The "$6 Billion Tax Cut" That Gov. Spitzer Isn't (Quite) Proposing
News coverage of Gov. Eliot Spitzer's first State of the State message invariably highlighted his proposal for what has been widely billed as a $6 billion property tax reduction.
The governor himself was slightly more specific, saying his first budget would include "the first installment of a three-year, $6 billion property tax cut." Assuming Spitzer intends to formally introduce the plan he unveiled during his gubernatorial campaign last June, that $6 billion figure represents the sum of three numbers:
$1.5 billion in fiscal 2007-08, plus
But in New York State, property taxes are collected and expenditures budgeted one year at a timenot three. There is no suggestion that Spitzer expects his property tax initiative to expire after just three years, so describing the proposal in terms of its cumulative three-year impact makes the "cut" look bigger than it actually is.
In an annual budget context, state or local tax programs are best evaluated in terms of their projected annual impacts when fully implemented. By that standard, Spitzer is proposing a $2.5 billion expansion of a state-funded School Tax Relief (STAR) program now budgeted at roughly $3.4 billion, not including nearly $900 million in property tax rebates enacted just last year. Roughly 75 percent of the current STAR appropriation applies to homeowners' school property taxes outside New York City, which now total $16.5 billion, so Spitzer's proposal can be seen as a relatively large additional tax offset even without resorting to cumulative counting.
How STAR Works
Initiated by then-Gov. George Pataki as part of his 1997-98 budget, the STAR program finances a partial exemption from school property taxes on owner-occupied homes. The "basic" exemption is set at $30,000 of a home's estimated full value, with no limit on the homeowner's income. 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 non-primary residences (vacation and 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, with a much smaller property tax offset.
For a house valued at $120,000, STAR reduces the taxable assessment to $90,000effectively cutting the tax that would otherwise apply by 25 percent. The STAR exemption is largerand the percentage tax break smallerin areas where home values far exceed the median statewide home price.
Spitzer would increase existing STAR exemptions by up to 80 percent on a "means-tested" basis. Homeowners whose incomes don't exceed the "middle class" maximum, defined as ranging from $60,000 to $80,000 on a regional basis, would get the full 80 percent increase. Savings would average of $565 on a statewide basis. But the subsidy would be lower for homeowners with higher incomes, and no added STAR benefit would be available to the "wealthiest" two percent of homeowners, defined as those with incomes above $235,000.
STAR requires an annual appropriation and thus is counted as an expenditure in the state budget. It does not require school districts to reduce their property tax levieswhich increased at a somewhat accelerated pace during the period when STAR was originally phased in between 1998 and 2001, as shown in the chart below:
Despite these characteristics, Pataki consistently described STAR as a "tax cut." Spitzer is taking the same approach.
Nonetheless, STAR actually is less a tax cut than a tax shift. The state Comptroller's Office made this point in an April 2006 research brief:
STAR is financed by a share of the state's personal income tax revenues, which are deposited in a special fund for this purpose. Thus, in choosing to expand STAR for New York homeowners, Spitzer effectively is choosing not to cut the income tax by the same amount for all New York taxpayersincluding renters, who aren't eligible for STAR.
New STAR in the heavens
The 2006-07 state budget, finalized by the Legislature and Pataki last June, added new "property tax rebates" worth a total of $875 million. Unlike the main STAR program, which sends extra aid to school districts to reduce tax bills, the new program takes the form of direct payments to homeownersinitially timed for delivery in the weeks leading up to the November 2006 elections. The rebate law stipulated that if Spitzer's first budget doesn't appropriate money for further rebates, the program automatically will be converted into an income tax credit in future years. This language was designed to ensure that Pataki's successor would be forced to bargain with the Legislature on the issue of state-subsidized property tax breaks even if he had no proposal of his own in this area.
A few days before Spitzer took office, Senate Republicans proposed more than tripling the existing STAR rebate over two yearsincreasing it to $2.4 billion in 2007-08, and to $3.6 billion in 2008-09. Anticipating that Spitzer would follow through on his campaign proposal, they chose to highlight their plan's cumulative value of $6 billion.
But the Senate plan includes two significant added wrinkles: it would give local voters the right to petition for ballot propositions limiting both school and municipal tax-rate increases, and it would create a blue-ribbon commission to study property tax reform statewide.
The bottom line
Spitzer's property tax initiative would be worth $2.5 billion a year to homeowners by 2009-10. The Senate Republican proposal would be worth $3.6 billion a year soonerin fiscal 2008-09.
Strictly speaking, both the Spitzer and Senate plans can more accurately be described as tax shifts rather than tax cuts. Like Pataki's original STAR program, Spitzer's STAR expansion promises temporary added relief from rising school taxes while promoting higher school property tax levies in the long run. The Senate plan at least offers local property owners an outlet for direct control over spiraling taxes at the local level.