Lecture 4: Property Taxes in New York

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Lecture 4 Property Taxes in New York

• EDA 757/PPA 730
• Fall 2002

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Importance of Property Tax

• Nationally, by far the most important local
  source of revenue, especially for school
  districts.
• In New York (1999), property taxes are
• 29 of total local government revenue
• 41 of local own-source revenue
• For New York school districts (without NYC)
• 52 of total local revenue
• 90 of local own-source revenue
• Source New York State Comptroller, Special
  Report on Municipal Affairs, see website
• http//www.osc.state.ny.us/localgov/muni/specrep/9
  9/specrep.htm

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Lecture 4 Outline

• Structure of property taxes
• Tax baseexemptions
• Tax rates
• Administration of property taxes
• Assessments
• Evaluation of property taxes
• Tax evaluation criteria
• Key role of assessments

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Tax Structure

• On the surface, the property tax is a simple
  taxtax revenue (TR) equals assessed value (AV)
  times the tax rate (r)
• TR AV r
• However AV may not equal true market value
  (MV)(AV/MV) is the assessment ratio (AR), and
  may not equal 1 if assessments are not kept up to
  date. Formula can be rewritten as
• TR MV (AV/MV) r
• AR measures the accuracy of assessments, which is
  the key factor affecting equity of the property
  tax. In NY, AR is called the equalization rate.

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Property Tax is a Wealth Tax

• Property tax is one of the few wealth taxes used
  in this country. Wealth measures what you own at
  a given point in time and includes
• Real estate land and improvements
• Personal property Other physical assets, usually
  lasting more than one year.
• Intangible property financial assets (stocks,
  bonds, savings account, etc.)
• Only real estate is taxed in most states,
  including New York. Exceptions include cars, and
  equipment used by business. Many specific
  pieces of equipment which may be considered as
  personal property in other states are defined as
  real property under the NYS Real Property Tax
  Law.
• (http//www.orps.state.ny.us/assessor/valuati
  on/valstdsm.htmreal)

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Composition of Real Property

• Residential property represents majority of
  parcels (69), but a smaller share (60) of value
  (Figure 4-1).
• 80 of parcels are single family owner-occupied
  homes.
• Commercial property represents 11 of parcels
  (30 of value)
• 56 of parcels are apartments
• Industrial is only 0.5 of parcels and 2 of
  value. Large variation in importance of
  industrial property across school districts.
• Source Office of Real Property Services (for
  parcel info.)
• (http//www.orps.state.ny.us/ref/pubs/parcels/200
  1/index.htm)

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Figure 4-1
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Significant Property is Exempt from Taxation

• 34 of market value was exempt (2000)--441
  billion
• Residential property (primarily STAR) 93 of
  parcels exempt, 29 of value (Figure 4-2).
• Government property 3 of parcels, 42 of value.
• Nonprofit property 1.5 of parcels, 14 of
  value.
• Economic development related (or agricultural)
  3.6 of parcels, 15 of value.
• Large variation in exempt property by place in
  New York. A number of local governments
  (including Syracuse) have over 50 of their
  property value exempt (Figure 4-3).
• Source Office of Real Property Services,
  Exemptions from Real Property in New York State
• http//www.orps.state.ny.us/ref/pubs/exempt/ex00/
  

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Property Tax Relief--Homestead Exemption

• Only applies to owner-occupied housing (not
  renters).
• Exemption is an absolute reduction in taxable
  property values (e.g., 30,000)
• Subtract exemption from AV to calculate tax.
• Lower the price of the house, the higher the
  percent reduction in taxes. Helps owners of
  lower value homes relatively more.
• Used in 41 statesoften limited to elderly or
  veterans (Figure 4-4). Most states do not
  reimburse local governments for lost revenueNY
  STAR program is an exception.

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STARNew Yorks Primary Property Tax Relief
Program (homestead exemption)

• All homeowners eligible for 30,000 Basic
  Exemption. Low-income seniors will receive a
  50,000 Enhanced Exemption. Only applies to
  school taxes.
• Exemptions are significantly higher downstate
  (see Figure 4-5).
• Tax reduction is equal to exemption amount
  multiplied by the property tax rate set by the
  school district. State reimburses district for
  lost revenue.

Example (Basic Exemption)
After STAR
After STAR
Before STAR
(Upstate)
(Westchester)
Market value of house
100,000
100,000
100,000
Subtract STAR exemption
30,000
73,980
Taxable property value
100,000
70,000
26,020
Multiply by local property
2
2
2
tax rate
Property taxes
2,000
1,400
520,4
Property tax reduction
0
600
1,479.8
Percent reduction
0
30
74
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Problems with STAR Program

• Does not help renters (often lower income
  households)
• 47 of housing units statewide in 2000.
• 60 of housing units in Syracuse.
• 24 of housing units in rest of Onondaga County.
• Distributes more tax relief per pupil to the
  wealthy downstate suburbs (and least to large
  cities)Figure 4-6
• Higher exemptions downstate (no good
  justification for this).
• Higher share of renters in large cities.
• STAR works in the opposite direction of present
  school aid program (Figure 4-6), and it is an
  expensive program.
• In 2001, cost 1.3 billion.
• Likely to cost over 2 billion when fully
  implemented.

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Property Tax Relief--Circuit Breaker

• Provided as a credit on state income tax for
  high property taxes. Does not lower actual
  property tax billdoes not affect directly local
  property tax revenue.
• Can be applied to both homeowners and renters,
  and is usually means tested (only for households
  with income below threshold).
• 32 states use some version of circuit breaker
  (Figure 4-7). Often gives more relief to elderly.

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Circuit Breaker Structure

• Relief is equal to the difference between actual
  property taxes (PT) or calculated property taxes
  for renters and what is considered a reasonable
  property tax burden as a percent (k) of income
  (I). The credit is usually a percent (t) of this
  difference.
• R t (PT k I)

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New Yorks Circuit Breaker

• Applies to homeowners and renters.
• With total household income below 18,000
• Home value must be 85,000 or less.
• Renters must have average monthly rent of 450 or
  less (excluding utilities and furnishings)
• Source New York Department of Taxation and
  Finance, http//www.tax.state.ny.us/pit/Income_Tax
  _2001/Credits/Real_Prop_Tax_Cr.htm

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ExampleNew Yorks Real Property Tax Credit for
Homeowners and Renters
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Circuit Breaker in NY Provides Little Tax Relief

• Annual credit is capped at
• 375 for seniors
• 75 for nonseniors
• Cost of program to state is small and has been
  declining.
• Cost 32 million in 1998 (3 or less of STAR)
• Cost to state and of filers claiming credit has
  declined by 40 since 1990 (Figure 4-8).

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Property Tax Relief Possible Reform Proposals
to Improve Equity

• Remove the higher STAR exemption in downstate New
  Yorkrewards wealthy districts.
• Remove the basic STAR exemption (but keep
  enhanced exemption for low income elderly)Basic
  exemption provides tax relief to many upper
  income homeowners.
• Significantly expand the circuit breaker income
  tax credit by expanding the income limit, and not
  limiting the amount of tax relief that a
  household can receive.

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Determining Property Tax Rates

• Property tax is the revenue that balances the
  budget. Tax rate is calculated by taking total
  spending (E), subtracting other sources of
  revenue (OR), and dividing by taxable assessed
  value (AV).
• Example Let E3,000,000, OR750,000,
  AV45,000,000
• r (3,000,000 - 750,000)/45,000,000 5
• If AV/MV 50, then the effective tax rate (ETR)
  is
• ETR 50 x 5 2.5
• ETR is defined as property taxes as a percent of
  true market value. In NY it is called the
  equalized rate.
• Property tax rate typically expressed as dollars
  per 1,000 of assessed value. Commonly called
  mills. 2.5 25 mills or 25 per 1,000 of AV.

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Overlapping Property Taxes

• Property taxes are used by almost all local
  governments in New York. This means that your
  property tax bill will often includes taxes of
  counties, towns, villages, as well as school
  districts.
• ORPS has a publication Overlapping Real Property
  Taxes (see Figure 4-9) that provides information
  on property tax rates (and equalized rates) for
  all overlapping governments in a town.

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Example of Overlapping Taxes (Figure 4-9)

• This publication provides information on the tax
  rates per 1,000 of Assessed Valuation, for all
  the local governments in a county. However, not
  all districts have reassessed their property
  recently. Thus their assessment ratioassessed
  value/full value or equalization rate (Eq
  rate)is not necessarily equal to one. For
  example, in the town of Otisco, the equalization
  rate is 0.0391. Assessed value is 3.91 of
  estimated market value. To find the tax rate per
  1,000 of market value multiply the nominal tax
  rate (for assessed value) by the equalization
  rate. This is the effective tax rate or
  equalized tax rate.
• In the town of Otisco, there are several school
  districtsOnondaga, Marcellus, and Tully. The
  county tax rate for residents of this town is
  161.72 (x 3.91 6.32 eq rate), the town tax
  rate is 125.06 (4.90 eq rate). The school
  district taxes range from 416.3 to 607.8 (16.28
  to 23.76 eq rate). Total property tax rates on
  town residents range from 703.08 to 894.58 (27.49
  to 34.97 eq rate).
• Residents of the Onondaga School District are in
  the towns of Otisco, and Onondaga, primarily.
  Residents in this district have town tax rates
  (eq rates) that range from 4.90 (Otisco) to 2.48
  (Onondaga).

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Figure 4-9 ORPS, Overlapping Real Property
Taxes
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Property Tax Assessment

• Methods
• Comparable sales approach use data on actual
  sales price on comparable house to estimate sales
  price of property (used for residential property)
• Income approach Use information on income
  generated by property net of expenses to estimate
  market value (accounting for life of the
  structure). Used mainly for commercial property
  and agricultural property.
• Cost Approach Estimate the cost of replacing the
  existing facility minus depreciation (age of
  facility). Used primarily for industrial and
  utility property.
• Agricultural property close to an urban area is a
  problem. Most of the value is in the land.
  Pricing land at the next best use, which may
  involve residential or industrial use, can be
  much higher than the land can produce in income.
  Many states, including NY, provide special
  exemptions for agricultural land.
• (see http//www.orps.state.ny.us/assessor/valuati
  on/agriculture/index.htm
• for more information)

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Property Tax Assessment

• Frequency and cycle
• Cyclical assessment all property is assessed in
  the same year, and then not assessed for several
  years.
• Segmental assessment a portion of property is
  assessed every year.
• Annual assessment Use of computer assessment
  software to update assessments every year between
  regular assessments.

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Property Tax Administration in New York Is Behind
the Nation

• What is wrong with NYs property system? The
  one-word answer is everything. the Real
  Property Tax Law mandates many bad practices and
  permits other local assessors to persist in even
  worse ones. (Netzer and Berne, 1995)
• New York is one of the few states that does not
  require regular reassessment cycle.
• Office of Real Property Services has no power to
  require regular reassessment.
• Over 25 of units did not reassess in the last
  decade. 13 of units have not reassessed in over
  30 years (See Figure 4-10)
• New York has over 1,000 assessment units, 4th in
  nation (Figure 4-11).
• Over 40 states assess residential property at
  county-level, and assess utility and
  transportation property at state level.

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Figure 4-10 Frequency of Assessment in NY
Source ORPS. Calculations made by Tae Ho Eom,
Ph.D. candidate in Public Administration.
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Calculations made by Tae Ho Eom, Ph.D. candidate
in Public Administration.
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Assessment Accuracy Is a Problem in New York
Assessment Accuracy Is a Problem in New York

• Assessment accuracy is measure by the coefficient
  of dispersion (COD).
• Defined as the average deviation around the
  median assessment ratio as a percent of median
  (see example).
• Acceptable COD include
• Residential COD of 10 to 15
• Commercial COD of 15 to 20
• At least 30 of residential property have
  assessments not meeting accuracy standard (Figure
  4-12).

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COD Example
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Figure 4-12 Number of Assessment Units by COD
Level
Source ORPS. Calculations made by Tae Ho Eom,
Ph.D. candidate in Public Administration.
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Property Tax Administration Signs of Progress?

• ORPS has been making a concerted effort to
  encourage reassessment of property on frequent
  basis (Figure 4-13)
• Aid to encourage full reassessment
• Aid to encourage annual reassessment and setting
  AVMV
• Aid to encourage consolidation of assessing
  units.
• Technical assistance and outreach.
• Only 39 of assessing units reassessed from
  1996-99, but two-thirds of assessing units found
  to have quality assessment roles.
• Significant reduction in assessment bias in last
  two decades.

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Figure 4-13 Number of Reassessments by Year in NY
Source ORPS. Calculations made by Tae Ho Eom,
Ph.D. candidate in Public Administration.
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Property Tax Administration Possible Reform
Proposals

• Move residential and commercial assessment to the
  county level.
• Move assessment of some industrial and utility
  property to state level.
• Increase state aid to encourage frequent
  reassessment.
• Modify PT law to set assessment cycle, and
  enforce an assessment accuracy standard.

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Property Tax Evaluation Criteria

• Administration
• Efficiency
• Equityhorizontal and vertical
• Adequacy/elasticity

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Administration

• Key steps
• Registration identify properties to be taxed.
• Assessment identify the value of the property,
  and the amount of property tax owed.
• Collection Send out bills, process tax receipts.
• Enforcement Identify delinquent taxpayers,
  assess penalties for nonpayment.
• Assessors are responsible for first two, and
  finance department or treasurer is responsible
  for last two.
• Assessment is most expensive and difficult part
  of process.

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Efficiency

• Tax reduces efficiency if it causes taxpayers to
  change their behavior to avoid tax.
• Move to new location to avoid tax.
• Buy goods in different location to avoid tax
  (assuming business tries to pass tax onto
  consumers by raising prices).
• Reduce investment in real estaterent, or buy
  smaller houses.
• How much taxpayers react depends on the
  availability of good substitutes.
• How easy is it to moveavailability of locations
  with significantly lower taxes.
• Availability of products that are not taxed.
• Availability of other good investments.
• Does tax significantly reduce economic
  development?

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Equity

• Ability to pay principal Taxpayers should pay
  taxes in line with their ability to pay. Ability
  to pay is usually measured by income adjusted for
  family size and medical expenses.
• Horizontal equity Taxpayers with the same
  ability to pay should pay the same. For property
  tax this is usually measured as the same market
  value of property. Frequency and accuracy of
  assessment significantly affects horizontal
  equity.
• Measure COD measures accuracy of reassessment
  and horizontal equity of property tax. Higher
  the COD the more horizontal equity problems.

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Vertical Equity

• Vertical equity taxpayers with higher ability to
  pay should pay more tax.
• Another definition of ETR total taxes divided by
  income (as of income)
• Progressive ETR goes up with income
• Proportional ETR doesnt change with income.
• Regressive ETR goes down with income.
• Depending on tax incidence assumptions property
  tax could range from very regressive to
  regressive at low income and then proportional
  (Figure 4-14).

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Vertical EquityKey Questions
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Figure 4-14 Effective Rates of Property Taxes,
by Adjusted Family Income, 1981
Adjusted family
Most
Least
income (thousands)
Progressive
Progressive
0-5
1.0
7.9
5-10
0.6
3.0
10-15
0.9
2.4
15-20
0.9
2.1
20-25
1.0
2.1
25-30
1.2
2.1
30-50
1.4
2.2
50-100
2.2
2.3
100-500
3.9
2.2
500-1,000
5.2
2.2
Over 1,000
5.8
2.3
Source Pechman, 1985, Table 4-9.
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Lack of Reassessments Usually Decreases Vertical
Equity of Property Tax

• Lack of reassessment leads to differences in the
  gap between AV and MV within a local government.
• Typically the fastest growing property values are
  in the wealthiest part of town.
• Wealthy taxpayers tend to benefit more from lack
  of assessment since their taxes are significantly
  lower than they should be.

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Adequacy/Elasticity

• Adequacy The broader the tax base, the more
  adequate the tax is to raise significant revenue
  at reasonable tax rates.
• Tax exemptions reduce adequacy of tax and should
  be used cautiously.
• Elasticity Whether tax revenue keeps up with
  growth in income (without changes in tax base or
  rate). The more frequently the property tax is
  reassessed, the more elastic is the tax.

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SummaryReassessment is the Key

• Assessment of property tax is expensive, and can
  be politically controversial.
• Without frequent assessments, AV diverges more
  and more from MV.
• Leads to large horizontal inequity between
  taxpayers as measured by COD.
• Leads to larger tax burdens on lower income
  taxpayers, because they live in property with
  slower MV growth (regressive)
• Leads to tax that is not responsive to growth in
  the local economy (inelastic).