Defining the Terms Tax credit: A dollar-for-dollar offset of a tax obligation. A couple might have a personal income tax bill of $1,290. With the newly increased state personal income tax credit of $290, they would pay only $1,000. Some credits call for taxpayers who owe no tax to get a check for the amount of the credit. Tax rebate: A dollar-for-dollar return on a portion of a taxpayer’s obligation, it is basically a temporary tax credit, often issued as a check directly to the taxpayer. It is the big political ingredient in the changes in the School Tax Relief, or STAR, program. Tax deduction: A subtraction from a taxpayer’s total taxable income. While this reduces the tax bill somewhat, the amount saved depends on the specific taxpayer’s tax rate. Governor Eliot Spitzer proposed a $1,000 tax deduction for households that send their children to private or parochial schools. This would have meant that a family with $50,000 of state taxable income would pay taxes on only $49,000. At a tax rate of five percent, the savings would have been only $50. The bid failed, largely because the Democratic State Assembly saw it as a means to provide public funding for parochial and private schools. Tax exemption: Property or income not subject to any tax. The STAR program depends on tax exemptions. At least $30,000 of home value (and much more in higher some high priced areas) is exempt from local property taxes, saving the taxpayer whatever the local property tax would have been on the $30,000 or more. Seniors get higher benefits. |
As New Yorkers rush to file their tax returns by April 17, city and state officials have been assembling a crazy quilt with every form of tax relief: tax credits, deductions, exemptions, rebates, tax rate reductions. While Mayor Michael Bloomberg and the City Council negotiate over several proposed tax relief plans, including a tax credit for renters (see related story), Governor Eliot Spitzer and the State Legislature have agreed on a plan to reduce taxes that illustrates the complexities and problems associated with political tax doctoring.
In his 2008 preliminary budget, Bloomberg offered several plans to ease taxes. One highlight is a five percent, across-the-board cut in the city’s property tax rate. This will cost the city $758 million in revenues in 2008 and $941 million in 2011, according to the Independent Budget Office. This alone represents about one-quarter of the projected $3 billion a year deficits for 2009 through 2011.
Bloomberg also proposes a four-year extension of the current $400 property tax rebate for homeowners at an additional cost of $256 million a year. The rebate serves as a temporary tax credit and gives the mayor the enviable political task of writing a city check to every each homeowner. Permanent tax credits, on the other hand, get lost in accountants’ work sheets, and their creators go unremembered.
The mayor also proposes several traditional tax credits that would provide tax relief to a narrowly defined group of taxpayers.
The childcare tax credit is one. It helps only families that that earn less than $30,000 and have children under the age of three. The maximum benefit would go to families with incomes of $15,000 or below, providing them with as much as $1,155 per child. Families earning $15,000 to $30,000 would receive lower benefits on a sliding scale. The mayor estimates that 49,000 city families would benefit, at a cost of $42 million in 2008 and $45 million by 2011. The tax credit would take the form of a refund if the family owed no personal income tax.
The mayor has put forther two other tax credit proposals, both aimed at smaller businesses and partnerships. Some business owners now essentially pay taxes twice on the same income -- once in the business tax and then, when the money shows up as part of their income, through the personal income tax.
Earlier changes eliminated this for more than 20,000 businesses with relatively low incomes. This year, the mayor wants to expand that. Resident sole business proprietors and partners with taxable incomes of $42,000 or less could take a credit for 100 percent of their business tax, in effect eliminating that tax for them. The percentage declines for those with higher incomes.
This new credit would cost the city $30 million -- a little more than the mayor anticipates -- the IBO estimates, and would benefit some 21,000 businesspeople. The IBO also estimates that 86 percent of the benefits for the calendar year 2007 would go to people earning more than $142,000. (This change does not require state approval.)
The mayor’s second proposal recycles a measure that was adopted in 2002 but failed to get the necessary state OK. Similar to the tax credit for business owners, this would let resident shareholders of small businesses eligible for certain federal and state tax benefits -- known as subchapter S corporations -- take a tax credit for some of their city corporate income taxes.” (For more on these tax changes, see the IBO analysis of the mayor’s preliminary 2008 budget.)
The estimated costof this change, according to the mayor, is $70 million in 2008. As with the business/income tax credit, the proposal would not apply to taxpayers who are not city residents.
The City Council has also put forth its own tax breaks.
The main proposal is a $300 tax credit for renters, which would be available to families making less than $75,000 a year or single renters with annual incomes below $43,000. The council describes this credit as an extension of the mayor's rebate for homeowners, which provides relief to New Yorkers who saw their property taxes increase after 9/11. While renters don’t pay the property tax directly, its cost is reflected in their rent, so, the reasoning goes, they also are entitled to some kind of break. But the council credit has one sharp distinction from the homeowner's rebate. While the mayor’s rebate gives all homeowners -- regardless of income -- $400, the council ties its credit to income level.
The council wants to give tax credits to businesses that hire welfare recipients, former felons, or people with physical or mental disabilities. It also would like to increase the city's Earned Income Tax Credit for low-income workers.
The main tax change in the new state budget, passed on April Fools’ Day, is a $1.3 billion expansion of the state’s School Tax Relief program, known as STAR. This program, aimed at reducing the impact of property taxes, will now save New York State taxpayers $5 billion a year or cost the state $5 billion in tax revenues, depending on one’s point of view. As the New York Times reported, the deal on STAR includes tax credits, property tax exemptions and rebate checks
STAR sets out some property tax reductions. Then the state reimburses the local taxing authority, usually the school district, for what it has lost in property tax revenues because of STAR. Last year, though, the state started sending some of the property tax savings to the homeowners directly in the form of rebate checks. These rebates will double with the new STAR budget. Although touted as a middle-class homeowner tax-savings program, benefits can go to households making up to $250,000.
New York City does not fare as well under STAR as other jurisdictions. In 2007, it got about $1 billion in reimbursements for lost personal income tax and property tax revenues, according to the Independent Budget Office -- far less proportionately than many other governments in the state receive. This is because STAR is targeted at lowering property taxes for homeowners, and a smaller percentage of city residents own their homes than people in the rest of the state. Also, the average property tax burden in New York City is much lower than in communities outside the city.
In addition, residents of the city receive less tax relief from STAR, again because of the lower property taxes and percentage of homeowners in the city. But city residents do pay a local income tax. And so to provide them with some tax relief, the state budget deal increased the personal income tax credit for people filing a joint return from $230 to $290. The credit on an individual return will go from $115 to $145.
Clearly STAR has a pro-suburban/upstate bias. And some critics charge that STAR may actually serve to increase property taxes. “The reason for this,” the state comptroller’s office has written, “is that STAR lowers the effective tax rate on homeowners - the largest group of people who vote on and otherwise influence local school budgets…. By reducing the local tax share paid for greater school spending, STAR actually provides an incentive to increase school spending.”
As a result, Edmund McMahon, director of the Empire Center for New York State Policy, has written, “It’s an inefficient use of funds that basically encourages what it’s supposedly trying to fix.”
That indicates the kind of pitfalls that can confront politicians who play the tax relief game. While some remedies, such as the city childcare tax credit and its two business tax credits, are tightly targeted, relatively inexpensive, and serve specific social or economic goals, the same cannot be said of many of the other tax relief proposals. Tax policy provides fertile ground for politicians, but they would do well to be wary. Often their approach offers only short-term answers to long-term problems.
Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.
The city’s spring budget process looks to be an especially interesting one, as substantial proposals get debated at City Hall.
It is no surprise that New York City carries by far the biggest tax burden of the nine largest cities in the United States. According to a study by the Independent Budget Office, New York’s taxes are 47 percent higher that the average for the other eight cities. Taxes took $9.02 out of every hundred dollars of taxable resources in New York City in fiscal year 2004 ($5.62, local and $3.40, state).
Though Mayor Michael Bloomberg responded quickly with a defense of the city’s high taxes, saying that New Yorkers want and get more services than other cities, both sides of City Hall are flush with proposals to cut taxes.
In January, the mayor proposed a $1.3 billion tax reduction plan that includes a five percent property tax rate cut for all residential and commercial owners, another year of $400 rebates for all homeowners, and elimination of the four percent city sales tax on all clothing.
In February, City Council Speaker Christine C. Quinn proposed her own tax cut in her State of the City address, with a plan to give working-class and middle-class renters (i.e., families of four making $75,000 or less) a $300 tax credit. Initial reports suggested such a credit would cost the city approximately $261 million in lost city revenues (which roughly matches the annual $256 million cost of the $400 homeowner rebates). Those lower-income renters who could not use a city tax credit (because they earn too little to pay any city income tax) would get a $300 check from the city.
The city’s $3.9 billion surplus has also prompted Speaker Quinn to propose creating a rainy day fund, presumably a reserve account that would be established through joint city and state legislation. The idea would be to set aside some surplus funds and then use the funds in the future to soften economic downturns and budget emergencies. Quinn said, “Families do it, businesses do it, even squirrels save nuts for the winter.”
Under current state law the city can’t do a rainy day fund. The city cannot end the fiscal year with a surplus, so it spends down some of the surplus in that year and prepays some of next year’s bills with the rest, usually for debt service. But the mayor has thus far not encouraged a joint council/mayoral plan to craft a rainy day fund, so it will be interesting to see what happens next. (As noted in earlier columns, the mayor has created his own version of such a fund -- a retirees health benefits trust fund -- that will get a total of $2.5 billion by 2008.)
The March report on the mayor’s January financial plan from the Office of the State Deputy Comptroller for New York City is a useful analysis of the impact of Governor Eliot Spitzer’s proposed budget for the state’s next fiscal year (beginning April 1, 2007) on the NYC budget. The good news here is that Spitzer would send $3.2 billion in increased state education aid over the next four years ($637 million in 2008).
Added to the $2.2 billion in increased city funding over the next four years in the mayor’s January plan, that’s $5.4 billion in new education funding for city schools. According to the comptroller report, this represents “more than twice the minimum amount recently ordered by the New York Court of Appeals, which concluded the longstanding Campaign for Fiscal Equity lawsuit.” How that huge influx of money gets spent will be one of the big budget stories during the next few years.
The bad news for New York City in the Spitzer budget proposal is that all the non-education proposals add up to a “net loss of $317 million over the course of this year and next year” to the city. The main reason is the governor’s elimination of the state’s annual $328 million in general revenue sharing funds to the city. That’s no-strings-attached, unrestricted money for the city. (Spitzer wants to focus revenue sharing on distressed communities.) To make up for that loss, the governor proposes eliminating certain corporate tax loopholes that he says will generate approximately $375 million a year in new revenues for the city.
Council Speaker Quinn’s tax credit for renters would make the city’s property tax system somewhat more equitable. Renters, who contribute to property taxes through their rent and who on average earn much less than the average homeowner, have not benefited from the mayor’s $400 rebate to homeowners. They would thus get some tax relief. But the new policy will also further complicate the system.
The deputy comptroller’s report, for instance, describes another example of the bizarre nature of the city property tax. Property tax collections are projected to grow from $12.5 billion in 2006 to $17.5 billion by 2011 (excluding the impact of the Bloomberg proposed tax rate cuts). The big reason is that since 2000 citywide market values have more than doubled.
But because of many complex restrictions on assessments, much of the market value increase either never gets taxed (house owners get this big benefit) or is phased in over five years (for rental landlords and commercial owners). Some $22 billion of assessments (called a “pipeline”), for example, will get phased in during future years. This helps assure future tax revenues, even if market values fall, but in the short run it denies the city current revenues, as well as maintaining inequitable distinctions among different categories of owners and renters.
Nevertheless, taxes and tax cuts are on the table, and there are competing visions of what’s fair and what’s not, at least in property tax policy. That is a good start for a broader debate about taxes in the city, and the need for more simplicity, transparency, efficiency, and equity in tax policy overall.
Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.Â
When Richard Hutchens turned his attention to the Erie Canal in the late 1990s, the famed waterway's heyday had long since passed. Still, the businessman knew a deal when he saw one -- and so he happily paid $30,000 for the development rights to 524 miles of state-owned property along the once-legendary waterway. That came to $57.25 a mile.
Hutchens was not the only developer who saw that such rights could be worth many millions. But he had one big advantage: a close relationship with several staff members at the Canal Corporation, the part of the state Thruway Authority that was selling the rights to develop the land. These friends rebuffed other bidders, fed Hutchens inside information, and hid the Buffalo developer’s lack of experience and prior failures from other officials, according to a 2004 report prepared by the office of then Attorney General Spitzer and Inspector General Jill Konviser-Levine.
Hutchens' friends also asked him to fork over more than $10,000 in campaign contributions for various candidates. In the vernacular of government corruption, Hutchens had to "pay to play."
New York's public officials have long accepted money from those with whom their agencies do business, and such donations are often perfectly legal. But quid pro quos such as Hutchens' are getting increased attention from public officials. In his inauguration speech as governor, Spitzer said he wanted to restrict such practices. Mayor Michael Bloomberg and City Council Speaker Christine Quinn used their respective State of the City speeches to say that they would also limit political contributions from people who do business with the city. And Attorney General Andrew Cuomo has committed his office to developing an Internet database to allow New Yorkers to track the links between political donations from lobbyists and special interests on one hand and state contracts on the other.
Hutchens' sweetheart deal was cancelled by State Comptroller Alan Hevesi, who cited ethical violations in the process. Spitzer, who was attorney general at the time, called the deal the result of "bureaucratic incompetence, cronyism, ethical lapses, and lack of oversight."
Hutchens insisted he had done nothing wrong. But, perhaps inadvertently, he acknowledged what he was doing. "Everybody makes a political contribution for a purpose,” he said. “My purpose was that I'm living in New York, and I need to be a friend, be acquainted with people that make things happen."
At its most blatant, pay to play is simply bribery and plainly illegal. One of the most notorious cases involved Guy Velella, then a state senator representing the Bronx, who sought campaign contributions and legal fees from a contractor in exchange for the senator’s support in seeking renewal of a state contract to paint a bridge. Court documents seemed to indicate that Velella engaged in many other corrupt practices as well. In 2004, the senator ended up behind bars (his imprisonment turned into a dark comedy in its own right).
Businessman Ron Laberge, who did a large amount of business with state agencies, said that bribery is standard procedure in New York State. In 2003, after the FBI confronted him with proof that he had bribed a state official, Laberge "prepared memoranda outlining the methods used by politicians and business owners to contribute money to campaigns and to have those contributions recognized for later business opportunities," according to court documents obtained by the Albany Times-Union: "This information laid out the blueprint for the FBI concerning the manner in which business is often conducted in New York."
Laberge and two other men, a state employee and a real estate broker, ended up being convicted of trading money for a lucrative lease.
Laberge and Velella's crimes were particularly blatant. But the pay-to-play system is not always so obvious. Instead, good government groups say, lobbyists, contractors, and developers pressure public officials through campaign contributions. This does not necessarily result in quid pro quos, they say, but exerts a creeping influence on government decisions.
“Actors in this field are presumably shrewd enough to structure their relations rather indirectly,” Stephen F. Williams, a senior judge of the D.C. Circuit Court of Appeals said in a decision addressing pay to play on the federal level.
The case of State Senate Majority Leader Joe Bruno serves as a possible example. Bruno is being investigated by the FBI for his relationship with a personal friend, businessman Joe Abbruzzese. Abbruzzese has paid for Bruno to fly on his private jet to Florida, where the two men played golf and visited an upscale strip club. He also contributes a large amount of money to Bruno's campaigns. Meanwhile, businesses that Abbruzzese has a financial stake in receive hundreds of thousands of state dollars in the form of state grants called member items, money that Bruno has a lot of control over. Abbruzzese is also bidding for the state's horseracing franchise.
The investigation is not complete, and both men insist that they have done nothing wrong. Bruno says Abbruzzese's business ventures should not be seen as questionable simply because the two are friends. But one thing is certain: There is a lot of money involved.
Bruno’s case and the others that make the newspapers are hardly isolated incidents. Vendors who do business with New York State donated almost $2.2 million to state officials between 2001 and 2003, with health, construction, and financial service interests being the most generous, according to a study by the good government organization New York Public Interest Research Group. During the same period, officials gave out about $26 billion in “influence-able" contracts, or contracts where price was not the primary factor in deciding how they were awarded, the group said. In addition, 15 vendors directly violated campaign finance law, giving more than was allowed.
According to a report (in pdf format) published by the city Campaign Finance Board, 22.3 percent of campaign contributions for the 2005 municipal election cycle came from people or entities that do some kind of business with city officials. Certain offices seem to attract a larger proportion of money from this group. In the races for borough president in 2001, for instance, 81 percent of contributions came from lobbyists, their clients, or contractors – even though they accounted for only 8 percent of contributors.
Money flowing between officials and those with whom the government does business does not mean that anything improper is taking place, the Campaign Finance Board cautions.
"There is nothing in our data that allows us to conclude that contributions have influenced the awarding (or refusal) of any contract or other benefit," it wrote. "As such, our data do not provide direct evidence of a 'pay-to-play' culture in New York City."
But even if there is not outright corruption, the board, good government groups, and elected officials say that the perception of pay to play is damaging.
"When we look the other way while those who do business with the state give huge contributions to the officials who determine state contracts, we invite even greater cynicism in our public institutions," said Attorney General Cuomo.
Some developers are also concerned.
"When you do business with the city, you get solicited by everyone from U.S. senators down to members of the City Council," said Atlantic Yards developer Bruce Ratner in former Public Advocate Mark Green's 2004 book on campaign finance, Selling Out. Reflecting on his past contributions and fund-raising efforts, Ratner added, "I didn't want to be a person on the outs, nor could my business afford to be a person on the outs given how much business we do with government."
Despite his qualms, Ratner still plays the game. As the Atlantic Yards Report, a blog opposed to his plan for downtown Brooklyn, writes, Ratner no longer makes campaign contributions – directly. But his brother and sister-in-law both contribute large amounts to public officials who may have sway over development projects he hopes to pursue.
Not everyone, however, sees this as a very big deal.
Both the city and state comptrollers – the government's official financial watchdogs – question whether campaign contributions really influence the way that officials grant contracts and do business. Thomas DiNapoli, the new state comptroller, said he would not forgo contributions in future campaigns from those who want to do business with the $145 billion state pension that his office controls. DiNapoli did say he would limit those contributions to $10,000 or less, instead of the $50,000 that is legally allowed under state campaign finance law.
"It is important for people to run for office who are not wealthy people," DiNapoli has said.
City Comptroller Bill Thompson has also questioned whether pay to play is such a big problem. "It's a great catch phrase, but what does it mean?" he told the political blog the Politicker. Accepting a relatively small amount of money from those who do business with the government will not lead to corruption, Thompson argued. He added that the current $5,000 contribution limit for candidates for citywide office is reasonable. "I don't see pay to play on the $5,000 level," said Thompson, who is considered a strong candidate for mayor in 2009.
There are relatively few restrictions on how public officials and candidates for office can raise money from those with whom the government does business. Money flows particularly freely in Albany, which has relatively permissive campaign finance laws.
Still, there are limits. If they personnally are running for office, state employees are allowed to solicit contributions for their campaign from a person with business before their agency. They cannot, however, direct someone to donate money to other political campaigns – a rule that Hutchens' friends at the Canal Corporation violated.
In addition, a federal rule restricts investors who buy municipal bonds from contributing to officials in charge of issuing those bonds. (They are allowed to make small donations in elections they can vote in, however.)
Many city agencies, including the Health and Hospitals Corporation, the city Housing Authority and the Department of Education, are covered by these state laws. But when city officials do play a role, they tend to be more aggressive than state officials in campaign finance reform. Pay to play has been no exception.
Last year, the city passed a series of laws that tighten restrictions on lobbyists. One of these laws changes the city's campaign finance system so that contributions from registered lobbyists can no longer be matched with public funds. In the past, such contributions were matched $4 to $1.
The city has not moved so quickly on restricting contributions from businesses seeking city contracts, however. In 1998, voters approved a charter amendment that called for the Campaign Finance Board to write stricter rules concerning such contributions. It still has not done so.
In 2004, the Bloomberg administration attempted to move on adhering to the charter provisions and introduced a bill that would have put a $250 limit on campaign contributions from people doing business with the city. Larger contributions would not be eligible for matching funds from the Campaign Finance Board.
That bill failed, with critics saying it went too far. For one thing, the language of the bill was so unclear that homeowners would have been considered to be "doing business" with the city if they applied for certain zoning variances.
Last year, the Campaign Finance Board came up with a series of proposal and asked the City Council to retrict pay to play. But nothing ever came of the plan.
The Bloomberg administration and the Campaign Finance Board disagree about whether the city has fulfilled its obligations under the 1998 charter amendment. The board says it has submitted rules for public comment and that, in any event, the city does not have the ability to enforce pay-to-play regulations.
But the administration disputes this. "The mayor has been clear that voter mandates should not be ignored for bureaucratic reasons or dismissed on technical grounds," said a spokesperson for Bloomberg.
Spitzer has said he would set limits on contributions on the state level but has not offered anything specific. So far he and Cuomo are not trying to directly restrict donations but would simply make the contributions more transparent. Cuomo's proposed "Project Sunshine" Internet database would track donors, lobbyists, special interests, state contracts and elected officials, and allow users to find the connections between them. Spitzer's executive budget contains money for the attorney general to pursue this project.
City officials have their own database of people who do business with the city called VENDEX. They hope to make it compatible with the city's campaign finance database, so that officials could monitor which contractors make campaign contributions. But VENDEX only includes current contractors, not those bidding on city contracts. In addition, the database does not include contractors involved in land use even though real estate is the city's biggest industry and developers are among the top donors to city campaigns.
One key dilemna in regulating pay to play is determing what, exactly, it means to "do business" with the city or state. This could be defined narrowly to mean someone with a city contract worth over a certain amount of money or it could be construed more broadly. "If you apply for a license for a sidewalk café, do you have to register? I don't think so," Gene Russianoff of the New York Public Interest Research Group has said. "You have to draw the line somewhere."
And there is the issue of what the city has the legal right to do. In many places, pay-to-play laws put the responsibility for compliance on the campaign contributor. If contractors make an illegal donation, their government contracts can be cancelled. But New York City does not have the legal authority to penalize contractors without the permission of the state.
Bloomberg's 2004 proposal avoided that problem by putting the responsibility on the candidates, punishing them if they accepted money from contractors illegally.
But good government groups see problems with this plan, too. Asking candidates, particularly for local offices such as City Council, to guarantee that none of their contributors hold contracts gives them "a great incentive to opt out of the public financing program," said Megan Quattlebaum of good government group Common Cause New York. "You essentially destroy this great program," she said.
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