Policy Brief: Property Tax Relief (Circuit Breaker)

March 5, 2015. The property tax relief plan (circuit breaker) proposed by the governor would help low- and middle-income New Yorkers that are struggling to pay their taxes and should be adopted with a few changes that would make it even more effective.

The governor’s Executive Budget proposal includes a significant new property tax “circuit breaker” that would provide relief to households whose property taxes are unreasonably high relative to their income. Currently, 33 states and the District of Columbia provide some type of property tax circuit breaker relief to their taxpayers. Circuit breakers would address a serious shortcoming of the property tax—that payments are not linked to the taxpayers’ ability to pay.

Some modifications the legislature should consider include:

  • Eliminating a provision that makes homeowners and renters eligible for refunds only if they live in jurisdictions that comply with the state’s property tax cap law.
  • Boosting the size of the credits to provide a sufficient level of relief.
  • Minimizing the cost of any expansion by considering the use of a broader measure of income to determine whether a household is eligible for the credit or limiting the amount of the credit for owners of very high-valued homes, design features recommended by the Lincoln Institute of Land Policy. Increasing the minimum amount of time a person has to have lived in their home to qualify for a refund is another option.
  • Covering the cost of the property tax relief through the reform or elimination of unnecessary tax breaks for businesses and high-income individuals, rather than through an arbitrary limit on state spending that harms New York’s economy.

Why a circuit breaker is needed.

Local governments in New York and elsewhere rely on the property tax to pay for important services such as education, transportation, and health care. Funding local services with the property tax carries some advantages. For example, it is a relatively stable revenue source that generally grows as needs grow, when population and the local economy expand. In addition, the property tax gives residents local control over funding and service levels.

But property taxes bring major equity problems. The amount of property taxes owed is not tied directly to a household’s ability to pay. As a result, many individuals and families in New York pay an unsustainably large share of their income in property taxes.

One group of taxpayers for whom residential property taxes are often high relative to income are those with low and moderate incomes. This includes:

  • Families who live in areas where income has stagnated in recent decades, during the period when the state has reduced its contribution to jointly funded services, forcing localities to rely more heavily on the property tax than they did in the past.
  • Families who live in areas with high housing costs, since property taxes within a given community tend to be roughly proportionate to housing costs.
  • Renters—who are disproportionately represented among low-income families—as landlords generally pass on a substantial share of their property taxes in the form of higher rent.
  • The more than 700,000 households with incomes below $100,000 who have lived in their homes for more than five years and pay more than 10 percent of income in property taxes. This includes close to two-thirds of households with income of $25,000 or less.[1]
  • The nearly 240,000 households in New York with incomes below $50,000 a year who pay more than 20 percent of their income in property taxes.[2]

A second group of taxpayers who may struggle to afford property taxes are those who rely primarily on fixed incomes living in places where property values—and thus property tax assessments—have risen rapidly, for instance a senior citizen who has lived in the same home for decades. This will be a growing problem for many other people as housing values begin to recover from the recession but incomes remain stagnant.

A third group of homeowners whose property taxes may be high relative to income, at least temporarily, are those with a sudden decline in income—for example, the newly unemployed.

How the proposed circuit breaker would work.

Property tax circuit breakers can address these and similar problems by providing tax refunds based on annual income—often using information from income tax returns—and property tax bills. Under the Executive Budget proposal, homeowners with incomes under $250,000 would receive a credit of up to 50 percent of the amount that property taxes exceed 6 percent of income. For example, a family making $50,000 per year and paying $6,000 annually in property taxes would see a $1,500 annual credit—or a 25 percent reduction in property taxes.

Renters with incomes under $150,000 would get a credit based on the property taxes built into their rent. The credit would be up to 50 percent of the amount of the property tax—estimated at 13.75 percent of rent—that exceeds 6 percent of income. For example, a renter who makes $40,000 a year and pays $2,000 per month in rent would get a credit of $450. This equals 50 percent of the amount that $3,300 (13.75 percent of annual rent of $24,000) exceeds $2,400 (6 percent of income). See “Summary of Executive Budget Proposal” after the “Conclusion”.

When fully phased in by 2018, more than 1.3 million New York homeowners would get credits that average $950. Over 1 million renters would get credits based on the property taxes included in their rent that average $400. The program would reduce state income tax revenues by $1.66 billion when fully phased-in.[3]

Low- and moderate-income taxpayers would be the biggest beneficiaries.

Those at the bottom of the income scale would benefit most—62 percent of homeowners and 37 percent of renters with incomes below $19,000 would receive a circuit breaker refund according to an analysis of the governor’s proposal by the Institute on Taxation and Economic Policy. Some 27 percent of homeowners and renters with incomes below $106,000 (80 percent of all incomes in New York) would receive a tax cut. Just 12 percent of those earning $106,000 or more—the top 20 percent—would get a refund.[4] See Figure 1 and the tables in the appendix for more details.

Property tax payers across New York would benefit.

Figures 2 and 3 show beneficiaries and average credits by region based on data from the Office of the Governor.[5] Homeowners in all parts of the state would get tax relief. The average credits would be largest for those downstate because of the high property taxes relative to income there. For example, more than 330,000 homeowners in the two Long Island counties of Nassau and Suffolk would receive credits averaging $1,186—some 25 percent higher than the statewide average.

Ways to improve the circuit breaker

The proposed circuit breaker is a good idea but it could be improved. Some changes that the state should consider include:

Removing the link to the property tax cap. One of the most problematic features of the Executive Budget proposal is that homeowners and renters are only eligible for credits for property taxes levied by jurisdictions that are in compliance with the state’s property tax cap law. Under the provisions of the property tax cap law passed in 2011 localities are not permitted to raise property taxes by more than 2 percent or the rate of inflation, whichever is lower (with some exceptions). Localities are allowed to override the limit either through a supermajority (60 percent) vote of taxpayers (for school districts) or of the governing body (for cities and counties). The override rules allow localities to decide whether higher property taxes are acceptable to finance specific needs. In general, higher wealth localities have been more likely to pass overrides.

However, there are pockets of low- and moderate-income households even in the wealthiest localities. These residents may not be able to influence the override votes but will still be required to pay property taxes at a level that may be a significant share of their incomes. The state should not deny needed property tax credits to these homeowners and renters simply because their neighbors desire and are able to afford higher taxes to pay for services. In theory, tying the circuit breaker refunds to compliance with the cap could make it harder for localities to override the cap since residents who would lose the benefit of the circuit breaker would oppose the override. But in reality, it is unlikely that the linkage will be a major factor in such decisions. The circuit breaker refunds are paid in the year following payment of the property taxes owed so taxpayers must come up with money to pay the tax up front. And, the proposed circuit breaker only reduces taxes above a certain level by fifty percent. It does not eliminate all property taxes owed.

Increasing the size of the credits. The effectiveness of the credit would be improved by raising the maximum credit amount. There are many areas of the state where homeowners will face a steep property tax bill even after a $2,000 credit. Increasing the percentage of taxes offset by the credit would also assist more renters and homeowners.

Renters, in particular, face difficulties paying for housing. The median income of renters in New York is less than half that of homeowners.[6] The renters credit could be increased by raising the percentage used to determine the share of rent that constitutes property taxes from 13.75 percent to one that better reflects costs in New York. Property taxes make up almost 30 percent of the costs of New York City apartments according to the most recent report of the New York City Rent Guidelines Board.[7] The majority of New Yorkers who would receive the renters credit live in New York City.

Considering Other Changes to the Design of the Credit. Providing more tax relief by increasing the credit amounts would make the program more costly. This increased cost could be offset, however, by considering design feature changes that would reduce the cost such as:

  • Broadening the income definition. The circuit breaker uses adjusted gross income as defined in the personal income tax to determine whether a household is eligible for the credit and the size of their credit. This income definition excludes some sources of income that are not taxable but that do contribute to a taxpayers’ ability to pay property taxes, such as interest from tax-exempt bonds and Social Security payments. A broad definition of income is recommended by many experts in circuit breaker design.[8] New York’s existing circuit breaker for low-income taxpayers uses household gross income—a broader definition of income than adjusted gross income. Because the credits would be better targeted to those most in need, using a broader definition of income would lower the cost of the program.[9]
  • Including an asset test. Limiting tax relief to the tax on the portion of home value below a set ceiling avoids making large payments to people with very expensive homes. They are more able to borrow against the equity in their houses to meet expenses. The limit could be set at a multiple of the median home value in the state such as twice ($576,400) the statewide median value.[10]
  • Increasing the residency requirement. As proposed, the credit would be available to all New York residents who have lived in their homes for at least 6 months. This short residency requirement could result in new residents purchasing homes that are more expensive than they could otherwise afford, which is not the purpose of the credit. Extending the time required to be eligible for the credit would address this problem and also reduce the cost of the program.

Replacing the revenue lost. According to the Executive Budget, the future cost of the credit will be covered with surplus funds generated by the state’s adherence to the overall 2 percent cap on spending increases in future years. This self-imposed and unnecessary austerity leaves New York unable to invest enough in education and poverty reduction, as FPI discusses in its budget briefing book.[11] Rather than limit investment in other needed services to pay for the circuit breaker, the state should generate additional revenues by fixing some of the problems related to last year’s corporate tax reform, eliminating or scaling back many of the state’s smorgasbord of business tax credits, rejecting the proposed Education Tax Credit, and limiting the increase in the estate tax exemption.

Conclusion

As welcome as the circuit breaker is, it will not solve the fundamental problem that is causing high property taxes in New York: the state’s failure to be a reliable partner to localities in shouldering the cost of education, healthcare, transportation, and other services. This failure is one of the major reasons for higher-than-average property taxes in New York.

Until these long-term problems are addressed, enacting the property tax circuit breaker (with or without the improvements suggested above) would provide much needed assistance to those who struggle the hardest to afford property taxes.

APPENDIX

PDF of Property Tax Relief Brief


[1] FPI analysis of 2011 American Community Survey data.

[2] FPI analysis of 2011 American Community Survey data.

[3] FY 2015-16 Executive Budget and various press releases from the Office of the Governor.

[4] Institute on Taxation and Economic Policy analysis, February 2015.

[5] Property Tax Relief for Middle Class Families, Office of the Governor, January 14, 2015.

[6] According to the most recent American Community Survey data from the Census, the median income of homeowners in New York State is $79,750 while the median income of renters is $36,805.

[7] 2014 Price Index of Operating Costs, New York City Rent Guidelines Board, April 24, 2014.

[8] See, for example, Property Tax Circuit breakers: Fair and Cost-Effective Relief for Taxpayers, Lincoln Institute of Land Policy, 2009.

[9] Ibid.

[10] Per the Census American Community Survey, 2009-13 median home value in New York was $288,200.

[11] Fiscal Policy Institute, A Shared Opportunity Agenda, February 10, 2015.

Policy Brief: Education Tax Credit

March 2, 2015. The Executive Budget includes an Education Tax Credit (ETC) that would provide individuals and businesses with a substantial credit against income taxes owed for donations to private and public schools, or scholarship organizations. The governor’s legislation proposes a 75 percent credit rate, with individual credit amounts capped at $1 million. Any unused credit could be carried over to a subsequent year. Both businesses and individuals would be eligible to receive the credit on personal or corporate income tax returns. Total credits would be capped at $100 million per year. A related bill that passed the senate January 21 would allow a 90 percent credit rate and would allow credits totaling $675 million over the next three years.

In an act of political brinkmanship, the governor’s ETC bill ties passage of the education credit to passage of the DREAM Act. And then in his 30-day amendments he went even further by conditioning the Tuition Assistance Program (TAP) appropriation on passage of the ETC and the DREAM Act. Apart from these perverse linkages, the governor’s and the senate’s proposals to divert hundreds of millions of dollars to privately determined educational uses raise three serious issues:

  1. The ETC represents a radical and unwise departure from existing state tax policy and because it provides an unprecedented proportion (75 or 90 percent) of tax reduction relative to a contribution it has the potential to lessen charitable contributions for a wide range of worthy causes;
  2. Because of how the allocation of credits is administered and the fact that the ETC skirts limits on charitable contributions for high-income taxpayers, there is nothing to prevent a situation where all or the lion’s share of credits go to a relative handful of wealthy donors, corporations or financial partnerships; and
  3. The state is essentially delegating its spending authority to private individuals, departing from the well-established and constitutionally sound basis for allocating state education aid and potentially in violation of section 7 of Article 7 of the state constitution that requires all appropriations to be “distinctly specified.”

Radical and unwise tax policy

The ETC proposal flies in the face of sound, long-standing New York income tax policies. All existing personal income tax credits in New York available to households are geared to lower–income households, or have fairly low maximum credit amounts or income eligibility limits. For example,

  • Earned Income Tax Credit: maximum income for eligibility of $53,267 for 2015;
  • Household Credit: no credit for incomes over $32,000;
  • New York Child and Dependent Care Credit: NY’s credit is determined as a percent of the federal credit and declines sharply for incomes over $50,000;
  • Empire State Child Credit: phases out beginning at $110,000;
  • Family Tax Relief Credit: incomes over $300,000 not eligible.

The ETC also stretches far beyond the bounds of the tax benefit provided by itemized deductions. For example, expenses for mortgage interest payments or charitable contributions made by households are eligible for a deduction on state personal income tax returns. The effective value of tax benefit for such deductions is a taxpayer’s tax rate times the amount of the expense or contribution. Thus, at most, the effective tax credit “rate” for deductions is 8.82 percent, the state’s top income tax rate. The state average effective income tax rate in 2010 was 5.6 percent—that is the benefit that New Yorkers get on average for a charitable contribution.

The potential for the ETC to displace other charitable contributions is illustrated by this example for a married couple with $200,000 in adjusted gross income making a $10,000 charitable contribution.

  • For a normal charitable contribution of $10,000, the New York State tax reduction would be $665 ($10,000 times the 6.65% marginal tax rate for a couple with $200,000 in income),
  • Under the governor’s proposed ETC, a $10,000 contribution would result in a state tax reduction of $7,500 since the ETC provides a tax credit calculated at 75% of the qualifying contribution.

Moreover, the state has acted in recent years to limit the deductions for itemized deductions and charitable contributions for high-income taxpayers. New York reduces the amount of itemized deductions by 25 percent for married couples filing jointly with incomes in excess of $200,000, and by 50 percent for such filers with adjusted gross incomes over $525,000. Beginning in 2013, for those with New York adjusted gross incomes over $10 million, the state limits the itemized deduction to 25 percent of the federal itemized deduction for charitable contributions, and all other federal itemized deductions are reduced to zero.

Since the proposed Education Tax Credit takes the form of a “tax credit” rather than a charitable deduction, it entirely skirts recently enacted state tax policy that limits the tax benefit available to high-income households for itemized deductions, including charitable deductions. Consider this example for a married couple with $10 million in adjusted gross income making a $1 million charitable contribution.

  • Under existing state tax law, the state tax reduction would be $22,050 ($1 million times the 8.82% top state tax rate times the 25 percent limit on charitable contributions).
  • Under the ETC, the state tax reduction would be $750,000 (the 75% Education Tax Credit times the $1 million contribution) or 34 times the amount the state would otherwise permit for non-ETC charitable contributions.


Most likely beneficiaries are well-heeled individuals, partnerships and corporations

Since the proposed allocation process favors those submitting applications to make contributions early in the year, there is the possibility that wealthy donors, corporations or financial partnerships would be able to claim all or a lion’s share of the credits early each year. An application would have to be submitted prior to making a contribution, it would have to be approved by the Tax and Finance Department and the recipient educational organization would have to be approved by the State Education Department. Furthermore, as noted above, because it provides a very lucrative tax credit, the ETC blatantly skirts the existing New York State limit on the deductibility of charitable contributions by very high-income households. The allocation process, the high ($1 million) donation limit, and the tax credit end-run around the charitable contribution deduction limit, would allow wealthy individuals or partnerships to potentially exhaust the $100 million annual credit pool, freezing out smaller contributors.

Diverts funding from well-established, constitutionally-required education funding needs

While the Governor’s proposed ETC legislation goes to some length in specifying the educational entities and purposes that can qualify for the credit that does not alter the fact that the ultimate result could be to direct state revenues to purposes at odds with the general thrust of state education funding as required by the state constitution. Because New York State still heavily relies on local property taxes (outside of New York City) to support public schools, there are wide and alarming disparities in spending per pupil between property-rich downstate suburbs and many low-wealth school districts across the state.[1] In partial response to these disparities and in response to the Court of Appeals decision in the Campaign for Fiscal Equity case, the state adopted a school aid distribution formula in 2007 that gave extra weight to public school districts with high proportions of low-income and high-needs pupils and more to low-wealth districts based on relative incomes and full property valuations. It has been a long-standing state policy goal to provide school aid based on this formula, although the amount of aid provided in recent years has fallen short of the commitment made in 2007. The ETC completely disregards that policy priority, and it would divert funds that should be applied to the funding shortfall.

The governor’s proposed ETC legislation specifies that 50 percent of qualified contributions shall be allocated to public education entities (public schools but not charter schools), school improvement organizations (501(c)(3) non-profits that assist public schools in their provision of educational programs), and local education funds (501(c)(3) non-profits established to support public schools), and 50 percent to Educational Scholarship Organizations (ESOs, non-profits providing scholarships to non-public, including private and parochial, schools or public schools outside of a student’s district of residence, provided that at least half of scholarships go to students from low-income families.) In addition to the requirement that ESOs award at least half of scholarships to low-income students, there is a maximum allowable family income of $300,000 for any scholarship recipient. The ETC bill that passed the Senate has a $550,000 family income limit but no requirement that any of the scholarships go to low-income students. The Senate version also makes charter schools eligible for funding as public education entities.

Such allocation criteria could result in ETC eligible contributions going to support public schools in high-income suburban school districts or funding scholarships at elite prep schools. The fact remains that there is nothing in the legislation to prevent a small number of wealthy individuals or businesses from garnering the bulk of the $100 million tax benefits and steering contributions to favor purposes completely different from the criteria used to determine the allocation of most taxpayer-funded school aid.

A proposed tax credit of 75 or 90 percent is so extraordinary in the context of New York’s tax system that it warrants particularly careful consideration. This proposal is very nearly an outright reimbursement for a private expenditure and as such, is difficult to distinguish from an appropriation. It amounts to handing $100 million to wealthy individuals or business interests and allowing them to determine how to spend it.

Governor’s linkage is perverse, politicized policy-making

The governor, in his executive budget proposal, has tied the passage of the Education Tax Credit to passage of the DREAM Act. It is perverse and politicized policy-making to inextricably link two unrelated policy initiatives. The two measures should be acted on individually on their own merits. In his 30-day amendments, the governor dramatically upped the ante by linking passage of the Education Tax Credit and DREAM Act to the Tuition Assistance Program (TAP) appropriation. The governor appears to be willing to hold TAP benefits hostage until he gets his education tax credit passed. This is a new low even by Albany standards.

PDF of Education Tax Credit Brief

 

 


[1] Record Setting Inequality: New York State’s Opportunity Gap is Wider Than Ever, Alliance for Quality Education, January 12, 2015.

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