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Tax cap plan: Should New York tell its cities what to do?

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Mike Groll/AP

(Read caption) New York Gov. Andrew Cuomo speaks during a news conference on property tax cap legislation at the Capitol in Albany, N.Y., on May 24, 2011. By proposing to limit cities' budget authority, the state is limiting local democracy.

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New York Gov. Andrew Cuomo and the Democratic leaders in the state assembly have agreed on a proposal to cap local property taxes. They cannot grow by more than 2 percent a year, although there are exceptions for extraordinary costs to cover pensions or legal settlements.

I can certainly understand the impetus for property tax limits. Property taxes are ridiculously high in many jurisdictions. When I moved from Arlington, Virginia, to Fayetteville, New York, my new home cost less than half what the old one sold for, but my property taxes doubled. The rate was four times as high! I ultimately decided to vote with my feet and moved to Syracuse, a lower-tax jurisdiction. But a lot of my Fayetteville neighbors, who have young children, thought the supersized property tax bill was worth paying in exchange for world-class public schools. It seems to me that is exactly how democracy is supposed to work.

Until recently, property tax caps were widely supported by Republicans and opposed by Democrats. Cuomo’s support was a game changer. It has always seemed odd to me that small-government Republicans would want to move decision-making on taxes away from the local level up to the state government level. In other contexts, they argue that local governments are best suited to making decisions in the interest of their constituencies. Indeed, even in the context of the property tax debate, they’ve made that argument. Many Republicans are saying that relief from unfunded state mandates should also be part of the legislative package. That is, they don’t want Albany telling localities how to spend their money (I agree), but are perfectly happy for Albany to tell towns how much revenue they can raise. The inherent contradiction in those two positions seems to escape their notice. Or perhaps they lack a sense of irony.

The obvious motivation for the Republicans is that they really don’t want democracy to work when the consequence would be larger government. They are perfectly happy for the state to tell cities and towns that they can’t spend money. Presumably, they’d even be happy for the federal government to do it as long as it advanced their interest of smaller government.

In theory, small governments should be most responsive to taxpayers. If my mayor raises my taxes and doesn’t provide services I’m willing to pay for, I’ll vote her out of office. If she spends my tax money well, Syracuse will be a better place to live and property values will increase. I’ll be happy.

There is an alternative model called, ominously, Leviathan. It posits that bureaucrats serve their own interests by growing government and expanding their power, unchecked by voters. Therese Mcguire, in a thoughtful survey of the evidence regarding California’s property tax limitation, prop 13, concluded that there was support for the Leviathan model and that prop 13 resulted in smaller, more efficient government: “On balance, as long as an escape valve is in place for local voters to override the limit, … there is the potential for property tax limits to improve the welfare of local resident voters.” [Emphasis mine]

Note the caveat: there must be an escape valve. The proposed New York legislation includes an escape valve, but it requires a super-majority vote (60%) to raise taxes by more than 2% in a year. That is, a minority may prevent the majority of taxpayers from financing the level of public services they desire.

So it really does appear that New York’s leaders don’t trust local government democracy. It would make a lot more sense to allow local voters to finance more school spending (or other spending) with a simple majority vote. Such a limit could tame any Leviathan tendencies without disenfranchising a majority of voters.

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This was originally posted on my Forbes blog (The Impertinent Economist).

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