More STAR in New York's Future?
FISCALWATCH MEMO March 23, 2006
By E.J. McMahon

With school property taxes continuing to rise across New York State, Albany’s leading Republicans are pushing for a major expansion of the STAR (School Tax Relief) program in the next state budget.

On top of the $3.2 billion the state has spent on STAR in fiscal 2005-06, Governor George Pataki wants to add $600 million in new STAR rebates and tax exemptions for senior citizens in 2006-07.[1] The Senate Republican Majority has much larger ambitions for the program. Its budget package would increase STAR spending by nearly $2.6 billion over the next three years, including a universal $400 per-homeowner rebate and a new version of STAR for small businesses.[2]

Misleadingly billed by Pataki and the Senate as a "tax cut," the existing STAR program is actually a form of tax shift, in which the state effectively takes over a portion of each homeowner's school property tax bill. But as explained below, more STAR spending at the state level will do nothing to reduce New York's oppressive state and local tax burden. Instead, it will promote faster growth in school spending and property tax levies unless it is tied to a firm cap on school district budgets or taxes.

While Governor Pataki included a school spending cap in his "STAR Plus" proposal, the Senate has rejected it. Both the Senate and Assembly also have rejected the governor’s proposals for modest mandate relief that would take at least some of the pressure off school budgets.[3]

Despite STAR and a series of large state aid increases, the per-pupil property tax burden in districts outside New York City has risen by twice the rate of inflation over the past four years. Per-pupil property taxes increased by at least 8 percent in the 2004-05 school year alone, according to data from the state comptroller's office.[4] And for all the talk in Albany about the need for property tax relief, the coming state budget seems likely to make the underlying problem worse.

Hitching school taxes to STAR

Initiated by Governor Pataki as part of his 1997-98 budget, the STAR program finances a partial exemption from school property taxes on owner-occupied homes.[5] The "basic" exemption is set at $30,000 of a home's estimated full value, with no limit on the homeowner's income.[6] 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 vacation homes or 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.)

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.[7]

The law creating the STAR program included reforms in school budget voting rules and required districts to share more information with the public (in the form of a "Property Tax Report Card") on the impact of their proposed budget changes. But STAR did not require a reduction in school property tax levies. Instead, school districts continue to establish annual tax levies as they did before STAR was created. They receive STAR aid from the state as reimbursement for exemptions granted under the law.

While traditional forms of state school aid are designed primarily to "equalize" spending among districts, STAR tends to have the opposite effect. STAR money flows disproportionately to the wealthiest school districts, where home values are highest. In per-pupil terms, school districts receiving the most STAR funding are located predominantly in the New York City suburbs of Long Island and in the lower Hudson Valley. But in percentage terms, homeowners living in areas with house prices below the statewide median realize the greatest savings.

The first STAR exemptions became available to senior citizens in 1998 (a statewide election year) and the basic STAR exemption was phased in—at the rate of $10,000 per year—between 1999 and 2001.

Lasting relief proves elusive

In the space of just a few years, STAR emerged as one of the largest single programs in the state budget, totaling more than twice the total state operations outlays for general government agencies. With no further change in its structure, the $3.2 billion program will be on track to grow by another $2 billion over the next decade. More than 10 percent of New York State's personal income tax is now set aside for STAR, which in turn represents more than 16 percent of total state spending on K-12 public schools in fiscal 2005-06.

With a "tax relief" program so big, why are homeowners still so unhappy about their property taxes? The explanation can be found 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

As shown above, the overall school tax burden in New York (after STAR-induced savings) dipped slightly during the four-year period when STAR exemptions were being phased in. From 2001 to 2005, however, property taxes per pupil shot up by 28 percent even after deducting STAR savings. For the vast majority of homeowners, school taxes are now significantly higher than they were before STAR was enacted.

For owners of commercial and rental properties, the cost of school taxes has been rising even faster than the total tax levy, which has shot up by 55 percent since the enactment of STAR.

By effectively lowering the marginal cost of education to homeowners, STAR created a new incentive for homeowners to support larger spending increases, and for districts to raise taxes by larger amounts than their voters would otherwise have accepted. Aware of these perverse incentives, Pataki included a local school tax cap in his original STAR proposal in 1997. But the Legislature rejected the cap. The result was a surge in spending and taxes, as illustrated in the chart above.

STAR did little to boost student performance but led to significant increases in spending and taxes, education researchers at Syracuse University have found.[8] Tax increases were "strikingly high" in upstate small districts and cities, where STAR generated the largest percentage tax savings for homeowners, they said.[9]

These findings are consistent with those of another academic researcher who found that STAR had a "statistically and economically significant effect" on spending increases, concentrated in districts where a larger proportion of the tax base consisted of commercial and rental properties.[10]

The Latest Twist

Pataki has not succeeded in reinserting the tax cap in subsequent STAR appropriations bills; nor has he used his constitutional power to force the Legislature to confront the issue through the state budget process.[11] This year, however, the governor has reintroduced the cap in a different form. His proposed $400 "STAR Plus" rebate would be available only to homeowners in districts that hold spending at the lesser of 4 percent or 120 percent of the inflation rate.

The governor worded the STAR provision of his 2006-07 education appropriation bill to make the spending limit an absolute prerequisite for the rebate. If Pataki digs in his heels on this point, it will take veto-proof majorities in both houses to enact a STAR increase that does not include a limit on school spending.

If the Legislature overrides the governor—or if he simply drops the cap—the record suggests the inevitable result will be a further acceleration in school spending and tax levies.[12]

Alternatives to STAR

Given its negative unintended consequences, short of doing nothing about school taxes, is there a feasible statewide alternative to STAR?

The answer depends on the ultimate policy objective.

If the objective is to shift more of the public school cost burden from the local property tax base to the state income tax base, this can be more efficiently accomplished through a larger increase in state aid to schools—linked to permanent local tax limits, to ensure that savings are passed along to all property owners.

If the objective is to simply reduce property taxes—period—this could be far more effectively accomplished through a constitutional change such as Massachusetts' Proposition 2½, which limits a community’s total tax levy to 2.5 percent of total market value and caps annual rate increases as well. Prop 2 ½ produced a significant long-term reduction in the Bay State's overall tax burden.

If the main objective is to prevent people on fixed incomes from being taxed out of their homes, the best approach would be to provide such homeowners with cash assistance through an income tax "circuit-breaker," as proposed by Assembly Democrats as part of their 2006-07 budget.[13] While retaining the existing STAR program, the Assembly tax cut package includes $900 million to reimburse homeowners and apartment dwellers up to $400 each for the extent to which their property taxes exceed 7.5 percent of income. The credit would be phased out for taxpayers with incomes above $150,000.

Avoiding the real issue

STAR has not been a cure for high property taxes. At best, it has functioned like a dose of fiscal novocaine whose effects have now worn off. Increasing the dosage will only aggravate the source of the pain—heavy school spending.

New York's overall tax burden will never become more competitive unless something is done to reduce the rate of spending growth, especially in the well-funded public schools sector. In the meantime, Governor Pataki and most legislators seem content to continue wishing upon STAR.

Notes

  1. More details on the Governo's STAR program are available at http://publications.budget.state.ny.us/fy0607littlebook/index.html.
  2. See Senate plan posted at http://www.senate.state.ny.us/pressreleases.nsf/2e0e86fa9105ed5a85256ec30061c0be/
    087529fe9b81e481852570e000611d7c?OpenDocument
  3. Pataki has called for a statewide school district exemption from the Wicks Law, which drives up school construction and renovation costs by requiring the use of multiple subcontractors.
  4. This calculation assumes no change in public school enrollment from 2003-04 to 2004-05–although preliminary estimates indicate enrollment may actually have decreased, which would make the per-pupil ax increase even larger.
  5. More specifically, all one-, two- and three-family homes, as well as condominium and coop apartments, and multi-use buildings that include a residence (such as an apartment above a store), are eligible for STAR if they are the taxpayer's "primary residence."
  6. In the many communities that assess properties at only a portion of full value, the full value is estimated using the state equalization rate.
  7. For example, in the Westchester County town of Rye, where the median home price approaches $1 million, the basic STAR exemption is now about $119,000.
  8. Tae Ho Eom, William Duncombe and John Yinger, "Unintended Consequences of Property Tax Relief: New York's STAR Program," October 2005, Abstract. Center for Policy Research, Maxwell School of Citizenship and Public Affairs, Syracuse University, http://www-cpr.maxwell.syr.edu/cprwps/pdf/wp71.pdf.
  9. Ibid., p. 29.
  10. Rockoff, Jonah E., "Community Heterogeneity and Local Response to Fiscal Incentives," December 2003. Text posted at http://www0.gsb.columbia.edu/faculty/jrockoff/papers/rockoff_local_response_dec_03.pdf.
  11. In its 2004 decision in Silver v.Pataki, the state Court of Appeals said the Legislature could not substitute or alter language in appropriation bills submitted by the governor. In practice, the Legislature can only get around an attempt by the governor to restrict spending by adding a separate line item of appropriation subject to his veto.
  12. Buried within the Senate’s budget proposal is a provision that would permit a local voter initiative to limit increases in annual school tax rates. This is not a pre-condition for STAR increases, however.
  13. New York does offer such a circuit-breaker, but the $18,000 income limit is so low that very few homeowners are eligible for it.

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