New tax cap legislation rife with loopholes – By George J. Marlin

New York’s property tax cap only kicked in on the first of the year and already there have been widespread reports of taxpayers confused by the new law’s formulas and of computation errors made by local governments.

The New York State Comptroller’s Office, which monitors municipal budget compliance, has recently revealed that 66 percent of the budgets it has reviewed so far have made tax cap calculation mistakes.

What many New Yorkers have failed to grasp is that the cap law, which limits the increase of property tax levies imposed by municipalities and school districts to 2 percent or the rate of inflation, whichever is less, does contain loopholes.

Counties, cities, towns, villages and special districts outside of New York City can raise taxes beyond the cap if a supermajority (60 percent or more) of its governing bodies vote for a cap override. The New York State Department of Taxation and Finance set the parameters for such a move this way:

A budget officer or chief executive may prepare a tentative budget that requires a tax levy in excess of the levy limit. However, the governing body cannot, without first complying with override requirements, (i) adopt a budget that requires a levy in excess of the tax levy limit, or (ii) impose or cause the imposition of a tax levy to the extent that a budget requires a levy in excess of the levy limit.

School districts can increase taxes over the cap if 60 percent of the district voters who turn out to the polls vote to do so. If taxpayers turn down at the ballot box proposed budgets twice for a given fiscal year, however, the district must freeze their property tax levies in a contingency budget. The tax cap law clearly states there can be no exceptions:

Notwithstanding any other provision of law to the contrary, if the qualified voters fail to approve the proposed school district budget upon resubmission or upon a determination not to resubmit for a second vote … the sole trustee, trustees or board of education shall levy a tax no greater than the tax that was levied for the prior school year.

Other tax cap loopholes:

Annual pension contributions that are greater than 2 percent of the municipality or school district payroll are exempt from the cap. With pension costs expected to zoom in the coming years, due to overly generous benefits and lackluster investment returns, expect this to be the most controversial exemption. Annual contributions that have consumed, on average, about 8 percent of local budget expenditures are expected to exceed 16 percent by 2018. For many government bodies, this will mean annual tax levy increases will exceed 2 percent.

If voters approve the issuance of school district bonds to finance capital projects or improvements, the principal and interest payments on the debt are excluded from the tax cap calculation. Because capital projects bonds are backed by the full faith and credit of a given school district, a cap would violate that pledge and prevent the bonds from being underwritten by the investment community.

A governmental entity’s tax levy can exceed the cap if the cost of a tort lawsuit settlement or judicial award exceeds 5 percent of the tax levy in a fiscal year.

Finally, a municipality can carry over to the next fiscal year up to 1.5 percent of unused tax levy growth. In other words, if a township raises the tax levy only 1 percent, the remaining 1 percent of the annual 2 percent cap can be rolled into the next year’s levy cap, which would then total 3 percent.

A little confusing? Perhaps. Remember, however, despite the imperfections, the property tax cap legislation signed into law by Gov. Andrew Cuomo in 2011 is an important first step in the struggle to curb the ravenous spending appetites of New York’s municipal leviathans.

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