New York State’s Property Tax Cap

One reason for California’s high housing costs might be Proposition 13.  This law, passed by referendum in the 1970s, may discourage housing production in two significant ways.

First, under Proposition 13, all housing- even vacant land- is taxed at its original purchase price rather than its current value.  By artificially capping taxes on vacant land, this part of Proposition 13 ensures that a landowner does not suffer as much from keeping land vacant as it would under another tax system.

Second, by reducing local property taxes, Proposition 13 forced municipalities to rely on other sources of revenue, such as sales taxes.  Because retail shops bring in more sales tax revenue than residential uses, this law gave California towns an incentive to favor the former. *

New York’s Gov. Cuomo has recently proposed a tax cut that buys popularity for state lawmakers on the backs of municipalities.  In 2011, the state passed a law to limit local governments’ property tax increases to 2 percent or the rate of inflation, whichever is lower.  This cap was originally temporary, but Cuomo now proposes to make it permanent.   A bill implementing Cuomo’s proposal was recently passed by the State Senate, but has yet to be voted on by the State Assembly.   Historically, the cap has not included high-cost New York City, but that may change.  If the cap does include New York City, will it have the same results as Proposition 13?

Probably not, for two reasons.  First, the tax cap, unlike Proposition 13, does not artificially favor property purchased long ago, and thus does not discourage people from selling their property.  Second, New York State has to consent to sales tax increases, so municipalities don’t have as much of an incentive as their California counterparts to favor land uses that bring in lots of retail revenue.  On the other hand, new retail shops will increase sales tax revenue even if a town does not increase rates.

Having said that, I oppose property tax caps for a reason unrelated to housing costs.  It seems to me that one level of government should not be buying votes with another’s taxes.  That is, if the state wants to cut taxes, it should do so in a way that cuts state spending, rather than mandating that a lower level of government cut taxes and spending.  Otherwise, one level of government gets the credit for tax cuts and another gets the blame for service cuts- a way of doing things that takes advantages of voters’ ignorance.

*In addition, California relies heavily on impact fees on developers, which increase the cost of housing.  But impact fees are less common in New York suburbs due to their uncertain status under New York law.