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N.Y. Tax Follies


N.Y. Tax Follies

June 24, 2004

THANKS to state budget gridlock in Albany, New York City homeowners will have to wait at least a little longer for Mayor Bloomberg's $400 property tax rebate.


Not because New Yorkers don't need or deserve a tax break — they do.

But the added delay will give taxpayers more time to ponder what's really going on here.

After all, Mayor Bloomberg's proposal isn't really a tax cut. It's an income-transfer from businesses and landlords (especially in wealthy Manhattan) to homeowners (especially in the outer boroughs).

And as an income-transfer, it's fairly cheap by New York City budget standards — requiring him to kick back just $250 million of a record $1.8 billion property-tax hike enacted in late 2002.

City taxes have been increased a total $3 billion a year as of Fiscal Year 2004, compared to the last Giuliani budget in Fiscal Year 2002.

This, along with the belatedly improving city economy, is the primary reason why New York City temporarily enjoys a budget surplus.

The key word here is "temporary": Real and lasting tax relief would demand more determined efforts to reduce the city budget.

Instead, the reverse is happening: City-funded spending will rise at well above the rate of inflation under Bloomberg's 2005 budget, leading to some of the largest future budget gap projections on record.

When Bloomberg first floated his rebate proposal in January, City Council Speaker Gifford Miller countered with a much better idea — an across-the-board rate cut for all payers in the city's four-class property-tax system. However, the council was unwilling to devote the resources necessary to pay for anything more than a token 2 percent cut on this basis.

Last week, Miller surrendered. The speaker agreed to the property-tax rebate in exchange for the mayor's agreement to add earned income credits for the working poor. When the council formally adopts the city budget today, it will cap things off with $215 million in added spending, further reducing the prospects for real tax cuts in the near future.

The rebate plan exacerbates a long-term trend in which more and more of the city tax burden has been shifted to wealthy individuals, businesses and landlords. But a narrower tax base is a prescription for more of the sort of wild revenue gyrations the city experienced between 2001 and 2003.

To make matters worse, Bloomberg had wanted the state Legislature to make the rebate a permanent part of the city's already unfair and complex property-tax law. Future mayors and councils would then be able to manipulate the rebate in a way that would put even more of the tax burden on owners and occupants of commercial property and apartment buildings.

The final version of the bill corrects this problem with a pair of provisions backed by Miller, with the support of the real-estate industry:

* If the mayor and council want to squeeze more money out of the property tax over the next three years, they must first reduce the homeowner rebate before raising the tax rate.

* After three years, homeowners will not continue to receive the rebate unless all classes of property get a rate cut of equal value.

In effect, if the city's elected leaders want to avoid raising taxes on homeowners three years from now, they will need to cut taxes for everyone. Assuming the Legislature ever gets around to acting on this bill, it will represent a rare instance in which a last-minute, back-room compromise has produced a better result for taxpayers.

Meanwhile, Albany's inaction actually underscores a reason why those city budget gaps will get even bigger in the near future. The prime reason for this year's state budget delay is Assembly Speaker Sheldon Silver's insistence on first enacting a multibillion-dollar response to the court decision in the Campaign for Fiscal Equity school-funding case, which mandates more state funds for city schools.

CFE was popularly misconceived as a pure windfall for New York City. But, as all sides have gotten around to acknowledging, it will also force even higher school spending in the city's own budget.

Compared to across-the-board rate cuts, targeted rebates may be good politics but are bad tax policy. Further insulating homeowners from the effects of heavy city spending will weaken political pressure for fiscal restraint in the short run. But in the long run, driving up taxes on New York's wealth-creators will weaken the city's economy — and then everyone will pay.