By Brad Cronin: New York's tax cap legislation passes, but uncertainties, exceptions remain

According to the Business Council of New York State $48 billion in property taxes were paid in New York last year, a 5% year-on-year increase. The Council notes that of this $48 billion, businesses paid nearly 44% of the total tax levy, or $21 billion. These staggering numbers, and their perpetual increases compile each year and create a crippling burden on owners and tenants alike. In search of a pro-business solution, governor Cuomo promoted the implementation of a tax cap. In an earlier piece for this publication, I compared state property tax caps throughout the country to the proposed New York cap. On June 30, 2011 that potential cap became a reality when the Governor signed New York's first ever property tax cap into law. The tax cap limits the growth in property taxes to 2% per year or the rate of inflation, whichever is lower. Per the State Comptroller's Office, inflation will be slightly higher than 2% when the law takes effect, thus limiting the cap to 2%. However, the cap applies to the budget, not the tax rate. This is a critical distinction as the effective cap on the tax rate can result in greater than 2%. New York's cap, as expected, contains a number of exceptions. In fact, the governor's first press release regarding the law makes a point of mentioning the following three exceptions: * Judgments or court orders arising out of tort actions that exceed 5% of the localities' levy; * Certain growth in pension costs where the system's average rate increases by more than 2 percentage points from the previous year; the amount of contributions above the 2 percentage points will be excluded from the limit; and * Growth in tax levies due to economic development. The governor has touted the bill as stringent enough to prevent steep yearly increases, but flexible enough to provide the tax revenue required "to ensure the delivery of critical services for New Yorkers." However, with the current economic climate impacting budgets throughout the state, many local governments are facing their most difficult budget decisions and deepest cuts in many years. The law includes the ability to exceed the 2% and override the cap with the approval of 60% of voters (for school districts) or 60% of the total voting power of the governing body (for local governments). While most governing bodies have expressed hesitancy to override the law in its first year of existence, concerns over how to institute a cap during what increasingly appears to be a double-dip recession exist. This apprehension has consumed local governments, many of whom must submit first drafts of their 2012 budgets this month. Exceptions and overrides can render a cap meaningless if they provide too much latitude. In reviewing caps throughout the country, it is apparent that striking the proper balance between a strict cap and one that may exceed its limitation is critical to its success. This is the fear with the current state of affairs in New York. In many parts of the state, pension costs alone are expected to exceed the 2% cap. Due to their inclusion under the exceptions, these tremendous pension amounts coming due can counteract any stability property owners had hoped to achieve. The hope is that pension costs stabilize over time and existing services will be made more efficient by cuts to accommodate the cap. While a step in the right direction, property owners and tenants still lack clarity on what they can expect their property tax exposure to be on an annual basis. This leaves the target audience of the cap with the same uncertainties that they endured in the past. New York's tax cap will take effect in January for governments and in July for schools. The timing is significant as property values have continued to decline and very little new development has occurred. This causes an erosion of the tax base whereby even less revenue is collected for the state's tightened budgets. After taking into account exceptions and the current tax base, the heralded tax cap may not prove to be the cure-all measure that was originally envisioned. Accordingly, the prudent real estate professional should view the cap as a limitation, but remain extremely cautious in forecasting its actual impact on their taxes. Brad Cronin, Esq., is an attorney and partner at Cronin, Cronin & Harris, P.C., Mineola, N.Y.