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.
CITY RATE CUTS, CREDITS AND REBATES
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 COUNCIL’S TAX RELIEF
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.
TAX RELIEF FROM THE STATE
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 budgetsâ€¦. 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.