At this time of year when most New York State Towns and Counties are developing and passing their budgets, the Tax Cap is once again in the news. Now in effect for its second year, the Tax Cap is becoming more onerous on municipalities – perhaps as intended by its creators. But it is also becoming onerous for tax payers.
The Tax Cap, enacted in 2011, is almost universally misunderstood by taxpayers who are affected by it. Most think that it means that their tax rate cannot increase more than 2%. Wrong. The Tax Cap stipulates that the taxing jurisdiction’s tax LEVY cannot increase more than 2% or the rate of inflation as determined by the NYS Comptroller. Under the law, a taxing entity can pass along to the taxpayer an increase of 2% over its previous year’s tax levy. This sounds reasonable to most people but the reality is that municipalities have so many State-mandated costs, that the entire 2% is used up, and more, just meeting these costs allowing for no expansion of local programs and projects.
Pension contributions, unemployment insurance, health benefits make up the largest of these mandates but there are other smaller ones as well. This means that by the time the taxing entity accounts for these mandates, their discretionary budget is already less than the prior year's. As a very simple example, if a municipality raised $10 million last year through taxes, this year the Tax Cap would allow them to raise that levy by $200,000 to $10,200,000. But if State-mandated costs have increased the expenses by $400,000 (not unusual), this year’s operating budget must be reduced to $9,800,000. This is, of course, a simplification as there are some exceptions. Likewise, there are also financial penalties if a taxing entity exceeds the 2% Tax Cap levy without officially opting out of it.
What this means to the tax payer is that cuts to a municipality’s discretionary spending are going to be made – services, infrastructure and personnel are the most likely places for these cuts to occur. Looking at local Towns currently undergoing their budget processes, two things are occurring amongst almost all of them – 1) they are passing resolutions to opt out of the 2% cap to protect themselves against future penalties and 2) they are cutting things that are likely
to cost them more in the future – road resurfacing, vehicle replacements and repair, amenities such as recreation and leaf removal, important capital expenditures, and also personnel, leaving fewer people to do the essential tasks. One way of keeping some of these services intact is to raise revenues outside of taxing. Of course, this results in higher fees for permits, applications, recreation programs, parking, etc. Another form of taxation.
While the 2% tax cap may sound good to the taxpayer right now, in the long run local governments are not going to be able to live up to their taxpayers’ expectations as a result of an inflexible tax cap and mounting State mandates.