Localities wrestle with state tax cap as inflation drops

Column by New York State Comptroller Thomas P. DiNapoli

Most municipalities are finalizing their budgets for 2014 and may find themselves working with lower local revenues. For two years now, municipalities and school districts in New York have operated under a property tax cap, which limits the growth in the property tax levy to 2 percent or the rate of inflation, whichever is less, unless elected officials vote to override it. Because the rate of inflation has dropped, the property tax cap is now 1.66 percent for most localities.

The impact of this drop was first felt by local governments whose fiscal years ended July 31, when their levy growth factor fell to 1.96 for the upcoming year. This affected only a small number of localities – two cities and six villages. Similarly, a handful of entities with a September 30 fiscal year are limited to only 1.79 percent levy growth. Now the bulk of municipalities, nearly 2,000, with calendar fiscal years are facing a cap of 1.66 percent.

Property owners may rejoice but there is a cost that will play out in some communities. Based on my office’s calculations, these municipalities will have $35 million less to work with in local revenue. This translates too roughly $18 million for counties, $12 million for towns, $2.6 million for fire districts and more than $2 million for certain cities. Localities must adjust their budgets to reflect the lower local revenue unless they override the levy limit.Overriding the tax cap, as the law allows, will not likely be the answer in most communities. During the 2012 fiscal year, only 767, or about one-fifth, of local governments reported that they intended to override the tax levy limit. Taxpayers have been feeling the economic squeeze for awhile, and most local governments have little appetite to ask them for much more.

Instead, we expect most local governments will try to stay within the cap limit and likely target specific areas for cutbacks. In some cases, reductions in spending may promulgate a reduction in services or delay projects, such as deferring maintenance on infrastructure. Recent examples of cuts to spending, based on information reported to my office, indicate that between 2008 and 2011:

• Cities reduced spending for sanitation (including garbage collection and sewer service) by 8.5 percent ($22.9 million) and public safety by 4.5 percent ($53.4 million)
• Counties cut health programs by 9.8 percent ($198 million) and cultural/recreational programs by 20.3 percent ($67.1 million)
• Towns lowered spending on garbage collection by 16.6 percent ($106 million) and cultural/recreational programs and 5.7 percent ($37.1 million)
• Villages decreased spending for cultural/recreational programs by 18.2 percent ($31.2 million).

Some communities are choosing to charge fees for services. Others may start relying more heavily on sales tax revenues to make up shortfalls. While sales tax collections have increased in recent months, it is a tax that can drop quickly if the economy weakens and consumer confidence decreases. Generally, the impact of the tighter property tax cap varies based on the fiscal health of the municipality.

Moving forward, it is clear more local government officials will need to carefully balance the needs of their communities with the financial reality of the property tax cap.

That is why as comptroller I believe, more than ever, long-term budget planning will be vital to the fiscal health of our localities. The tax cap and our state’s continued slow economic recovery underscore the need to create accurate and balanced budgets, and develop realistic multiyear financial plans.

These plans can help residents and elected local government officials see the impact of their fiscal decisions over time. They can then decide what program funding choices to make in advance, avoiding the need for tax increases or dramatic budget cuts for unwanted or unnecessary services and programs. It will also help show taxpayers why their local government may choose to override the tax cap or even cut or charge for services.

Our local decision-makers must set long-term priorities and work toward goals, rather than making choices based only on the needs and politics of the moment. This is important when resources are limited, as they are in many localities, but can also be beneficial to all communities in avoiding future stress.

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