Real Estate & Home | Real Estate
Taxes Through the Looking Glass
Can Long Island have its cake and eat it too? An alternate view of property taxes.
Author: Lawrence C. Levy | Published: Thursday, March 25, 2010
“The pain is real.”
So began a cry from the heart to confront the threat of “killer” taxes.
“Long Islanders are struggling under one of the nation’s heaviest local tax burdens, an oppressive bundle of…levies that punishes homeowners and businesses alike,” continued Newsday’s 10-part call to civic arms. “No wonder Long Islanders are on the brink of a tax revolt.”
If you thought you read this series recently—maybe Newsday’s response to the deepest economic downturn since the Great Depression or the power-shifting tax protest in November’s local elections—think again. “Killer Taxes” appeared more than 20 years ago. I remember it well because, as an editorial writer for Newsday, I wrote it. And because it was hardly the first such cri du coeur from journalists, activists and a few far-thinking officials.
Today, despite stacks of reports yellowing on dusty shelves, despite periodic spasms of anger in the voting booth, the pain of property taxes remains very real. And so does its impact. The inability to contain tax hikes is not only straining our present prosperity but also crippling our ability to have it all—the essence of the Suburban Dream—to create jobs and afford strong schools, safe neighborhoods, beautiful parks, clean beaches and other magnetic amenities. The pain, in a word, is unsustainable.
According to the non-partisan Tax Foundation, typical Nassau-Suffolk homeowners pay about eight percent of their income in property taxes. That’s a rate nearly three times higher than the national average. Out of thousands of counties, Nassau and Suffolk rank third and ninth, respectively, in the bite that the property levy takes out of family income.
And if nothing changes, if spending and other patterns stay the same over the next two decades, property taxes will take an even deeper bite out of Long Islanders’ pockets. According to some projections, homeowners at the median income level will pay more than 12 percent of their income. That would be almost four times the national average.
But here’s a bigger insult to the injury of high property taxes, one that smacks the middle class and poorer especially hard: The less you earn, the greater the percentage of your income goes, and will go, to paying that bill. Why? Because property taxes aren’t based on your ability to pay, just the paper value of your home. That means a high-earner living in a million-dollar McMansion will pay the same school and municipal taxes as a retired pensioner living in a similar home next door. Wait till you hear what it does to the rich (later).
So if property taxes are unfair, unbearable and unfathomable, why the hell not get rid of them?
By taxing county incomes at a progressive rate, the typical homeowner would be paying less to the county than they now do in property taxes.
Yes, you heard me right, just get rid of those regressive and oppressive local property taxes. And replace all, or some, of them with a fairer tax that could lower the costs of owning a home for most Long Islanders. A tax that could slow the “brain drain” of young workers and the exodus of the elderly. A tax on income.
Of course, steps must be taken to contain costs without killing quality services, especially the schools that attract so many homeowners. Elected officials can’t even think about introducing a new tax—even if it were a fairer alternative to the hated existing one—unless they first tackle the spending side of the equation. If they can’t show they’re delivering value for the tax dollar, they’d have no credibility with any taxpayer.
But the reality is that dramatic savings will be hard to achieve. There is no consensus yet on how to spend less; not among the state and local officials in a position to make it happen, not even among tortured taxpayers. A majority of Long Islanders have told pollsters they want lower taxes, but they don’t want to see cuts in educational spending, not even to the salaries of the nation’s highest paid teachers and administrators. And, whether the motive is love of local control, or hate and/or fear of others, they don’t want school districts merged, especially healthy districts with those unable to carry the tax burden.
I have no doubt that many of the taxpayers crying loudest about their tax bills would fight sweeping and fundamental changes—such as merging our 124 districts into fewer, larger ones—that would yield the quickest and least painful savings. And fear of political backlash is why most policy makers are focusing on achieving slivers of savings through joint purchasing by small and overlapping jurisdictions. So whatever the reason, whether the power of teacher unions and the high cost of living, to the appeal of local control and sometimes just plain racism, property taxes will remain “killer” taxes for a long time to come.
Unless, as I said, we make all or most of them go away.
Now don’t misunderstand. I’m not talking about making all taxes go away. Even if Long Islanders and their leaders embrace Larry Levy’s Greatest Editorial Writing Hits, including the creation of larger, more efficient school districts, we still have to pay something for schools, police and other public services. And in an expensive region, the cost won’t be inconsiderable. So, in addition to how much we tax, attention must be paid to what and who and how we tax.
Attention must be paid to a local income tax that shifts the current burden of funding services from the poor and middle class toward the highest earners, who now pay proportionally the smallest share of their wealth in residential property taxes.
One respected researcher with the Fiscal Policy Institute, Frank Mauro, told the Suffolk tax commission four years ago that the poorest 20 percent of property tax payers ponied up relatively three times more than the wealthiest one percent. Another way of putting it: A homeowner earning $50,000 a year might pay $5,000 or more in property taxes, or 10 percent of his income, while an owner earning $1 million a year might pay $30,000, or three percent. Which owner can better afford their burden, even if it were equal? Which owner is paying an unfair share? Which owner is subsidizing the other?
Pretty obvious, huh? Pretty obvious who the suckers are, especially when they allow squeamish politicians to talk them out of any alternative to the regressive property tax.
If the higher earners were paying an equal percentage of their income—or even close to it—more revenue would be generated to pay for local services or tax cuts and the burden on the average taxpayer would be lower.
When it comes to funding local services, there’s a ton of untapped wealth on Long Island. Based on the 2007 New York State tax returns, about 43 percent of all the income earned on Long Island was raked in by less than two percent of the people. That high-flying crowd, about 21,000 individuals, families or in some cases businesses, averaged nearly $2 million a tax return. But they also paid nearly 50 percent of the income taxes we sent to Albany.
So whether you call them lucky or hard working or both, our “two percenters’’ pay a hefty chunk of the state’s bills, including the school aid that is returned to Long Island. Nobody can say they don’t pay a lot of money for important services. And they create a lot of jobs through their spending. But the wealthiest five or six percent don’t pay anywhere near that percentage of local property taxes the others pay. And while the top one percent of earners may have incomes often 15 times higher than the typical Long Islander, their individual property tax bills are rarely even four times higher.
A shift of the tax structure is not only fair but necessary to ease the burden on the middle class, which has seen no gains in income over the last decade though the wealthiest have opened a wider gap. Shifting the tax structure from a reliance on property to income is potentially the best way to ease the gross inequities in funding public services.
I don’t want to mislead you: An income tax won’t be easy to implement and not just because of the politics of fear and cynicism. Of any number of complex options, the simplest way to begin to even the local tax burden is to eliminate the county share of the property tax. (It’s simpler to start at the county level because everyone pays into the same pot.) Eliminating the school tax—the brunt of the bill—introduces the massive fiscal and political problem of deciding how to redistribute funds among the dozens of school districts that now tax themselves individually. Better to start smaller and let taxpayers get used to the benefit of an income tax. And better if both Nassau and Suffolk impose it at the same time to eliminate any competitive issues.
By taxing county incomes at a progressive rate—the more you make, the higher tax rate you pay—the typical homeowner would be paying less to the county than they now do in property taxes. How much less depends, of course, on how much the county wants to spend, the rates at which the various incomes are taxed and how much of the entire property tax levy is eliminated. (The most sensible plans I’ve seen keep the tax on commercial property, to make sure businesses pay a fair share and to maintain another stable revenue stream for services.) But there’s no doubt that even if rich and poor paid the same rate, and there were caps on the total an individual or family could pay, the counties’ 15-20 percent portion of the property tax would be a net benefit to all but the top 5-10 per cent of earners; those are tax filers with an income of nearly $250,000 a year. Most of the tax would be paid by those far wealthier.
The risk of chasing out the wealthy, who create jobs with their businesses and personal spending, is a real one, at least to consider. “Soaking the rich,” as critics call it, could have consequences. But research indicates this may not be the case, according to a survey of states by the New York Times. And as long as the burden fell reasonably—perhaps with a cap to limit just how much a wealthy individual or family could be forced to pay—there’s no reason to believe people would leave Long Island. Their homes might even be worth more and they, too, would be paying lower property taxes, which offsets the increase.
And there’s another point that some Long Island business owners understood when they told usually tax-phobic Republican state senators that it was ok if they approved a state surcharge on the highest incomes: If the middle class and poorer Long Islanders continue to be driven out by high taxes, the wealthy won’t have employees or customers to fuel their incomes. And the leading philanthropists knew they would have to shoulder an even bigger burden of funding not-for-profit service providers.
Yes, a shift from the property tax to an income tax might even be good for the people who would pay the most.
And right now, the property tax is crushing the real golden goose—the vast majority of people whose economic well-being has been and will be the future of our economy.
Now, getting rid of the county share of property taxes would be a start. But the real prize would be drastically or totally eliminating the two-thirds of the property tax bill that goes to schools. Yes, it’s far more complicated, but it also offers far more savings for property taxpayers and far more equity. Currently, homeowners in the poorest school districts pay higher property tax rates than those in the richest and get far less for their dollars by every measure of educational achievement. Lower school taxes would lower the amount of money Nassau and the Suffolk towns pay the school districts for errors in the tax rolls, saving more money overall.
Meanwhile, any plan to create fairness in local taxing policies demands that the taxes paid on the tens of billions of dollars worth of commercial property does not go to relatively few school districts. The approximately $20 million a year paid by Roosevelt Field Mall and its surrounding office buildings, a major regional asset that is within spitting distances of a half dozen school districts, only goes to two of them. All the school taxes that would be paid by the proposed Lighthouse, which would be by far the largest project in Nassau history, would go to one district, Uniondale. The continued revenues from commercial property taxes should go in a pool and be redistributed throughout the county with an edge to the poorest districts.
“The current system is so burdensome to residents that it has caused a shift in the landscape,” a Suffolk County tax commission concluded in 2006. “People are now ready to discuss options considered taboo in the past… [and] willing to consider dramatic changes to our system of property taxation to finance public education.
“According to the Long Island Index, a majority of Long Islanders are ready for something new. Approximately 55% of Long Islanders favor replacing a portion of the school property tax with an income tax. Another 76% of Long Islanders favor pooling commercial property taxes and distributing them evenly across all school districts.”
But the commission, which seemed intrigued at the expert testimony in favor of the income tax, balked at recommending it as a substitute for the property tax. Its members felt the shift, particularly at the school level, was too complicated and risky. They did raise a number of questions and concerns, many important and difficult to answer, but many of them, such as how to tax second homes, worth figuring out and finding fresh data to answer. (Reading the conclusions, I got the feeling that the majority of members decided such a huge change would be a political pain in the butt to defend.)
Too bad. Isn’t it time we and our leaders found the courage to try something different? The pain of “killer taxes” can’t get any more real but it can get worse.