NY's tax cap plan came with lessons

ALBANY -- A property tax cap plan agreed to by Gov. Andrew M. Cuomo and legislative leaders last week may enable New York to avoid issues that have triggered controversy and litigation in states including Colorado and California, experts said.

Forty-five other states have some type of tax limitation in place. But experts said that by choosing to go the route of capping the size of the total tax levy, the amount taxpayers are responsible to pay, New York has avoided methods that can lead to inequities among homeowners.

"It's the most equitable, the most efficient and the least complicated to administer," said E.J. McMahon, director of the Empire Center for New York State Policy, a conservative think tank.

On Monday, Cuomo and legislative leaders announced a tentative deal to limit local property-tax increases to a maximum of 2 percent or the rate of inflation, now about 1.5 percent, whichever is less. Payments for capital construction, legal settlements and tax base growth due to new economic development projects would be exempt; payments by school districts to the state pension system would be partially exempt.

The cap could be overridden only by a vote of the local governing board and a 60 percent majority of voters in a local referendum.

Nationwide, there are three basic types of tax caps -- those that limit growth in the property-tax rate, assessed valuations, or the total tax levy, as New York's would.

In taking that approach, New York may avoid problems that have cropped up in California, said Kim Rueben, a property tax analyst with the Urban Institute, a liberal think tank in Washington, D.C.

The California law, enacted in 1978, bases tax changes on a parcel's assessed value at the time of purchase. That can lead to inequity and litigation, Rueben said: similar homes sitting side-by-side can be subject to wildly different taxes if one hasn't been sold in 30 years but the other changed owners recently.

"New York would put an overall cap on revenue -- that avoids the California problem," Rueben said.

Rueben noted two other features of New York's proposal: exceptions for a portion of the growth of pension costs and for economic development projects that expand the local tax base.

Colorado, which limits the growth rate of tax revenue, initially had neither. When its housing market boomed and more municipal services became necessary, the cap handcuffed local governments from raising more revenue. There since has been a stream of political and legal fights over amending the law.

"Some of the stuff that happened out West with tax caps is more dramatic" than in East Coast states such as Massachusetts and New Jersey, Rueben said. She noted that some Western states' tax policies came about through initiatives or referendums, not the legislative process. That's often produced more sweeping caps and also led to litigation and constant tinkering, Rueben said.

The Massachusetts law, which New York used as a model, limits tax-levy growth to 2.5 percent. It has lowered the growth of education spending but also forced state government to send more aid to local communities, according to experts.

The lone exception allows for growth of a community's overall tax base, from projects such as business parks and housing developments. There are no community votes on school budgets in Massachusetts, so to exceed the cap, town selectmen, by a two-thirds majority, must agree to put the question before the voters; a 50.1 percent majority is required for passage.

The override provision has been used frequently over the years and gives towns the ability to address special circumstances, said Barbara Anderson, head of Citizens for Limited Taxation and the architect of the initiative.

Because the Massachusetts law, which turns 30 this year, has survived with less controversy than in other states, Anderson said she's not surprised New York used it as a model.

"Everyone is trying to do what we did -- come up with a viable cap that works," she said.