New York Wins Again

New York swept the annual property tax competitions sponsored by the Census Bureau. Scored by the Tax Foundation, New York counties dominated the competition in the “property tax as a share of median home value” event, capturing all of the top ten places. Camden, New Jersey was pushed off the top ten after a spirited showing from New York’s Chemung County. Newcomer to the Top Ten, Chemung ranked #16 in 2007.

In the “property tax per dwelling” event, New York’s perennial champions, Nassau and Westchester counties, took the top two spots with Rockland and Putnam counties also placing. The remainder of the Top Ten was dominated by New Jersey, always a contender in the nation’s tax competition.

What a contest to win! Is there hope of ever losing this competition? What must we do to cut the cost of state and local government? Does it matter?

High taxes are corrosive. Only occasionally do we hear of someone like Tom Golisano who publicly declares that taxes are driving him out of New York. But people DO leave. Winning another dubious Census competition, New York boasts the highest share of its residents leaving for other states (for the period from 2000 to 2008).

Cutting taxes is hard. We don’t tax ourselves to dump the accumulated cash in Lake Ontario. Taxation transfers money from the taxpayers who fund the benefit or program to the people who will receive the benefit or provide the funded service. The political dynamic opposing change can be powerful. Typically, the beneficiaries are few but care intensely about their benefit or job. They are willing to lobby to preserve the status quo. Typically, the number of funders is large but the impact on each is small. Few of these taxpayers are willing to expend significant effort to achieve a small saving.

In some cases, of course, the number of beneficiaries can actually be greater than the number of funders. The Manhattan Institute’s City Journal reports that in New York City, 1.2% of taxpayers pay half the taxes and half the residents pay no tax at all.  In this circumstance, even if every person votes his or her self interest, the benefit or service will continue.

Nor is there a single item of public expenditure that is responsible for most of the “problem.” In New York we transfer significant sums from taxpayers to health care providers through the Medicaid program. Public schools receive tremendous support from state and local taxpayers. And all public sector employees benefit from New York’s labor-friendly laws and effective public employee unions. Taxpayers, on the other hand, pay more when public employees negotiate more generous pay and benefits.

There is no “silver bullet” in tax cutting. Every bit helps—cutting excess levels of government, eliminating a portion of the funds going to Medicaid, reducing spending in public schools.

The property tax is particularly unpopular, the bulk of which (over 60% outside NYC) supports local public education. The NYS Commission on Property Tax Relief, established by Governor Eliot Spitzer in January 2008, proposed a cap on school property taxes similar to what has been established in the State of Massachusetts (by Proposition 2 ½) and by the State of California (by Proposition 13). The proposal was accepted by Governor Paterson and has been put before the NYS Legislature.

Here’s how it would work: Growth in property taxes collected by school districts would be limited to 4% or 120% of the increase in the Consumer Price Index. Taxpayers could vote to override the cap in a referendum. Depending on the level of state aid received in the district, the support of either 55% or 60% of the votes would be necessary for the override.

Would a cap work? Spending on schools in California is lower and most analysts would attribute this to Prop 13. Some argue that the cap has been too severe, forcing local districts to starve the public schools. Yet California does not allow the kind of flexibility built into the Governor’s proposal. Many analysts conclude that Prop 2½ in Massachusetts has also cut the growth of public spending.

The pressure to spend more is very hard to resist. I believe that the cap is a modest measure that is worth serious consideration. Suburban school budgets are already subject to vote. The cap would “raise the bar” by 5-10%, making it just a bit more difficult to pass a budget that exceeded the cap. A flexible cap gives elected officials a “scapegoat” when crafting a budget, e.g. “The cap made me do it.”

But a tax cap, while a helpful tool, isn’t magic. Elected officials have to be willing to say “No” and voters must be willing to elect people who bring that perspective to their jobs.

A shorter version of this essay appeared in the Rochester Democrat & Chronicle on September 27, 2009.

Kent Gardner, Ph.D. President & Chief Economist