Probably More Than You Wanted To Know About New York State's 2% Property Tax Levy Cap

I'm responsible for the budget of the Tuxedo Park Library, and as a result, I've been getting intimate with New York State's property tax levy cap. For anyone confused as to what I'm talking about, back in June of 2011 the New York State legislature passed a bill that supposedly placed a "2% limit on property tax increases in a plan that rivals the toughest such measures in the nation."

The why is simple: everyone hates taxes. Passing a bill that looks tough on taxes is a great political move that wins you a lot of friends, especially in a state that is amongst the highest taxed in the union.

From a guy in the trenches who is actually implementing this thing in a special district budget, here's some more information that you probably didn't want to know about it:

1) It's not a cap on the actual property tax

Your actual property tax increase can and likely will exceed 2% often. For example, the building that we now own in Tuxedo (9 Store Road) paid $12,630.58 in property taxes in 2013 but $11,997.35 in 2012, for an increase of $633.23, or an increase of 5.28%.

There are several reasons this can happen. First is that the 2% cap applies to the tax levied (requested) to the entire district, which may or may not be the actual amount of taxes collected. This distinction is very important, and is the reason that for the rest of this article I'll be referring to the subject as the 2% tax levy cap, which is what it actually is.

Second, there are several exemptions that go into the actual formula that make IRS forms look simple: new construction increases the tax base, and thus the tax base growth factor could push the levy above 2%; payments in lieu of taxes (a PILOT agreement, in which a non-profit such as a university agrees to pay the municipality even though it doesn't have to) are excluded, thus if a PILOT drops out this can then be levied onto the tax base; and finally, to protect retired workers, contributions to retirement plans are exempted from the formula. Torts also don't count in the tax levy calculation.

Finally, if a municipality doesn't increase taxes up to the levy limit for the prior year, that means that they can carry forward the prior year's levy increase and apply that to future tax years. So, if a town increases the tax levy by 1% in 2013, they can carry that "extra" 1% forward into 2014 and beyond.

Therefore, if new construction increases the tax base of your town, and if a religious organization that was making PILOT payments decides not to, and a bunch of government employees retire all in one year, and the municipality carries into the current year allowable increases that they didn't use last year, the tax levy might stay under 2% but your actual property taxes can increase much more than that.

2) Even the levy cap isn't simply 2%

Oh no - it's far more complicated than that!

The levy cap is 2% OR the inflation factor which can be less than 2%, but not less than 1%. Therefore, the 2% levy cap is more of a 1-2% cap.

The inflation factor is based on a national average calculated monthly by our friends at the Bureau of Labor Statistics call the Consumer Price Index for all Urban consumers (CPI-U). Since 1974, the CPI-U has averaged about 4% annually, although much less in recent times.

Annualized inflation was a bit painful in the US during the good old Jimmy Carter / gas line days, when the economy was in a bit of a free fall, and the monetary system was still in a bit of a funk after Nixon removed the gold standard a few years prior. However, as you can see, prices have generally been experiencing slow but steady growth for the past 30 years. In fact, the recent danger was that we were actually experiencing negative inflation (deflation) during the financial crisis, which is probably why that 1% floor on the 2% levy cap was added.

It is curious that the data set that New York chose to use is the national CPI-U, not a regional dataset. This may have simply been convenience - the BLS calculates the CPI-U monthly & the data are freely available. I also wonder why they chose to use CPI-U, which includes food and energy, over the slightly less volatile PCE (personal consumer expenditures), which does not. The Federal Reserve, for example, uses a 2% inflation target based based on PCE.

The inflation factor is calculated in this manner: take the average of monthly CPI-U data for the past year, then divide that figure by the average of the 12-months prior to that, except the entire time period is shifted by six months to the past. For example, the January 2015 budget year will have a levy cap based on the time period beginning June 2013 - June 2014, divided by the 12-month period before that of June 2012 - June 2013. There's an example on page four here.

Using the average was a little bit of a surprise - we do our budget in March for the following fiscal year (January), so it's a little bit of a constraint to wait for the June CPI-U information (which is released in July) before knowing what our cap is going to be.

Going into January of 2015, the current levy growth factor (tax levy cap) is actually only 1.56%, even though the year/year CPI-U increase from June 2013 to June 2014 was about 2.08% (because it's based on a moving average).

3) It's actually really easy to override the tax levy cap

This is the real reason that the tax levy cap lacks any real teeth - it has a very simple override feature.

All that is required to override the cap is that 60% the governing body (a Town Board) vote in favor of local law that specifically overrides the cap. Local law requires public notice and hearings in advance which must occur before the budget vote.

The situation is slightly different for school districts, which require a 60% public vote to override. Special taxing districts (of which the Tuxedo Park Library is one, the Fire District another) require a resolution of the governing body with a 60% majority in favor, followed by a 50% public vote, in order to increase the cap.

If any of these measure fail, however, the law is clear that the property tax levy is frozen at the prior year's level (thus, the public can vote to freeze taxes).

I suppose, to conclude, that the ultimate purpose of the tax levy cap is to make the public more aware of the budget process. Since nobody is excited about an increase of taxes, forcing municipalities to enact a local law to override a tax cap is really the point since this should get the attention of the local population.

Yet I remain critical of any "sweeping" reform that can easily be ignored by the governing body. The 2% tax levy limit is actually rather complicated to understand, which, in my opinion, limits its utility.

Thus, in 2014, approximately 26% (315 out of 1,200) of NYS municipalities are planning to override the property tax cap. This appears to be a decline from 2013, which reportedly saw 387 overrides.