Property Tax Cap: Does it Discourage Development Financing through IDAs?

In 2011, the New York State Legislature enacted "property tax relief" in the form of a two percent property tax cap. The tax cap shifted the focus from total spending to the property taxes levied by a school district and local government. The law did not specifically address economic development, in particular, when such development applies the financing mechanisms of an Industrial Development Agency. The law merely states that new physical and quantitative changes to assessment rolls are included in the Taxing Authority's property tax growth factor, which enhances the two percent cap on tax levies.¹ However, how does a municipality treat new investment that is exempt due to IDA financing and Payment in Lieu of Taxes? The law is silent. A developing consensus is that the new construction is not included in the property tax growth factor, minimizing that growth factor.

The two percent cap tax limit levy formula provides: 

1. Determine the total amount of taxes levied in the prior fiscal year; 
2. Multiply total amount of taxes levied by the "tax base growth factor;" 
3. Add any PILOTs received in base year; 
4. Subtract the tax levy necessary to support tort actions expenses for any amount greater than 5 percent of the tax levy in the prior fiscal year; 
5. Multiply the result by the allowable levy growth factor (two percent or as provided by the Office of the State Comptroller); 
6. Subtract any PILOTs to be received in coming year. No adjustment is permitted; 
7. Add any available carryover from the prior fiscal year; and 
8. Unused exclusions associated with growth in pension costs or tort judgments may not be carried forward.

For new construction, there are no prior PILOT payments to increase the tax levy (see Step 3, above). Thus, unless the Town has special district taxes or assessments, the physical and quantitative changes are not included on the assessment rolls (being exempt pursuant to Real Property Tax Law §412-a). The new construction is not picked up by the property tax growth factor.² The result is a negative impact on tax levy growth, in particular, for school districts and counties. While the taxing authority receives the PILOT payments, such payments tend to be less than what the school district would have received had a PILOT not been granted (assuming, of course, the new construction would have gone forth without a PILOT). With a PILOT, the taxing authority also does not receive the impact of possible decreased tax rates for the tax levy cap, as the assessment rolls (over which the tax rates are determined) are not increased to reflect the new development until the end of the PILOT.

Does that mean new construction financed through an IDA PILOT is negative? Has the New York State Legislature found an indirect way to accomplish their repeated attempts to "cripple" IDA functions and financing. The answer lies in the economic analysis that must be run for each IDA Project application. The developer should include in its economic analysis any potential impacts relative to the property tax application, especially with respect to School Districts, which normally comprise over sixty percent of the property taxes paid and have the more difficult time to avoid the tax cap's implementation (60 percent of the electorate must approve).

We can assist in this analysis, having already performed it for both taxpayers and municipal stakeholders. For more information, please contact Mark Lansing at (518) 429-4264 or mlansing@hlbaw.com; or Mark McNamara, Chair of the Real Property Tax & Condemnation Practice Area at (716) 566-1536 or mmcnamara@hlbaw.com.

¹The law allows the growth in the levy through the property tax growth factor due to physical and quantitative change, such as new construction.

²For school districts, as they have no special district assessments, their tax rolls would not account for the exempt new development.