Property Tax Caps and Local Governance

By :: May 26th, 2011

New York Gov. Andrew Cuomo and the Democratic leaders in the state assembly have agreed on a proposal to cap local property taxes. They cannot grow by more than 2 percent a year, although there are exceptions for extraordinary costs to cover pensions or legal settlements.

I can certainly understand the impetus for property tax limits. Property taxes are ridiculously high in many jurisdictions. When I moved from Arlington, Virginia, to Fayetteville, New York, my new home cost less than half what the old one sold for, but my property taxes doubled. The rate was four times as high! I ultimately decided to vote with my feet and moved to Syracuse, a lower-tax jurisdiction. But a lot of my Fayetteville neighbors, who have young children, thought the supersized property tax bill was worth paying in exchange for world-class public schools. It seems to me that is exactly how democracy is supposed to work.

Until recently, property tax caps were widely supported by Republicans and opposed by Democrats. Cuomo's support was a game changer. It has always seemed odd to me that small-government Republicans would want to move decision-making on taxes away from the local level up to the state government level. In other contexts, they argue that local governments are best suited to making decisions in the interest of their constituencies. Indeed, even in the context of the property tax debate, they've made that argument. Many Republicans are saying that relief from unfunded state mandates should also be part of the legislative package. That is, they don't want Albany telling localities how to spend their money (I agree), but are perfectly happy for Albany to tell towns how much revenue they can raise.  The inherent contradiction in those two positions seems to escape their notice. Or perhaps they lack a sense of irony.

The obvious motivation for the Republicans is that they really don't want democracy to work when the consequence would be larger government. They are perfectly happy for the state to tell cities and towns that they can't spend money. Presumably, they'd even be happy for the federal government to do it as long as it advanced their interest of smaller government.

In theory, small governments should be most responsive to taxpayers. If my mayor raises my taxes and doesn't provide services I'm willing to pay for, I'll vote her out of office. If she spends my tax money well, Syracuse will be a better place to live and property values will increase. I'll be happy.

There is an alternative model called, ominously, Leviathan. It posits that bureaucrats serve their own interests by growing government and expanding their power, unchecked by voters. Therese Mcguire, in a thoughtful survey of the evidence regarding California's property tax limitation, prop 13, concluded that there was support for the Leviathan model and that prop 13 resulted in smaller, more efficient government:  “On balance, as long as an escape valve is in place for local voters to override the limit, … there is the potential for property tax limits to improve the welfare of local resident voters.” [Emphasis mine]

Note the caveat: there must be an escape valve. The proposed New York legislation includes an escape valve, but it requires a super-majority vote (60%) to raise taxes by more than 2% in a year. That is, a minority may prevent the majority of taxpayers from financing the level of public services they desire.

So it really does appear that New York's leaders don't trust local government democracy.  It would make a lot more sense to allow local voters to finance more school spending (or other spending) with a simple majority vote.  Such a limit could tame any Leviathan tendencies without disenfranchising a majority of voters.

This was originally posted on my Forbes blog (The Impertinent Economist).


  1. Ralph H  ::  8:17 am on May 27th, 2011:

    As a resident of NJ I can only say that our 2% cap has resulted in the towns and school districts living with the law and somehow finding a way to deal with it. The local superintendents have someone to blame and there is more cooperation than would be the case without a cap. Think about what state budgets would look like if there was not a constitutional mandate for a balanced budget! Naturally there will be some pain, but it is almost impossible for officials to restrain spending without a cap.

  2. Michael Bindner  ::  2:06 pm on May 27th, 2011:

    2% is awfully low when compared to the increase that Home Owners Associations usually get, which is inflation.

    The problem with property taxes in general is WHAT they fund. Schools are a redistributional activity – and unless you have a Georgist level of land value taxation with a citizen dividend – the proper tax to fund it is an income tax or maybe a net business receipts tax (provided that the net includes taxing wages and employees can chose education providers).

    The property tax should fun local infrastructure and public safety – basically what an HOA would provide. Indeed, if everyone had a strong HOA with privatized roads, fire protection and security, property taxes could be dispensed with altogether.

    Of course, in modern smart growth communities, there would be a great deal of overlap between neighbors and co-workers. If the local employers were cooperatively owned, the overlap could increase further without the danger of old style company towns turning workers into slaves.

    Of course, in a smart-growth, employee-owned world, the cooperative would provide all the services (see Mondragon in Spain) and there would be no need for taxation or a separate government.

  3. betterthanzero  ::  1:58 am on May 30th, 2011:

    I totally support the Tax Cap as sometimes majority is wrong. If you have 3 kids and you take a democratic vote in your house hold against the kids will you win. Same here people are ignorant how their money is getting wasted by the schools, unless this becomes an epidemic they will not rise up and revolt. Also only 20% voter turnout is always in favor of the school districts and districts also play games, sorry politics with its residents. Why do you think lot of schools do Art show or bake cookies on the same day as the Voting day every year. Just to get parents in there who are less like to vote NO. Any tax increases are not going to educations any more they just fund the pensions and benefits. And there is blackmail using contingency budgets that are more than regular budget. Who is the for democracy with no voting choice. School have come down to Salesman tactics to pass their budgets!

  4. Tax cap plan: Should New York tell its cities what to do? | Tax Accountant Pleasanton CA | CPA  ::  2:57 am on May 30th, 2011:

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  5. Acetracy  ::  10:48 am on May 30th, 2011:

    As a NY coop owner for the past 20 years, my building’s experience with NYC real estate taxes has been a horror. Our building is not in a luxury area, does not have a doorman, and mostly comprises of middle class families. Since Bloomberg came into office 10 years ago, our taxes have grown from $90,000 to #385,000!! through a combination of rate increases and assessment increases. Owners set for retirement are moving out – the trend in taxes makes them realize that this city will price them out.

    However, what is also onerous is that a single family house in NYC valued at 2x my apartment, pays 1/3 that tax. It’s a lovely quirk in the NYC tax system that favors free standing homes over coop/condos. NYC uses the ‘rental value’ of a coop. So with the deregulation of rent in NYC for the past 6 years, rents have skyrocketed, thus assessed values of coops.

    Yet, even more outrageous is the luxury highrise condo down the street from my building where apartments go for $10 million each. The entire building has a tax abatement which makes their real estate tax practically -0-. So under Bloomberg the super rich can buy condos with no real estate taxes while middle class families are being taxed out of the market. And we haven’t even started to talk about the tax abatements firms like Goldman Sachs, NY Yankees, etc. get every year from the city.

    From local, to state to federal, the tax system is making the rich richer, and the middle class poorer. Welcome to the new America.

  6. Ralph H  ::  2:21 pm on May 31st, 2011:

    Your situation is illustrative of much of taxation in america. I cannot understand why GE and Google pay a lower tax rate than my little company. The well connected and wealthy can afford the help to reduce their taxes and “buy” savings. This is why ordinary taxpayers find Caps, Flat Tax or other so called solutions attractive. If you had a 2% cap there is no way the tax would be where it is. Maybe if that was implemented they would not give away tax abatements! For myself I just do not trust lawyers or government officials so an absolute (like a cap) is the only viable solution available.

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