Short Term Tax Relief and Long Term Tax Reform: An Omnibus Bill…

Short Term Tax Relief and
Long Term Tax Reform:
An Omnibus Bill Approach




By Frank Mauro
www.fiscalpolicy.org

August 15, 2008
          Short Term Tax Relief and Long Term Tax Reform: An Omnibus Bill Approach


The administration of the property tax can be improved. And such improvements should
be made. But even if the assessment process were perfect, and all properties were
assessed at exactly their true market value, criticisms of the property tax's "fairness"
would still remain.

The attention that is currently being given to property tax issues in New York State is in
large part the result of the efforts of organizations and individuals who, for a variety of
reasons, have argued for years that the property tax should be replaced completely; or
that it should be replaced as the basis for school funding; or that New York State should
substantially reduce its reliance on the property tax for economic policy reasons or for tax
fairness reasons. While differing in their emphasis and advocacy style, all of these people
and organizations shared an interest in a classic type of "tax reform." Whether
consciously or unconsciously or subconsciously they were all saying in one way or
another that, as far as they were concerned, the property tax is not sufficiently related to
various homeowners' relative "ability to pay."

Despite the "tax reform" roots of the current property tax debate, tax reform options are
receiving virtually no attention as elected officials, the media, advocates and the general
public consider a variety of approaches to tax relief.

This is not really surprising, given the fact that between 30 and 40 percent of
homeowners in the state have property tax bills that represent unacceptably large
percentages of their income. But it is disappointing to many of us who want to make the
New York's overall tax system more equitable by reducing the state's reliance on local
property and sales taxes and increasing its reliance on taxes based on ability to pay,
primarily the individual and corporate income taxes. Thus, our interest is in legislation
that combines meaningful property tax relief in the short run with a long run plan for
reforming the state-local tax system. In addition to providing for the assumption by the
state, over a reasonable period of time, of a targeted $10 billion in local government
responsibilities, the long run plan for reforming the state-local tax system should also
provide for the creation of a tax reform study commission, with members to be appointed
by the Governor and all four parties in the Legislature, and the establishment of a
statutory requirement for both a periodic study of the incidence of the overall state-local
tax system and analyses of the distributional impact of proposed tax legislation.1

Property tax relief: An immediate need

During the last two years, local real property tax reform groups have been successful in
making the wonky idea of a middle class circuit breaker a front burner issue in New York
State government and politics. Large portions of the public understand what a circuit
breaker is, and there is broad public support for the idea of a middle class circuit breaker
as a way to deal with situations in which homeowners are significantly overburdened by
1 Three states--Maine, Minnesota, and Texas--have enacted laws of this type. These three states and two
others (Colorado and Oregon) have completed periodic studies of the incidence (i.e., the distributional
impact) of their tax systems.



FPI   August 15, 2008                                                                                     1
         Short Term Tax Relief and Long Term Tax Reform: An Omnibus Bill Approach


their property taxes. But a dilemma regarding the funding of such a circuit breaker may
end up stopping its enactment for the time being.

The main circuit breaker bill pending in the Legislature, referred to as the Galef/Little bill
after its main sponsors, would create a relatively generous middle class circuit breaker. It
endeavors to limit the cost of this property tax relief by establishing a 5-year residency
requirement (which reduces the estimated annual cost of the proposal from about $2.5
billion to about $1.65 billion) and by excluding renters from participation (which
eliminates an estimated $1.3 billion in costs). It then proposes to cover the $1.65 billion
cost of the circuit breaker by eliminating the STAR rebate check program, which was
established in 2006 and substantially restructured in 2007. This switch or swap would
eliminate a program that provides relatively small checks to all homeowners and
establish a circuit breaker credit that will provide significant relief to those homeowners
who are truly overburdened by their property taxes. While most of us in this room would
probably support this swap, there is opposition in some important quarters in the
legislature to the idea of taking this benefit away from many homeowners. Some
legislators would be willing to cover the cost of the circuit breaker by a high-end income
tax increase, but this alternative may also fail to attract the level of support necessary for
enactment.

While there are some changes that we would like to see in the substance of the circuit
breaker proposal, and while the state's current budget outlook creates a large number of
competing demands for the revenue that could be produced by a high end income tax
increase, the enactment during the upcoming special session of the legislature of a
significant middle class circuit breaker financed in either of those two ways, would be an
extremely important and significant victory for hard pressed homeowners. If a middle
class circuit breaker is not enacted in the upcoming session because of concerns with the
two possible funding mechanisms now being discussed, consideration should be given to
the possibility of phasing in this relief mechanism through one or more of the following
or similar means:
    · Increasing the income limit in several annual or biennial steps rather than
        beginning with the $250,000 income limit included in the current legislation
    · Decreasing the percent of income threshold in several annual or biennial steps
        (i.e., starting at eight or nine percent of income and then reducing that percent to
        the six, seven and eight percent limits contained in the current legislation)
    · Establishing a maximum credit amount and then increasing that maximum
        amount in several annual or biennial steps.

In terms of the substantive recommendations, two seem relatively easy to resolve (either
positively or negatively) while two others will take time and/or money:
    (1) Given a particularly compelling issue of the times, household income for
        purposes of the circuit breaker should not include, for some reasonable number of
        years, disability compensation received by veterans on account of an injury or
        illness incurred or aggravated during military service in the post-9/11 wars in
        Afghanistan and Iraq



FPI   August 15, 2008                                                                       2
           Short Term Tax Relief and Long Term Tax Reform: An Omnibus Bill Approach


      (2) The criteria for determining a homeowner's eligibility for circuit breaker relief
          and for determining the amount of such relief should not vary with the
          homeowner's place of residence;
      (3) The tax reform study commission should use the results of the first study of the
          incidence of New York's state-local tax system to review the distributional
          impact of the items of income included in the definition of household income for
          purposes of the circuit breaker and make recommendations to the governor and
          the legislature for any changes in this definition that the commission deems
          appropriate;
      (4) The middle class circuit breaker should include renters particularly if it is to be
          funded by an increase in the income tax or in some other tax of general
          applicability.

Tax reform: A continuing priority

The core idea of the tax reform part of the omnibus bill will be to increase the
progressivity of the state income tax and to use the revenues produced for a reduction in
local property taxes by shifting additional costs from the local to the state levels.

In thinking about ways of substantially reducing the reliance on the property tax, two
approaches provide useful starting points. First, Assemblyman Kevin Cahill and Senator
Kenneth LaValle have introduced similar bills that would have the state government
assume all of the costs of what those bills refer to as a "basic quality education," with the
details to be fleshed out by the Commissioner of Education under guidelines to be
established by the state legislature. These two bills each provide (different) mechanisms
for funding, at local option, of educational services above the basic quality education
level. Second, the state Senate has, on several occasions, passed versions of legislation
(referred to as NY-STOP or Stop Taxing Our Property) that provides for the state
government to take over responsibility for funding the portions of school budgets (for
purposes other than debt service) that are currently funded by property taxes on owner-
occupied primary residences.

The foundation formula reform plan that was enacted into law in 2007 represents an
important breakthrough in the way that the state government shares in the costs of a
sound basic education. By establishing a method for calculating, for each school district
in the state, a foundation funding level (i.e., a funding level akin to that referred to as a
basic quality education in the Cahill and LaValle bills), this 2007 law provides a basis for
estimating the cost of these bills. The foundation funding formula established in 2007
also provides a basis for making sure that the approach embodied in the Senate's STOP
bills would, if enacted, treat all school districts in the state on a fair and equitable basis.
Since some school districts spend well above the foundation level in order to provide
their students with a very high quality education, while others are still funding their
schools at levels below the foundation level, taking over whatever school districts are
currently spending would institutionalize those inequities while providing state aid to
school districts on a very inconsistent basis.



FPI     August 15, 2008                                                                         3
         Short Term Tax Relief and Long Term Tax Reform: An Omnibus Bill Approach


The foundation funding level for the 2010-11 school year for all of New York State's
school districts, under the foundation formula law as enacted in 2007 and as modified
earlier this year, is an estimated $36.1 billion. Based on the statutory formulas by which
responsibility for funding this foundation amount is divided between the state and the
local school districts, it is anticipated that in 2010-11 that the state will provide an
estimated $18.5 billion is foundation aid to those local districts. All of this assumes that
the state government will honor the multi-year school funding commitments that it made
in 2007 to settle the Campaign for Fiscal Equity, and we certainly hope that this turns out
to be the case. But we must acknowledge that there is at least some uncertainty given
Governor Paterson's economic and budget forecasts.

If the state were to assume responsibility for funding 100 percent of the foundation
amount, as suggested by the Cahill and LaValle bills (and if such a commitment were
fully phased-in in 2010-11, which it will not be), it would mean that the state would be
responsible for an additional $17.66 billion of local school costs. So rather than making
this assumption, we suggest that once the initial 4-year phase-in of the new foundation
formula is completed in 2010-11 and the State Education Commissioner has completed
an updating of the basic "per pupil foundation amount" that the state government, in
addition to paying its current share of the foundation amount, that the state also gradually
increase its share of the foundation amount. We suggest that the omnibus bill include a
commitment to accomplish $6 billion of such shifting of responsibility from the local
property tax base to the state tax base over the course of the decade beginning in 2011
and ending in 2020.

Earlier, we indicated that the omnibus bill should provide for the assumption by the state,
over a reasonable period of time, of $10 billion in local government responsibilities. So
where is the other $4 billion?

At its meetings and in its report, the Suozzi Commission has constantly repeated that
school property taxes account for 62 percent of all local property taxes in New York
State. This is true only if we count the STAR reimbursements provided to school districts
as taxes paid by property owners. Statewide, if we treat STAR as what it is (i.e., state
aid), we see that the school taxes that property owners pay makes up 56 percent of local
property taxes statewide--but that figure varies tremendously. It's 37 percent in
Allegheny County, 37 percent in Fulton, and 39 percent in Cortland and Cattaraugus
counties, but it's 71 percent in Saratoga and Putnam counties. Why the bigger
differences? Because some counties have much greater concentrations of needy
individuals relative to their tax bases than do other more prosperous counties. And that
ends up making the local share of costs such as Medicaid a much greater lien on some
counties' tax bases than on others. Similarly, some counties have one or more older cities
and/or villages with responsibilities for urban services.

One important lesson is that we should not make public policy based on averages. So, in
addition to recommending that we shift $6 billion of school costs from the local school
property tax base to the state tax base, we suggest that we do something similar in regard
to revenue sharing with the state's cities, towns and villages, and in regard to the division


FPI   August 15, 2008                                                                       4
         Short Term Tax Relief and Long Term Tax Reform: An Omnibus Bill Approach


of responsibility for the non-federal share of Medicaid costs.

For general-purpose local governments, cities, towns and villages, the primary pressure
that the state has placed on local governments is a negative. It's because of not sticking to
its revenue sharing commitment. The underlying law, which gets notwithstood every
year, is that the state is supposed to share 8 percent of revenue with local governments. In
the 1980s, when Governor Carey was governor, we had our first freeze on revenue
sharing in order to allow one of the state's earliest multi-year income tax cuts to be
phased in as scheduled despite the recession that the nation was then experiencing. In the
budget problems of the early 1990s, no major state program was cut more than revenue
sharing--from over $1 billion a year to less than $500 million a year. My
recommendation in this regard is that over the course of the 2011 to 2020 decade that the
state phase in a $3 billion increase in revenue sharing with its cities, towns and villages,

In regard to Medicaid, the state should honor its commitment to picking up increases in
the local share in excess of 3 percent per year. But in addition to this, we recommend that
the omnibus bill include language that will gradually increase the state share of Medicaid
costs in a way that bases each county's share of Medicaid costs on objective measures of
each county's relative "ability to pay" and, in the course of doing so, shifts an additional
$1 billion in costs from the local property tax base to the state tax base.

Between now and 2010, the state may very well need to enact a temporary income tax
surcharge to get through the recession--similar to the temporary personal income tax
increase that was enacted in 2003 for three years. If it does take such a step, it should
continue that tax increase as a source of funding for the property tax reductions being
recommended for implementation during the coming decade.

This approach is less costly than the Cahill and LaValle bills, but it is more balanced
geographically. Putting all $10 billion into taking over the full cost of the foundation
formula would have a much greater impact on the overall property tax burden in more
prosperous counties and less of an impact in less prosperous upstate counties. The
omnibus bill will also establish a process by which the governor and the legislature are
required to consider a much greater takeover of local costs as part of the annual revenue
forecasting and budget making process.




FPI   August 15, 2008                                                                       5
The Fiscal Policy Institute is a nonpartisan research and
education organization that focuses on tax, budget, and
economic issues that affect the quality of life and the
economic well being of New York State residents.
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