New York Property Tax Relief Study: No Surprises

H. William Batt

[Reprinted from GroundSwell, January-February 2008]

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.