Monthly Archives: September 2010

Taxes

Attention Shoppers! For a Limited Time Only: The Clothing Tax Returns

Posted by Andrew Liebowitz, September 30, 2010

Thanks to the New York State budget adopted in July, clothing and footwear will get pricier for retail shoppers in New York starting tomorrow October 1. That’s when the 4.0 percent New York State sales tax and 0.375 percent Metropolitan Transportation Authority-dedicated sales tax on clothing under $110 return. From then on, anyone buying a coat that costs $109 will have to shell out $113.77. Or at least they will for a number of months. With the exemption on sales tax for clothing and shoes under $110 scheduled to return in phases over the next 16 months, a calendar may prove to be a helpful shopping tool.

In the first phase, the state sales tax and the portion of the sales tax dedicated to the MTA will be temporarily reinstated for clothing under $110 from October 1, 2010 through March 31, 2011. In the second phase, which runs from April 1, 2011 through March 31, 2012, clothing under $55 will be exempt from state and transit sales tax. And in the third phase, beginning April 1, 2012, clothing under $110 will once again be free of sales tax. MTA funding will not be affected during any phase of the legislation; when the sales tax earmarked for transit is suspended, the state and city each put up half the money to compensate the MTA for any revenue foregone.

The city has the option of following the state’s lead and temporarily repealing its own sales tax exemption for clothing under $110. If it did, clothing shoppers would pay sales tax totaling 8.875 percent: 4.5 percent for the city, 4.0 percent for the state, and 0.375 percent for the MTA. Repeal of the city’s exemption would require action by the Mayor and City Council.

The Mayor’s Office of Management and Budget estimates that the current sales tax exemption on clothing under $110 costs the city over $300 million annually. While repeal of the city’s exemption would provide a significant amount of revenue at a time when the Mayor is again proposing cuts to the city budget, opponents of restoring the tax argue that it would hurt local clothing merchants competing with jurisdictions that don’t tax clothing sales. They also point out that sales taxes on clothing are generally regressive, falling more heavily on those who can least afford it.

After taking into account clothing sales lost to other states with lower taxes, the New York State Division of the Budget estimates that taxing all clothing sales will increase the state’s sales tax receipts by $330 million for state fiscal year 2010-2011. With the sales tax exemption for clothing under $55 scheduled to be restored on April 1, 2011, the Division of the Budget expects a somewhat smaller revenue increase of $210 million for 2011-2012.

Implementation of the sales tax changes take on added complications with mail order and online sales, rain checks, layaway sales, and exchanges. The New York State Department of Taxation and Finance offers a guide that explains when the clothing tax should be applied to these types of sales.

Education

As the School Year Begins, School Budgets are Up and Down

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Posted by Yolanda Smith, September 21, 2010

As students and teachers headed back to school this month it was widely reported that given lower state aid, growing enrollment, and rising costs, school budgets had been cut. But the effect differed from school to school, with some schools even seeing their allocation per student rise. To provide parents, teachers, policymakers, and other interested New Yorkers with a clearer view of the funding available for schools across the city, IBO compared the initial allocation each school received to fund its basic operations this September with the allocation last September. Click here to look up the figures for particular schools.

Much of the year-to-year change was due to annual adjustments that take into account changes in the make-up of a school’s student body (how many students need special ed, are performing below standards, etc), plus changes in a school’s enrollment. But some of the change this year arose from funding shortfalls that threatened to leave some schools with budgets too small to cover basic operations, which led the education department to shift some of the basic allocation funding.

More schools than not will begin this year with less money per pupil for their basic operations than they had at the beginning of last school year. According to IBO’s calculations, 864 out of 1,464 schools have received an initial operating allocation per pupil that is less than last year’s. In contrast, 585 schools have received a greater per pupil allocation than last year, and 15 received exactly what they had a year ago, on a per-pupil basis. (Schools which have either been closed by the Department of Education or newly opened this year are not included in these counts.) These changes have real consequences—among schools with lower per capita allocations this year, the median decline was $151. In a school of 500 students such a change is roughly equivalent to the cost of one teacher. (Click here for table showing how changes in percentage terms were distributed.)

Each year the education department creates school allocation memoranda, often referred to as SAMs. These SAMs detail for principals the various sums of money available for each school’s budget. The most important of these, SAM #1, sets up the opening basic operating condition and the allocation of dollars largely through the fair student funding (FSF) formula, although some non-FSF funds are included in this allocation. In this post, we are comparing the initial SAM#1 FSF allocations made to schools this year and last year.

Fair student funding—the largest part of the SAM#1 allocation—is the method used since school year 2007-2008 to distribute most of the city and unrestricted state funds needed to run the schools. The FSF formula takes into account the student demographics at each school, with more money allocated for higher needs students. The FSF allocation is the core of a school’s budget, covering instructional staff and school operating overhead. The total amount of FSF allocated through SAM #1 this year is $4.4 billion, $91 million more than last year (including hold harmless and incremental funding, which are explained below).

The fair student funding methodology was originally going to be implemented gradually. In order to preserve stability and protect core programs in the first two years of implementation, the FSF allocations included hold-harmless money to avoid funding reductions for schools deemed “overfunded” under the formula. Schools deemed “underfunded” under the formula were only allocated enough to eliminate 55 percent of their shortfall with the expectation that their allocations would increase over time. The goal was to have all underfunded schools receive their full FSF funding level by 2009-2010. Yet as early as school year 2008-2009, the education department indicated that full implementation was likely to be slowed without adequate state and city funding. (See IBO’s report on FSF “New Funding Formula Seeks to Alter School Budget Disparities” for more details.)

Changes in the characteristics of a school’s student body generate changes in per pupil funding because FSF takes into account individual student needs. The formula, in other words, is weighted based on needs. Each student starts with a weight based on grade level, which can grow depending on the student’s characteristics. For example, a high school student performing below standards has 0.25 added on to her weight and high school students in English learner classes receive an extra 0.50 weight. All students’ weights are translated into dollars which determine the FSF formula allocation for the school.

The effect of changes in individual school demographics on each school’s SAM #1 allocation can be observed by looking at the percentage change in dollar allocations per needs-weighted student. We found that these changes in school demographics explain much, but not all, of the changes in per pupil funding for individual schools

Using the weighted student enrollment, the year to year per capita changes tended to be smaller compared to the simple per capita change, with most schools clustered between -2.9 percent and plus 2.9 percent, but there were still a significant number of schools that saw larger changes. One hundred and two schools saw their allocation per weighted student decrease by 3 percent or more and 151 schools increased by 3 percent or more. In total, 68 percent of all schools experienced a decrease in funding in weighted per pupil terms.

The combined effect of rising costs and reduced state aid also played a role in this year’s funding changes for schools. The Department of Education initially attempted to deal with these pressures, along with rising enrollment, by imposing a 4 percent cut on school budgets for the 2010-2011 school year; the second consecutive year with such a cut. After calculation of the baseline formula incorporating the 4 percent cut, the education department determined it had a problem: 400 schools would fall below the minimum funding level needed to maintain basic operations.

The education department then decided it needed to adjust its allocation methodology. In order to insure that all schools received at least a base allocation amount (actually 86 percent of the amount the department labeled “operating threshold”), other unrestricted funding was added to the pool to be allocated and the amount of funds that could be reallocated from any school was capped at 3 percent. This cap allows overfunded schools (in fair student funding terms) to remain overfunded. With the additional funding and the cap on reallocation in place, this year’s opening allocations were set by reducing the result under the FSF formula by 4 percent across the board and then using federal stimulus funds as needed to reach a final cut of not more than 4.2 percent in the total SAM#1 allocation—including dollars in addition to the FSF funds—for every school.

Social and Community Services

Recession’s Divide: Food Stamp Caseload Soars, Welfare Caseload Does Not

Posted by Paul Lopatto, September 13, 2010

In stark contrast to the limited effect of the recent economic downturn on the public assistance caseload, the recession has contributed to a relative explosion in the city’s food stamp caseload. Following years of slow growth, food stamp enrollment began to accelerate in the early part of 2008. The number of New Yorkers receiving food stamp benefits has risen from 1.2 million in January 2008 to nearly 1.8 million in July 2010, an increase of 555,000 or 46 percent. [see graph]

The greater sensitivity of the food stamp program to rising unemployment and falling incomes can also be seen at the national level. Federal statistics indicate that in the two-year period between December 2007 and December 2009 the number of food stamp recipients increased by 41 percent, nearly three times the increase in the public assistance caseload. Part of the reason may be a matter of public perception. As public opinion towards receiving welfare became increasingly negative, the food stamp program has emerged as the more acceptable form of income assistance. Moreover, policy changes that have made food stamps easier to access have also boosted food stamp caseloads.

There appears to be another change developing in terms of public assistance as well. The public assistance caseload and spending on welfare grants for city residents have generally followed a downward trend since welfare reform began in the mid-1990s. That pattern has begun to change.

After rising modestly in the last two years, the Mayor’s budget office projects that total grant expenditures will rise by 19 percent to about $1.6 billion in fiscal year 2010 (final numbers are not yet in for the year, which ended on June 30), and to remain at that higher level for the foreseeable future. While economic downturns are commonly associated with greater demand for social services, what makes the increased grant spending especially notable is that it has very little to do with any increase in the number of welfare recipients.

What’s driving the increased spending? One factor is a state-mandated increase in the basic grant, which covers costs other than rent and utilities. In July 2009 the state increased the basic grant by 10 percent, after it had been frozen for nearly two decades. A similar percentage increase was implemented this past July, with a third round scheduled for July 2011.

While this has pushed up total grant expenditures, city revenues have been spared so far. In order to limit the impact of this mandated increase on local budgets, the state agreed to cover the local share of the incremental costs through 2012, using state and federal funds. Starting in 2013, however, the city will be responsible for its share of the costs, adding significantly to the city’s welfare expenditures from that point on.

A second factor driving the cost increases is the Advantage Rental Assistance program, which provides rent subsidies for up to two years to families and individuals moving out of the city’s shelter system. As the shelter population has increased, the Advantage program has emerged as a key component of the city’s strategy for reducing homelessness. Since it began in 2007, the program has moved roughly 20,000 families from shelters to apartments.

The move out of shelters is coming at a rapidly growing cost. In 2009 the city spent $122 million in total funds on Advantage subsidies—city funds cover roughly a third of the cost with the balance coming from state and federal revenues. Costs are projected by the Bloomberg Administration to have reached $188 million in fiscal year 2010 and rise to $207 million in 2011. City officials have recently moved to limit costs by requiring participants to pay a higher portion of their rent out of pocket, and by increasing the number of hours they must work. These changes may well affect the program’s future growth.

Public assistance outlays in 2010 also were boosted by the Back-to-School grant program, which made use of federal stimulus funds to provide one-time grants of $200 per child for families receiving public assistance or food stamp benefits, to purchase school-related supplies. The city budget included $102 million for Back-to-School grants for 2010; the one-time program did not require any city funds.

Just a small portion of the increase in grant costs can be attributed to an increase in the welfare caseload. As the city’s economy started to shed jobs during the recent economic downturn some observers expected a marked increase in the public assistance rolls as large numbers of the newly unemployed sought out government assistance to replace lost income. In fact, after reaching a low of 334,000 in September 2008, the number of public assistance recipients rose slowly, reaching 358,000 in December 2009, an increase of 24,000 over 15 months. Since then, the caseload has resumed its downward trend, with 344,000 individuals receiving assistance in July 2010.

The limited effect of the recession on the public assistance rolls provides further evidence that city, state, and federal welfare reform policies of the mid-1990s made it more difficult for city residents to access and retain public assistance grants.

Taxes

Taxes Foregone Shouldn’t Be Forgotten

Posted by Doug Turetsky, September 1, 2010

In July Deputy Mayor Stephen Goldsmith unveiled his initiative to eliminate inefficiencies in several areas of city government, from getting rid of unused office space to consolidating information technology operations. The Deputy Mayor aims to save money and improve services. That’s a laudable set of goals. Similar efforts to root through city operations are taking place inside and outside City Hall as policymakers and pundits champion ideas to balance the city’s budget. Interestingly, few seem to be poking at one fairly large corner of the city budget: tax expenditures.

Maybe this neglect is because tax expenditures are money foregone rather than money spent. But the taxes foregone are substantial—$4.6 billion in taxes administered by New York City in fiscal year 2010, according to the Department of Finance’s most recent report on tax expenditures. That’s almost double the $2.4 billion foregone in 2003. Neither figure includes millions more in tax expenditures Albany requires the city to make: for example by not allowing the city to levy property taxes on colleges and universities.

These foregone billions are the result of dozens of individual tax exemptions or abatements. Each exemption or abatement is connected to a policy or programmatic goal such as creating and preserving affordable housing or spurring job creation and retention. But not all of the tax exemptions and abatements may be delivering the intended results, their costs may be outweighing their benefits, or they may conflict with more recent policy goals.

Take one such abatement, the tax break for co-ops and condos. Created 13 years ago, this abatement was intended to take a first step towards reducing the property tax for co-op and condo owners and making their tax burden more like that enjoyed by owners of one- to three-family homes. The co-op and condo tax break cost the city $393.4 million last year, according to the finance department. Yet as IBO has previously noted a large share of the abatement goes to co-op and condo owners whose property tax burdens were already as low, or even lower, than those of other homeowners. How much did these “extra” benefits cost? About $192 million in foregone taxes in 2010—enough to pay the salaries of roughly 3,000 teachers or 1,500 police officers.

There are other examples. How many New Yorkers know that residents of Manhattan get a special tax break when they reserve a long-term garage space for their cars? Not only does it cost city tax coffers about $12 million in lost revenue but it seems to run counter to more recent policies discouraging car use in the city. And many New Yorkers, including elected officials, have questioned the logic of continuing to exempt Madison Square Garden from property taxes at the cost of $14.1 million in revenue foregone last year.

Mayor Michael Bloomberg proposed the elimination of two tax expenditures in January, on aviation fuel and on the recording of mortgage for co-ops and condos. But it was a brief consideration, abandoned in his Executive Budget.

As policy- and opinion-makers comb through the city budget and consider the effectiveness and affordability of all sorts of city spending, they should follow the Mayor’s original impulse and not forget about tax expenditures; though they are harder to see, a dollar of taxes forgone costs as much as any other dollar spent.