Paterson's Tax Cap Plan May End Up Costing City

The exclusion of New York City from Governor Paterson's signature tax relief proposal is drawing complaints from state lawmakers, who say the governor's plan to set strict limits on how much school districts are permitted to tax each year would end up costing the city.

Embracing the recommendations of a special state commission led by the Nassau County executive, Thomas Suozzi, the governor is urging Assembly Democrats to pass a bill that would prohibit school districts from increasing annual growth in tax levies beyond 4% or 120% of inflation.

Mr. Paterson has said that a cap is necessary to stop the explosion in property taxes, which have grown by an average of 6% a year over the past decade and are an urgent concern for voters in suburban areas, particularly Long Island and Westchester.

Under the governor's bill, which the Republican-led Senate has agreed to pass when it returns to Albany for a special session that is scheduled for August 5, the cap would apply to all of the state's school districts except those in New York City, Rochester, Buffalo, Syracuse, and Yonkers.

Unlike the state's current tax relief program — which provides about $4.7 billion a year in tax exemptions and rebates to homeowners without restricting growth in school district levies — the Paterson administration's tax cap does not come with an accompanying break for New York City residents.

About a fifth of the money spent on the state's School Tax Relief Program flows to New York City through a refundable personal income tax credit.

New York City does not have a separate revenue stream for its public school system.

While the property tax rate in the city is relatively low compared to other parts of the state, city residents pay some of the highest sales and income taxes.

State lawmakers opposed to the Paterson bill are warning that a cap would ultimately cost the city in state education aid, predicting that Albany would be forced to bail out suburban districts that cannot balance their budgets without raising property taxes by more than the limit of 4%.

The cost of plugging the budget holes, they say, would come out of New York City's share of education aid.

A cap would "force us to make the hard choice of requiring New York City residents to pay extra money to fund a tax relief program from which they are essentially excluded," a Democratic senator of Manhattan, Eric Schneiderman, said.

The argument is echoed by the state's largest teachers union, New York State United Teachers, which yesterday announced a $350,000 television and radio campaign against the cap.

"The state will have no choice if it institutes a cap but to pick up more of the local costs in the capped districts, and the only place they are going to get those dollars is by taking them away from the cities," the president of New York State United Teachers, Richard Iannuzzi, said. "There will be greater pressure on shifting dollars from cities to the suburbs."

A spokesman for the governor did not respond to requests for comment.

Advocates of a tax cap say the teachers union is exaggerating the impact on New York City. After back-to-back 10% increases in school aid, the state's education budget is already stretched to the limit and won't be able to accommodate the needs of financially troubled districts, they say.

"This is not a zero-sum game. If that were the case, you wouldn't hear Nysut screaming about it," a fiscal analyst for the Manhattan Institute, E.J. McMahon, said. "That's why Nysut is so opposed to this. At the end of the day, a cap means a restraint on spending."

Mr. McMahon said a cap could lead to benefits for New York City by encouraging lawmakers to reduce public education costs. Lawmakers, he said, would be more inclined to rein in escalating teacher pension and health benefits, which have contributed to higher property tax rates.

"If a tax cap creates a need to save, the assumption here is that those dollars will come out of teacher salaries and benefits," Mr. Iannuzzi said. "I'm not prepared to say that teachers are prepared to make that happen."