Brad Cronin - Clarifying facts on the property tax cap law currently before the New York legislature

A commercial developer recently requested a projection of the future property taxes at a potential acquisition. He asked if the estimates would be limited by 2% increases annually if the property tax cap currently before the New York state legislature is passed. This highlights a major misunderstanding surrounding the much publicized tax cap. The cap that has been agreed to in principle by the Senate and Assembly does not cap the tax rate, rather it is a budgetary cap that imposes a limit on the amount property tax revenue can increase each year. The law calls for revenue to be capped at 2% or the rate of inflation, whichever is lower. However, the cap does contain exceptions that allow for circumvention of the 2%. In fact, many speculate that the final bill will carve out exceptions for lawsuits, pensions, and health insurance premiums which could result in an effective cap closer to 3.5%. The advertised 2% limit may not be as stringent a figure as it appears, but it is significantly less than the averaged 5.5% increases, each year from 1999 to 2009, according to statistics from the Cuomo administration. This should provide owners with a greater level of consistency and earnings visibility by eliminating potentially wild fluctuations, thus allowing annual expenses to be budgeted without the fear of an unforeseeable tax rate spike. New York's politicians should be applauded for providing property owners with a mechanism whereby they can manage their properties with greater stability. However, the notion that a tax cap is a solution without consequences fails to examine the impact of similar measures in other states. California enacted perhaps the most controversial cap with Proposition 13 in 1978. This amendment to the state's constitution limits annual property taxes to 1% of its assessed value and annual increases at 2%, while allowing for reassessment when a property is sold. The results have produced a devastating effect on the state budget, contributing to a near financial crisis in California. One area particularly affected by Proposition 13 is the state's educational budget. Today, property taxes cover only 20% of school costs, down from 60% before the amendment's enactment. Once atop national rankings, California has slipped in student achievement, now ranking 45th in the country. California's woes serve as a cautionary tale to New York. In 1980, Massachusetts passed Proposition 2.5 which capped growth on property taxes at 2.5%. Similar to the New York cap, voters may override the limitation by a simple majority of 50% (New York's bill places the override at 60%). The 2.5% cap is calculated prior to additions of new construction, thus allowing developing areas to gain additional revenue. Some point to Massachusetts' cap as a success, but others claim education has suffered, particularly in poorer districts. Additionally, Massachusetts school districts have been recipients of significant state aid, a safety net that does not appear on the horizon for New York. In 2007, New Jersey enacted a 4% cap that was so rife with exceptions, it was rendered meaningless. In order to effectively tighten the belt, a 2% cap was passed last year. The 2010 cap exempts cost increases for health care, pensions, debt service, states of emergency, and increased school enrollment. It also incorporated a provision wherein a municipality may "bank" the portion of the increase that they don't use in a given year, then exceed the 2% cap in a subsequent year. New York's bill as currently constituted will allow for a 1.5% "banking" of taxes as well. Upon receiving commitments from the Senate and Assembly, governor Cuomo proclaimed the tax cap a "game changer." However, in order for the cap to be truly successful, it must limit taxes without changing those aspects that make New York strong. As we have seen on the national political stage, tax cuts without accompanying fiscal discipline are a recipe for budgetary disaster. The next few weeks are critical to ironing out details and exceptions in order to find a balance that could be the difference between: an instrument that increases efficiency, a cap with little impact that effectively maintains the status quo, or one that undermines the very economic growth it is meant to encourage. A close examination of cap implementations in other states would be wise before officially "changing the game." Brad Cronin, Esq., is an attorney and partner at Cronin, Cronin & Harris, P.C., Mineola, N.Y.