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The Star Delusion


The Star Delusion

June 13, 2006

Faso, Spitzer Copy Gov's Fake Tax Cut

WHEN it comes to reducing property taxes, New York's two leading gubernatorial candidates are hitching their wagons to George Pataki's STAR.

Democrat Elliot Spitzer yesterday called for a major expansion of the STAR (School Tax Relief) program. John Faso, the Republican-Conservative candidate, had previously unveiled his own proposal to make STAR much bigger.

The fall campaign thus could shape up as a bidding war - over one of the more costly and counter-productive fiscal legacies of the Pataki era.

Initiated by Pataki as part of his 1997-98 budget, the STAR program finances a partial exemption from school property taxes on owner-occupied homes. Commercial buildings, rental housing and vacation homes or second homes don't get a STAR tax break. (Because New York City doesn't have a separate school tax, STAR aid there goes mostly for an across-the-board cut of two-tenths of a percentage point in the city income-tax rate.)

In just a few years, STAR grew into one of the largest single programs in the state budget. In 2006-06 alone, it cost $3.2 billion - more than 16 percent of total state spending on K-12 public schools.

Yet, while Pataki and state legislators call it a "tax cut," STAR is actually a tax shift - from homeowners to state income tax filers (who in many cases, of course, are the same people), and to those property owners who are not eligible for the program.

Another problem: By subsidizing high property taxes, STAR actually encourages school districts to spend more. Aware of this moral hazard, Pataki included a cap on school tax-rate hikes in his original STAR plan. But the Legislature rejected the cap, and Pataki unwisely didn't insist on one as his price for moving forward with the program in the late 1990s.

As a result, school district spending and tax levies accelerated when the original STAR program was being phased in between 1998 and 2001.

Despite its high cost, STAR remains immensely popular among state politicians in both parties, because it offers a way to redistribute income while providing at least the temporary illusion of "tax relief" - all without directly attacking the root cause of the problem, which is New York's sky-high school spending.

Spitzer's "Middle Class" STAR plan would increase current property-tax exemptions by 30 to 80 percent over three years, targeting the biggest amounts to families at or below the median-income level, and would offer no added STAR payment to households in the highest-earning 2 percent of homeowners (those earning above $235,000 a year, by Spitzer's estimate).

Faso's plan calls for simply doubling current STAR breaks over four years for all homeowners and city taxpayers.

Spitzer outlined "budget savings" more than sufficient to pay for his STAR plan. Faso, to date, hasn't explained how he'd pay for his proposal, although he has been more specific in identifying the mandate relief necessary to save money on the local level.

The most important difference: Faso's would link STAR exemption outside New York City to a cap on annual growth in school-district tax rates. Spitzer wouldn't cap school taxes or spending; his plan would thus promote another big run-up in school spending during its phase-in period.

The odd man out in the STAR sweepstakes is Spitzer's would-be Democratic primary opponent, Nassau County Executive Tom Suozzi. Suozzi would target more state aid to reduce taxes in some heavily-taxed districts, provided they are willing to limit spending increase.

Meanwhile, STAR also remains a major bone of contention between Pataki and the Legislature. The governor's final budget proposal included new $400 STAR rebates for residents of any district willing to cap its spending. The Legislature's budget stripped out the spending and enlarged the STAR rebate to a percentage of the existing tax break. Claiming legislators had changed his appropriations language unconstitutionally, Pataki is simply refusing to spend the money.

But the bottom line is this: STAR has not been a cure for high property taxes. At best, it's been a very expensive dose of fiscal novocaine whose effects have now worn off.

Without or without more STAR, unless something is done to limit the rate of increase in property taxes, New Yorkers won't be seeing real relief any time soon.