STAR Fails the Test of Sound Tax Policy
by Kent Gardner

Did you hear that nearly every breakfast cereal is now multigrain and low fat? Yippee! Lucky Charms, Fruit Loops, Frosted Flakes—they’re all healthy now.

Even the new property tax tastes great and is less filling. The “New & Improved” property tax was passed in 1997 by Gov. Pataki and the state Legislature. It was called STAR for State TAxpayer Relief. Just like making Lucky Charms with whole grain, STAR is supposed to make the property tax better.

The problem with property taxes is that they are too high, right? “Fine,” say elected officials. “We’ll make ’em lower.” Here’s how STAR works: Suppose you own a house in Clifton Park that is worth $150,000. Under STAR, you can apply to have $30,000 of that value ignored for school tax purposes—one-fifth of your school tax bill—and the kind, generous state of New York will send the Shenendehowa Central School District a check for the difference. What’s not to like? You save 20 percent of your school property tax but Penfield schools get the money anyway. And if you’re a senior, you save even more.

But just like breakfast cereal, you still need to read the label, regardless of the claims on the front of the box. Let’s think about what we would like in a property tax reform and see if STAR fits the bill.

We really want to spend less of our money on taxes, any taxes. It may surprise some people in Albany, but New York State taxes per capita are the highest of any state in the nation save Maine (according to the Tax Foundation).

Where do you suppose the kind, generous state of New York gets the money to send STAR checks to school districts? From state taxpayers, of course, many of whom are also homeowners. One tax goes down—but another goes up (like those fat-reduced products that now have twice the sugar).

Moreover, with some of the taxpayer anger siphoned off by STAR, it appears that school districts actually have raised taxes more than they would have otherwise, offsetting about one-third of the savings (this according to a study from the Maxwell School at Syracuse University).

So not only has our total tax burden not gone down—STAR has actually made it go up. That’s particularly true for owners of apartment buildings and commercial and industrial properties, since those properties aren’t eligible for STAR.

Well if tax rates haven’t gone down, maybe STAR has made the tax system fairer, which would be a good thing, right? Of course fairness is a subjective concept. I can think of lots of ways to measure it. Here are a few options:

Option One: Taxes are fair when each of us is treated the same (like going out to dinner with friends and splitting the bill equally). But STAR savings per person range from $87 in Jefferson County and $140 in Albany and Erie counties to $303 in Westchester County and $257 in Putnam County. Let’s use property wealth as a guide. A “fair” STAR would distribute benefits roughly according to assessed value. Yet Essex and Warren counties get about $2 in STAR for every $1,000 in assessed value while Montgomery and Broome counties get more than four times as much. STAR fails under this notion of fairness.

Option Two: Some would say that taxes are fair when the poor are favored over the rich. By this measure, STAR payments should be related to median household income. Which, it turns out, they are: The higher the income, the higher the payments (I did a quick regression analysis and found that more than 40 percent of the variation in STAR is explained by median household income). And renters, typically less well-off, are left out in the cold altogether. Failed again.

Option Three: Tax reduction is fair when the savings are distributed according to “tax effort”—how much you’re paying before the cuts. So this explains why Nassau STAR payments are 12 percent of local tax revenue while Chenango and Orleans counties are receiving 35 percent. More tax relief goes to people who pay more, but inconsistently. And this flies in the face of Option Two. So no joy here.

There are lots of ways to cut school property taxes. Most important, we should do more than just shift the burden. Let’s cut costs by trimming back state mandates on public schools.

If our goal is simply to reduce the burden on property taxpayers, let’s use an income tax credit instead. Then we can target the tax reduction based on how much property tax is paid as a share of income or some other reasonable criteria.

Let’s not insulate school districts from taxpayer “sticker shock” when the bills come out. Gov. Pataki and gubernatorial candidate John Faso have urged imposing spending caps on school districts—but that’s the job of voters, a job they are more likely to do if they see the real tax bill. Spending caps will simply add yet another layer of complexity to an already Byzantine school aid formula—let’s fix the formula, not make it worse (now I am getting delusional).

STAR fails every single test of sound tax policy. Except one: The voters still like it. Hear Ye, Hear Ye! STAR should be killed, not injected with porcine growth hormone.

So who are the Fruit Loops here? The politicians? Or the voters?

By Kent Gardner, president and chief economist of the Center for Governmental Research Inc.