LEGISLATIVE AFFAIRS: Local Government Costs Threatening to Push Transfer Taxes Higher

The cost of maintaining local government is going up, but the state portion of funding and state aid is not keeping up with the rising cost of upkeep. This is forcing cities like Yonkers and others to institute various regressive tax hikes such as transfer tax hikes and mortgage recording tax hikes.

The problem with this is that not only do transfer taxes hurt the poor and the middle class disproportionately, but also transfer taxes are cyclical, which means that they rise and fall every quarter and every year. This makes relying on transfer and mortgage recording taxes dubious, at best, and reckless as a mechanism for funding local governments at worst.

Why is this happening? One of the chief reasons, according to the Fiscal Policy Institute, is that New York local municipalities bear a higher cost of government services than other states. According to the institute, “On average across all states, local taxes represent about 40% of combined state and local taxes. But in New York, local governments bear more than half (53%) of all state and local taxes, the third-highest share among all 50 states.” One of the chief reasons is because in New York State local municipalities are forced to pick up Medicaid costs and public assistance costs that in other states are funded by the state government. It seems that if demands are going to be made of local governments, the state should provide the attendant funding for those demands.

One issue local governments and New York City are grappling with is the fact that large developers have been receiving liberal tax breaks for decades, which then forces taxes on home owners and small business owners to increase in order to subsidize that revenue the local municipality will not receive. Madison Square Garden for instance, for the last 34 years, has not paid a dime in property taxes.

Study after study has shown that tax breaks do not, in reality, spur development. They only help at the margins. What does spur development? Looser restrictions on land use regulation would help the most. The bigger the supply of homes that we have the bigger the tax base we would then have to fund for the services that residents want, need and desire.

The key is to expand the overall tax base, which would keep property tax hikes in check and would eventually allow municipalities to lower and eliminate their transfer taxes. Transfer taxes are sales taxes that are highly regressive. We must have a bigger conversation about tax reform, but first we must stop the most regressive taxes from increasing.

Philip Weiden
Legislative Affairs columnist Philip Weiden is the Government Affairs Director for the Hudson Gateway Association of Realtors.