(Nov.-Dec. 2008 GroundSwell)
NEW YORK PROPERTY TAX RELIEF STUDY NO
SURPRISES
By Dr. William Batt, Albany, New York
On December 2 Thomas Suozzi, Chief Executive
of Nassau County, NY, presented Governor David Paterson with the Final Report of
the New York Governor's Commission on Property Tax Relief on how to respond to
the state's homeowners pleading for property tax relief. Suozzi, a
very ambitious and aggressive figure who is seen as a rising star among
Democrats in the State, was appointed chairman of the Commission on Property Tax
Relief (CPTR), perhaps as a consolation prize in losing a primary challenge for
Governor months before. The Final Report was hardly a surprise to those who read
the preliminary draft last July or who followed any of the hearings.
The Commission's recommendations were quite conventional: no tax rates should
exceed four percent and that a circuit-breaker should be instituted to apply
according to household income.
The CPTR was originally appointed last
January by Paterson's predecessor, Eliot Spitzer, to widespread acclaim and
before his ignominious fall, and was filled with assorted politicos and
advisors. It relied upon borrowed staff from various state agencies and
held public hearings in the course of its deliberations. But none of its
members or staff looked widely beyond its mandate to look for ways to cut school
budgets and to find means of property tax relief to homeowners. The run-up
in residential property values in the course of the recent real-estate bubble,
has led to widespread complaints about the burdens of property taxes, especially
in the commuter communities outside of New York City. But compared with
the quality of commission studies for which New York State was known for decades
ago, this one is thin and shallow. When once New York relied upon studies
by figures like Robert Murray Haig, Edwin Seligman, Paul Appleby, Fred Kahn, and
Norman Hurd, giants in the field of public administration and fiscal policy, no
one close to this level comes near Albany today.
There was no other attention first of all to
the problems inherent in current assessment practices except for one
recommendation that responsibility for assessments be shifted and consolidated
from the present 1,128 assessment districts to the 62 county governments.
The State Office of Real Property Services (ORPS) has made available grants to
localities to encourage them to do more frequent re-valuations, but there are
still many instances where there hasn't been one for decades! And
there is as yet little further attempt by the State's Office of Real Property
Services to bring property tax administration into the 21st Century, as by GIS
and land value mapping.
The conclusions and recommendations of the
CPTR may actually have set back any ongoing discourse on property
taxation. There was no mention of its economic dynamics, for example that
the taxation of land and improvements differ in their impact. There
was no mention of tax impacts upon sprawl development, and nothing about how any
tax on real property measures up to the textbook standards of what constitutes
sound tax policy. There was no mention of the tradeoffs between the major
alternative tax structures and their pros and cons. Nothing about economic
rent, nothing about economic productivity, and nothing about deferral options,
generational equity, or economic development. It's as if the commission
had its conclusions assigned before they even started their review -- which may
well have been the case. Reading between the lines, one can infer that its
greatest concerns were distributive justice and economic competitiveness, but
neither of these criteria was explicitly mentioned anywhere in the report.
In fact, all that was discussed at all, at
least in the first half of the hundred-page report, is why New York's property
taxes are "too high" and the various ways to correct this. Presumably this
is measured against the patterns of other states, and reliance upon what is
often known as the "three-legged stool" of public revenue design. I've
written at length on this convention elsewhere, arguing that it really doesn't
make much sense, but it continues to be an unexamined truism. Comparisons
with other states make little sense either, because salaries, costs, and, yes,
property values too, are higher in New York than in most other states.
Even as a proportion of per capita income, New York's property taxes are not
especially out of line with those of other states.
What is most clear is that the property tax
is reviled in good part because it is typically paid in one lump sum rather than
in installments and because it is not understood. It's also much more
difficult for people to understand such concepts as deadweight loss, economic
rent flow, capitalization of gain, depreciation, and distributive justice than
simplified notions of progressivity or regressivity. People are
effective in being able to reach their political leaders and influence their
positions on property taxes, far more easily than on income and sales
taxes.
Since buildings are estimated to depreciate
in value at about 1.5 percent annually, the proportion of land value to building
value on many residential parcels is essentially reversed in the course of a new
home's thirty-year mortgage. Increases in property value are for the most
part due to land appreciation, something totally due to the community's
collective enterprise, and irrelevant to individual titleholder
behavior. Yet homeowners see their possession of title as a strategy
of private "equity building," to be cashed out when an owner dies or
moves to a nursing home. It is not earned wealth at all; it is simply
windfall gain, which in many instances is a crapshoot. Especially today
since many households have relied on increasing home equity as a cash cow, their
welfare position is precarious to the extent they are banking upon cashing out
again at retirement.
Professor Michael Hudson argues that the
increase in the price of housing, and the need to rely upon ever-greater
mortgage debt to secure ownership titles, has essentially profited the
banks. Whatever value isn't a result of land rent capitalization
then becomes pledged to banks in mortgage payments, leaving owners linked to
their debt obligations much as serfs were tied to the land in an earlier
age. Absent the public's recapture of rent to pay for public services,
payments are instead made to banks and then again paid by taxes on goods and
labor. The citizenry effectively pays twice and only a small class of
rentier owners benefits from the system.
The best solution for New York State's
overburdened taxpaying homeowners would have been to allow deferral of part or
all of the land gains until the property is sold, then to be paid off with
interest any obligation due. Secondly, phasing out taxes on buildings,
relying instead upon a revenue neutral shift to land values, would relieve most
homeowners and be assumed by vacant and underused sites in high-value
neighborhoods. These are parcels often owned by absentee landlords and
speculators. In my testimony before the Suozzi Commission, I proposed just
these solutions, adding that some twenty-four states have at least some system
of deferral as a means of alleviating hardship cases, and land value taxation is
spreading more widely now with the advantages of computer
simulations. Deferral arrangements allow homeowners to continue
living in their homes without fear of expulsion by the taxman, and to honor
their obligations to the community by ultimate payment of any amount due.
Consideration of these options didn't even make it into the Final Report.
Homeowners are a politically powerful
constituency, especially when silently backed up by the real estate industry:
cases may be apocryphal about "poor widows" thrown into the street and about
lifetime equity rightfully gained now snatched away. No distinction is
made between income that is earned by labor and that which is windfall gain by
the capitalized flow of rent. Even though Professor Hudson estimates that
about 80 percent of capital gains is really various forms of capitalized land
rent, such gains are viewed as entitlements every bit as much as are
earnings. The decedents of retiring homeowners feel more entitled to the
inheritance from their parents, a windfall that is often fortuitous at best,
than they feel their obligations to society. With roughly two thirds of
all households having property titles, there forms a conspiracy of thieves all
collectively involved in the politically untouchable robbing of the
commons. What's mine is mine; what's ours is negotiable.
And so the moment may soon pass when any
reasonable challenge to the current arrangements is possible -- if it hasn't
already. The Legislature and the Governor's office don't even see
any bigger picture beyond current screams. No one here in Albany,
except for my own lonely pleadings and testimonies, offered the view that
privileges secured so widely, even if so randomly, are really hurting us
all. No presentations and essays, except my own ten or so submissions,
spoke to the larger issue of discrimination, injustice, inefficiency,
unpredictability, and downright foolishness that the present proposals
entail. The protests against the current property tax burdens were
deafening.
I fully expect that the tax cap and circuit
breaker designs as proposed by the Governor's commission will pass the
Legislature shortly. Too many of the conspiracy windfall gainers and
supplicants have already signed on, and their ability to see things differently
is not only remote, it's now also beyond our resources to make a coherent
presentation. If I had graphic explanations, statistical analyses, maps,
and media access, I might have had a chance. But we have none of
this. Likely, matters will continue to unfold in their inexorable
and cumbersome way until another property tax crisis again requires attention a
few years from now.