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The Property Tax Proposal

by Glenn Pasanen, Nov 01, 2002
 

With the state elections over, Mayor Michael Bloomberg and City Council Speaker Gifford Miller can no longer evade the tough choices they face in filling an immediate $1 billion budget gap, as well as the $5 billion or more gap projected for next year. And suddenly, after months of vague promises from both sides of City Hall that "everything is on the table," the mayor has produced a bold property tax proposal.

If history repeats itself, the mayor's plan will be countered or supplemented by City Council ideas on the city's other major tax resource, the personal income tax.

The new-tax debate -- the first in more than a decade -- will make the news in the next few weeks as a mandated November budget modification and a January 2003 preliminary budget for next year force decision-making.

The mayor has tossed the biggest tax idea in at least a generation at the City Council: a property tax increase up to 25 percent that would produce as much as $2.5 billion! This increase would follow 11 years in which the city's average property tax rate has been frozen and property tax revenues generally flat. The lively debate that this proposal should prompt will be somewhat muffled, however, by the mayor's clever timing. Using all the executive powers at his disposal, the mayor apparently wants to include the property tax increase in the November modification. Since the council can only accept or reject that modification, the public debate and council powers will be unfortunately constrained.

Nevertheless, the mayoral/council negotiations and limited public debate will be enriched if the City Council adds its best thinking on how to use the city personal income tax, which is more progressive (i.e., puts a greater burden on the taxpayers who can best afford it. The tax burdens that accompany changes in the property and personal income taxes are quite different, so it is important to determine who pays and who doesn't in these big-ticket choices.

Tax Burdens

The mayor's timing is not only politically expedient in terms of his enhanced mid-term budget powers, but in the fact that the property tax rate is the one tax the city can do on its own, without state approval. A 25 percent January 2003 property tax increase - half-way through the current fiscal year - would raise over $1 billion this fiscal year, and $2.5 billion next year. That would solve a lot of fiscal problems.

Selling it to New Yorkers is another matter. There are several reasonable arguments the mayor can use to justify the increase, but the fact that the tax is basically regressive is a roadblock.

The inequities in the property tax are clear in the distribution of 25 percent increases, which must be across-the-board and would, on average, have the following residential impacts, based on Independent Budget Office data:

  • 1-, 2-, and 3-Family homeowners would pay $475 more a year.
  • Coop owners would pay $670 more a year.
  • Condo owners would pay $1,095 more a year.
  • Renters would pay $412 more a year.

The average renter would pay a total of over $2,000 a year in property taxes, payments that - unlike owners' payments Ð are not deductible from personal income tax. This is true even though renters' average household income was $33,000 in 1998, compared to average house-owners' household income of $60,000 and coop-condo owners' $177,000.

One of the most reasonable arguments for a property tax increase - questions of equity aside - is the inclusion of commercial properties. Commercial properties have benefited from the city's property tax system in recent years. The five-year phase-in of commercial assessment increases means businesses have been spared paying hundreds of millions of dollars in property taxes during the prosperous late 1990s.

Personal Income Tax

The property tax has the advantages of raising a lot of money quickly and spreading the tax burden very broadly to commercial properties as well as relatively-low-taxed homeowners. But it is regressive, which suggests that the personal income tax should be addressed concurrently. Rate increases here require state approval, but changes in the tax were quite common in the 1990s, so there are political precedents for quick state action.

The council's spring 2002 plan to raise $400 million from a permanent pe rsonal income tax surcharge illustrates how a tax can be made progressive:

  • Households earning up to $40,000 would pay only a flat five dollars more.
  • Households earning $40,000 to $100,000 would pay three percent to eight percent, or $25 to $142 more a year.
  • Those earning over $100,000 would pay nine percent to 14 percent more:
  • At $150k to $250k, households would pay about $600 more.
  • Households earning over $1 million would average $14,500 more.

The mayor rejected the council's plan.

A focus in the next few weeks on personal income tax increases as a counter to - or supplement to - the mayor's sudden focus on property taxes, would help sharpen public understanding of just what the mayor is proposing here. A complete dependence on the property tax would, on one hand, protect "average" millionaires, whose taxes would generally be far lower with a property tax increase than with the progressive personal-income tax options listed above. For example, the property tax on a $1 million coop is, c onservatively, about $12,000 today. A 25 percent increase amounts to only about $3,000

On the other hand, complete dependence on the property tax would be a severe burden on renters. Additional exemptions from increases for lowest-income renters would be one way to ease that burden. Innovative thinking -- such as making renters' property tax expenditures deductible just like owners' - would find more ways.

Best Opportunity For Balance

Mayor Bloomberg's remarkable property tax proposal is actually his second bold revenue plan. He included a plan to toll the city's bridges in his first four-year plan last year, which would generate as much as $800 million a year in the near future.

If the mayor's ambitious bridge tolls and property tax plan are combined with the City Council's interest in the city's personal income tax, that would mean over $4 billion in new revenue on the table. The city would have its best opportunity in at least a decade to craft a structurally balanced budget plan. No longer would the city need to depend on the multi-billion dollar one-shot financing that characterized the second-term Giuliani budgets and the first Bloomberg budget, which helped create the current crisis.

Glenn Pasanen, former associate director of City Project, teaches political science at Lehman College of the City University.


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