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Tax Breaks - Who Wins and Who Loses?

by Glenn Pasanen, Feb 08, 2008
 

Mayor Michael Bloomberg's January Financial Plan for the next four fiscal years repeats the message of last October's budget modification: The economy is slowing, city tax revenues are down, and it's time to make budget cuts. The mayor balances the preliminary $58.5 billion budget for 2009 through agency spending cuts over the next 18 months and the use of surplus funds from last year. The four-year plan, however, projects deficits of $5.6 billion in 2011 and $5.3 billion in 2012.

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Excessive cuts for commercial interests seem to have caught the attention of the City Council, if only in its recent near-unanimous vote to end the 25-year-old property tax exemption held by Madison Square Garden (a vote that is meaningless unless the state legislature and governor also act). Testimony at the council on the garden's tax break also called attention to much larger commercial tax breaks that also could use council review.

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A variety of tax cuts and breaks - including the $400 property tax rebate - cost the city revenues. With no significant service initiatives or increases in the preliminary budget for 2009 - and education cuts that look like a major retreat from an earlier mayoral priority - it's a good time to look a little more closely at city tax breaks in general. Who wins, who loses, and what are the costs?

Billions of Breaks

The city's recently updated Tax Expenditure Report for fiscal year 2007 provides a useful window into the billions of dollars in city tax breaks - commercial and residential property taxes in particular.

Many seem likely to remain during the widely predicted economic downturn. The mayor's financial plan extends the big property tax cuts in the current fiscal year through all four years. Next year's property tax cuts -- the $400 rebate for homeowners and a 7 percent property tax rate cut -- will cost over $1.3 billion in lost revenues. This almost dollar-for-dollar underwriting of tax cuts with agency cuts in 2009 will presumably be controversial at the City Council, setting the stage for the annual "budget dance," in which the mayor diverts the council from larger issues by slashing council initiatives, which the council then fights to restore.

The city took in about $13 billion in property taxes in 2007. All the individual property tax breaks add up to $3.3 billion in lost revenues. This does not include the 7 percent rate cut, but does include the $256 million cost of the homeowner rebate, the $311 million property tax abatement for co-op/condo owners (a 1996 "temporary" council plan to narrow the property tax burden between those owners and house owners that keeps getting extended).

Business income and excise tax breaks added another $573 million in lost revenues (in 2004). The largest of these remains the $248 million that insurance companies saved because they do not have to pay any city business income tax.

Commercial Tax Breaks

At the January 7 City Council hearing on ending the Madison Square Garden $12 million property tax exemption - granted in 1982 when the Knicks and Rangers threatened to leave the city - Bettina Damiani, director of GoodJobs New York, an advocacy organization, asked the council to review much larger questions of tax expenditures (a technical term for tax breaks) granted by the city's Industrial and Commercial Initiative Program.

The tax expenditure report notes that 5,771 exemptions and abatements under this pogram cost $410 million in lost revenues in 2007. Good Jobs New York argues that the initiative program, which was intended to help small firms outside the core Manhattan commercial district now includes benefits for "some of the priciest commercial districts in the city," including $14 million in tax breaks in 2007 for properties in mid-town Manhattan.

These tax breaks rarely get any review. The 2007 tax expenditure report does not feature any independent comment by the Department of Finance, which publishes the report, and offers only a single "evaluation" of business tax breaks. That's a one-page summary provided by the mayor's Economic Development Corporation of its Local Law 48 report for 2006, which is supposed to track the costs and benefits of the development corporation's tax exemptions. This mini report makes two extraordinary claims.

It states, "The present value of city benefits [from 631 EDC investment projects] is estimated to be $23.9 billion, over 34 times the value of city costs."

Further, it contends, "The projects will return a cumulative net benefit to the city (city benefits minus city costs) of approximately $3.2 billion."

If the council wants to pursue serious review of economic development projects, those claims would be a good place to start.

The 7 Percent Property Tax Rate Cut

Beyond the breaks, the across-the-board 7 percent cut in the property tax rate cost about $1 billion this year (Note: The January Finance column incorrectly reported it was $750 million).

The mayor's financial plan does acknowledge the current economic and fiscal uncertainty by making the 7 percent property tax rate cut conditional on the overall fiscal picture. The key variable is anticipated - but uncertain - state and federal aid. Already the mayor has complained in Albany that Governor Eliot Spitzer's state budget proposal shortchanges the city by at least $500 million.

For all the money it costs, though, the rate cut provides very modest benefits to taxpayers. In total dollar gains, it primarily benefits commercial properties because they pay the lion's share -- over 40 percent -- of the city's property tax -- although their properties represent only 22 percent of the market value of all properties in the city.

One-, two- and three-family houses, co-ops and condos together represent over 55 percent of the total market value of city properties, but their owners pay only 15 percent of the tax levy. That's good for residential owners, but on the flip side, in the aggregate, they get less of the benefit from an across-the-board cut than commercial owners.

George Sweeting, deputy director of the Independent Budget Office, explained in a New York Post op-ed last summer that most property owners saw little change in their tax bills after the cut. Owners of houses, for instance, saved an average of $43, or less than 1 percent. Condo owners got a $99 average benefit, and the average co-op owner had virtually no reduction. The reasons for these minimal gains are very complex (and desperately in need of simplification) but a key one is that assessments on average grew by 8 percent, while the rate cut was only 7 percent.

Put another way, the commercial benefits of the rate, while nominal for individual property owners, add up to a cost of some $400 million in lost revenues - while the new budget proposes cutting $324 million from education and hundreds of millions in other areas.

At the same time, the city's more progressive tax breaks, such as the $73.5 million for nearly 100,000 senior and veteran homeowners, the $86 million in rent-savings for 45,000 low-income seniors, and the $65 million (in 2004) in earned income city tax credits for 734,000 low-income working individuals, tend to be modest and dwarfed by big-business breaks.

There are many good arguments for the residential property tax breaks, such as the burden of the city personal income tax and other taxes. But the lack of tax relief for renters who are not senior citizens makes the owner benefits look unfair.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 


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