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For some reason, I never noticed that New York State also recently passed a property tax cap. That means absolutely nothing to me. In fact, I think it might possibly make things worse. Is the cap supposed to persuade localities and school districts to spend less? That will never happen, and here is one reason (of many) why:

School districts in New York State contributed $900 million last year to the state’s teacher pension system, but districts may have to spend as much as $4.5 billion on pensions within five years to meet rising costs, according to a December 2010 study by the Manhattan Institute. Local property taxes would have to increase an average of 3.5% a year just to pay for those added pension costs, the study estimated.

While Rochester is famous for having among the highest property tax burdens in the country, that data masks two issues. First, real estate prices are low, so dollar values of taxes paid are not nearly as high as the rates indicate (they are still high – on a $187,000 home we pay over $6,500 in annual property taxes). Second, our property taxes consist of school taxes, town taxes and county taxes. County taxes comprise the lions’s share – and the town taxes the smallest share. Many of the towns here in Rochester are run incredibly well and I would venture a guess that they are among the more efficient towns in the country. This is not my area of expertise, but with some time I hope to show you some more data on this.

Finally, New York instituted a very small cap-like program some time ago called STAR. Now, it’s not a cap at all, it is a program to provide school tax relief to most homeowners. Since that STAR program passed, there has been no slowdown at all in school spending, and I would argue that researchers would find that spending increased as a result of the caps. Why? Because for some households with small enough assessments, the marginal dollar of increased school district spending does not translate into a proportional increase in their tax liability. This would be a nice paper for someone (an undergrad even) to work on.

4 Responses to “Property Tax Cap Myth”

  1. blink says:

    I understand STAR as a simple lump-sum reduction. It lowers the assessed value of all houses (except those owned by high income individuals) by a fixed amount and so the reduction in taxes is also fixed, though varies by city. See a basic description here and a breakdown of savings by municipalityhere.

    Does the marginal tax rate change as you suggest? I think so, but let me see if I can fill in your reasoning. Imagine two houses, one worth $30K and one worth $70K. Pre-STAR, the burden of an extra $1 of school spending falls 30% on the first homeowner and 70% on the second homeowner. Post-STAR, the effective assessed values are 30K-30K=0K and 70K-30K=40K, so now the tax burden falls 100% on the second homeowner. So now we have introduced a progressive property tax structure.

  2. Harry says:

    WC, any tax cap is a good cap as a general principle.

    I assume property in New York means real property, a system that meant taxing farmers back in 1900 so the non-farmers would pay the then low cost of government for the benefit of the proletariat, who, by definition, had no land. Tax the guy behind the tree.

    My guess is that you pay plenty in property taxes, and so do your neighbors. The people who rent their dwellings in Rochester might think, perhaps correctly, that they are getting their kids educated off your and your neighbors’ backs, even if they rent the house two doors down. Depend on them to get out the pitchforks if there is any increase in the local income tax to fund the artificial turf on their school. Everybody would prefer to have someone a hundred miles away to pay for their children’s future. Who can argue about that, right?

  3. Harry says:

    Gosh, I meant to say that the non-farmers would not pay. A more direct way would be to say that the proletariat would not pay. They have been oppressed, after all, all over the world, since time began, right?

  4. steve says:

    To say that, “real estate prices are low, so dollar values of taxes paid are not nearly as high as the rates indicate” in Rochester ignores a crucial point; high property tax rates can help depress home prices because they affect affordability. Let’s say a couple searching for a home has a budget of $1500 a month for a mortgage payment/property taxes. At today’s rates and 10 percent down, they could just afford your home at $187,000, or they could go somewhere where property taxes are lower and pay the owner more for the home. My wife, who is in real estate, hears this all the time when couples come looking at a home they like where property taxes are higher and they start adjusting downward what they can afford to pay for the house itself.

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