including new construction and additions,” Gloak wrote in an email. “However, the cap is not adjusted to reflect increases in property values due to a strengthening real estate market."

State Sen. Cathy Young, a Western New York Republican and chairwoman of the Senate Finance Committee, said she is sympathetic to the difficulties localities face in trying to stay under the cap and that she and other members of her conference are willing to listen to ideas on funding sources and other potential solutions.

“When the property tax cap was passed there were measures to provide significant savings to school districts and localities,” Young said. “At the same time we’ve been working to increase funding.”

However, Young said the tax cap has been a great success, saving taxpayers $7.6 billion since it was instituted in 2012. She said she doesn’t see a great appetite from her constituents or her colleagues in the Legislature for significant changes to the law.

In fact, her conference has been pushing to make the cap permanent, something they failed to accomplish last year, but which they will continue to push for. Senate Republicans included a permanent tax cap law in their one-house budget bill this year, but that did not make it into the final version.

While Senate Republicans remain committed to making the law permanent, the appetite for doing so from their Democratic colleagues remains uncertain.

Democratic state Sen. Marc Panepinto of Buffalo said he would like to see the state move toward a hard 2 percent cap and that, especially in the absence of that change, municipalities and districts need additional funding from the state to make up the difference.

“While I certainly support the tax cap, the current configuration of it is not working for upstate municipalities,” Panepinto said. “It may be working for Westchester and Long Island, where they have significantly higher property values, but it doesn’t work in upstate.”

Young said that Senate Republicans are open to other solutions. “We’re always open to more discussions about mandate relief and other ways that we can help our local governments,” she said. “We look forward to having those this year.”

Still, advocates say they will continue to try to amend the law, if not this session then in future years.

In the meantime, they will push for more funding to make up for the gap between the consumer price index and the 2 percent cap that is often associated with the law.

This session they asked for increases in aid through programs like state AIM funding to make up for the limited growth in the levy. Baynes said that the state budget provided additional financial assistance for municipal infrastructure projects, but that “it provides zero help for tax cap compliance.”

“What we’re fighting for is a tax cap equalization aid program for local governments whereby a local government would receive a payment in aid from the state that would represent the difference between the 2 percent tax cap growth and whatever the tax cap growth limit is for that particular municipality,” NYCOM’s Baynes said. 

Baynes said the members of his organization are all very excited about the direction of the state from an economic development standpoint, but the law sets unrealistic expectations at a time when mayors and town supervisors should be able to use that growth to help their communities.

“Our mayors want to stay under the tax cap,” he said. “They want to keep taxes flat. But, they need the state to get some skin in the game and participate in that process rather than just chastising local governments to be more efficient when local governments have been working very hard for decades to be as efficient as possible.”