Class in Session

Posted by & filed under CGR Staff.

November 7th – Election Day – winds up being the big test for candidates.

It’s also the final grade for you – the voter. So let’s take a little time to brush up on our lessons so that we get a passing mark.

Today class, the focus is taxes. Specifically, local taxes and how the state should involve itself in reducing those taxes. Candidates are making a big deal about this. You’ve seen Eliot Spitzer – in extreme close-up on his commercials – tell you how high local property taxes are pushing people out of New York. John Faso and Tom Suozzi also know that the property tax issue plays in Elmira and Hempstead and Orchard Park.

So let’s look at options the state could use to drive down the local tax burden.

Keep in mind, class, as you ponder the options, however, that solutions come in two flavors: Those that cut taxes and those that simply shift the burden from one tax to another. Shaving spending is the only true way to cut taxes, but you’ll notice some proposals cut local taxes by grabbing money from some other sources.

***Option 1 – State government forces local governments to cut taxes, but “makes them whole” by increasing state aid. The big example of this is the School Tax Relief or STAR program, created by Gov. George Pataki in 1997. STAR allows homeowners to apply to have part of their property value exempted from school taxes. The state then makes up the losses to the districts by increasing state aid.

This reduces the dependence of school districts on the local property tax and shifts the revenue burden to state taxes. It is a tax shift, not a tax reduction. And don’t forget, you are also a state taxpayer—depending on your personal situation, you may end up worse off when the burden shifts from local to state taxes.

Even more troubling, a recent study by Syracuse University’s Maxwell School showed that STAR has stimulated an increase in school spending and school tax rates, offsetting about a third of STAR savings and driving up school taxes for owners of nonresidential property.

Governor Pataki and candidate Faso have suggested spending caps for school districts in exchange for expanding STAR. With Spitzer, they support STAR expansion, however.

Bottom line: The STAR program, at best, shifts the tax burden from local property taxes to state taxes. And it looks like school districts are actually spending more because of STAR, raising property taxes on taxpayers who aren’t eligible for STAR, like business.

***Option 2 – Increase state aid to local governments, allowing them to lower taxes if they so choose. Instead of directly reducing a specific tax on a selected group of taxpayers (as STAR cuts property taxes for homeowners) the state can increase spending on programs that burden local taxes. An example is New York’s recently-enacted cap on the local share of Medicaid. The state didn’t take over Medicaid—but the cap will slowly shift the burden from the counties to the state as costs go up. Similarly, the state is constantly changing the level and form of state aid to public schools. In recent years, total state aid for schools has been increasing.

These, too, just shift the tax burden. Will local taxes go down or will local governments keep tax rates the same and spend the money on something else? And are you better off or worse off when the cost burden moves from your property tax bill to your state income tax bill or some other form of state revenue?

***Option 3 – The state can invest in programs that reduce the cost of local government. As an example, the state just added $25 million to the $2.75 million Shared Municipal Services Incentive Program, which is intended to encourage local governments to save money through service sharing and consolidation. It’s popular – 266 applications for grants from the program pending are more than enough to eat through the state money.

As another example, the New York Power Authority loans money and expertise to local governments, enabling them to make capital improvements that reduce power consumption. NYPA gets paid back through energy savings.

Programs like these don’t have immediate and visible impact on our tax bills—maybe that’s why the candidates are happier talking about STAR. Let’s face it: Saving money is just as tough for government as it is for you and me. We love “silver bullet” solutions like government consolidation. But, as CGR has learned over the years, cutting the cost of local government is plain old hard work, whether consolidation is part of the solution or not.

***Option 4 – The state government can change state laws that drive up the cost of local government. The cost of local government pensions, for example, is determined in Albany, not in Penfield, Palmyra or Poughkeepsie. Every time the state passes another pension sweetener (EJ McMahon’s Empire Center has more), the cost rolls downhill to cities, counties, towns and villages. It was the state that decided that police & fire contracts would be subject to binding arbitration. And that existing collective bargaining agreements stay in force forever when the public employee union and the local government can’t agree, making it nearly impossible to cut benefits once awarded (like the cosmetic surgery benefit in the Buffalo Teachers contract).

The downside, however, is the relaxation of onerous mandates on the locals doesn’t guarantee tax cuts. But at least we’re talking about cost reduction, not just a tax burden “shell game.”

So there you are class, four options for the state to deal with local property taxes. Something to get you started for the big day, November 7th.

If you’re asking what the answer is … well, that’s up to you.

You can declare that answer by walking into the voting booth and casting a ballot for the candidates that most closely mirror your choice.

For this isn’t a test of right and wrong answers.

It’s a test that makes sure you’re voting for the right reasons – those based on relevant issues and your beliefs.