# AFFORDABILITY CRI\$IS

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1 RECLAIM NEW Y ORK Center For Government Reform & Accountability NEW YORK AFFORDABILITY CRI\$IS Long Island Edition METHODOLOGY

2 RECLAIM NEW YORK Affordability Crisis Methodology Income Tax Calculation Methodology of Income Tax: Our sample household has the following attributes: o Married, filing jointly o Renting a home in Suffolk County, Town of Brookhaven, Shirley, William Floyd School District o Earns the median income for Shirley (\$82,557 1 /year) o Takes a standard income tax deduction o Two dependents, both under the age of 17 o For calculation purposes this study assumes all income is W2 income. Federal and State income taxes were calculated at the 2014 rate schedule. Income tax was determined using an online tax calculator. 2 Federal Income Tax Tax Bracket Calculation Marginal Tax \$0.00+ \$18, x 10.00% \$ \$18, \$35, x 15.00% \$5, Child Tax Credit (\$2,000.00) Total \$5, FICA \$5, Medicare \$1, State Income Tax Tax Bracket Calculation Marginal Tax \$0.00+ \$16, x 4% \$ \$16, \$6, x 4.5% \$ \$22, \$18, x 5.25% \$ \$41, \$24, x 5.9% \$1, Total \$3, o Federal + FICA + Medicare + State = Total Income Tax Burden \$5,246 + \$5,119 + \$1,197 + \$3,435 = \$14,997 For homeowners and households with incomes above \$100,000, itemized deductions were used instead of the standard deduction. At this income level the itemized deduction provides greater savings for the tax filer. 2

3 NEW YORK AFFORDABILITY CRISIS REPORT Calculation Methodology of Itemized Deductions: Our sample household has the following attributes: o Married filing jointly o Owns a home in Suffolk County, Town of Huntington, Huntington, Huntington School District o Earns the median income for Huntington (\$118,222 3 /per year) o Two dependents, both under the age of 17 Federal Itemized Deductions (\$22,427): Property Taxes o Annual State Income Tax: \$4,480 o Annual Local Income Tax: (zero in Suffolk County) o Annual Property Tax: \$10,416 Details of calculations included in property tax section o Annual Mortgage Interest Payment: \$7,531 Details of calculations included in property tax section o Charitable Donations: (assume zero) o Medical Expenses: (assume zero dollars over 10% of AGI) The report identifies the \$100,000 income level as the minimum threshold for a family of four to accrue the savings necessary (in under five years) to afford the down payment and closing costs on a home. This conclusion is supported by US Census Bureau data which shows that in Suffolk County, home ownership and renting roughly splits equally 4 at this level. Therefore the study treats all income levels below \$100,000 as renters. For renters, US Census Bureau data identifies the percentage of household income spent on gross rent, down to the zip code level. These percentages were used to determine annual rent. Annual rent was assumed to be equivalent to annual mortgage payment, which includes home owner s insurance, upkeep and maintenance, and PMI. This allows for calculation of the home value and subsequently the property tax. o For the sample household earning \$82,557 per year, 42.4% 5, 6 (or \$2,917 per month) of household income goes toward annual rent. If this were the monthly mortgage payment, it would equate to a home value of \$251, based on the variables and calculations below. With the home value, total property tax rate, (3.26%) and location (William Floyd School District) known we can calculate annual property taxes on the property, \$8,198. One assumption in this calculation the full pass-through of property taxes from the landlord to the renter. A fair argument could be made that the landlord would pay the property tax. To be sure, the landlord is the person that makes this payment to government. But considering current vacancy rates and market demand it seems reasonable to assume that a profit-conscious landlord will pass along to the renter as many of the housing costs as possible. To account for the landlord assuming a portion of this payment the study accounts for the renter paying 75% of the total bill, \$6,148 per year. 3

4 RECLAIM NEW YORK Estimating home value and subsequently calculating the property taxes as described above involves multiple variables and an online calculator. The study models the approach around the process of a person attempting to buy a home today. The model assesses the value of a home a person with a given income would own. To accurately assess how much home you can own we used the process for securing a mortgage loan to identify a potential maximum affordable home value. o The average credit score in New York State as o With this credit score, we calculated an attainable mortgage interest rate of 3.85% 10 o A 15% down payment 11, 30 year loan term were applied. o Home owner s insurance, and estimated annual maintenance costs of 1.5% were included. 12 o Collectively, this information facilitates an estimate of how much home you can afford. A family of four with these financial characteristics can qualify for a home loan worth \$386,489. These attributes represent a sample family in Huntington in the Town of Huntington in Suffolk County earning the median annual income: o Credit Score: 680, 3.85% APR, 30 year loan o Annual income of \$118,222 o Down payment of \$57,973(15%) o Closing costs of \$10,725 o Mortgage Title Transfer Tax of \$1,109 o Annual maintenance (Insurance, Repairs) 13 of \$5, o Annual mortgage interest payment of \$7,531 o Estimated annual property tax of 2.69% 14 To verify the accuracy of our estimate, we compared the results to US Census Bureau data that identifies the ratio of home value to household income. To ensure we did not overstate the value of home Suffolk County households own, and therefore annual home expense, we kept ratios on the lower end of the scale. As income rises, so does the loan value a person qualifies to secure. And as income rises, the US Census Bureau data shows, so does ratio of home value to income. At an income of \$117,694, the multiplier is 2.3; at \$1,000,000 the multiplier increases to Finally, the values are in line with the 28% rule a real estate industry rule for evaluating mortgage loan applications by the ratio of housing expenses (including principal and interest on the mortgage, as well as property taxes and insurance) to gross income. A loan is considered safe when the ratio is at or below 28%. No property tax exemptions were included, as they are not guaranteed by the state. The calculation below is for a home market value of \$386,489, which is considered affordable for a household income of \$118,222. Multiply the home market value by each of the tax rates: o \$386,489 x 0.289% Suffolk County Tax Rate 4

5 NEW YORK AFFORDABILITY CRISIS REPORT = \$1,117 per year on County Property Tax o \$386,489 x 0.320% Town of Huntington/Special District Tax Rate = \$1,237 per year on Town Tax o \$386,486 x 2.086% Huntington School District Tax Rate = \$8,062 per year on School District Property Tax County Tax + Town/Special District Tax + School District Tax = Total Property Tax Burden \$1,117 + \$1,237 + \$8,062 = \$10,416 (Tax Burden on a home in Huntington School District with a market value of \$386,489) The adage of quality data-in, quality data-out rings true for calculating property taxes. The effective property tax rates used in this study are based on data from the Office of the State Comptroller. The State Comptrollers site offers tax rates which we applied against sample property values. From this calculation estimates are produced. Where the data reported to the State Comptroller and posted on their website does not reflect actual homestead rates, actual tax bills will differ. In localities where assessments are out of date, or which have an unofficial practice of over-assessing commercial property differences will exist. During the research phase of this study, it became clear that citizens without an advanced level understanding of property tax procedures, would struggle to compare property taxes between localities. Multiple conversations with town assessors and requests for current property tax rates produced few and often inaccurate results. To date, the best resource for property tax calculations and comparison is the Empire Center for Public Policy. Their online calculator 15 uses the State Comptroller data in a useful and simple tool that assists citizens in calculating and comparing results. Sales Tax New York State defines goods as either taxable or non-taxable. Counties do not hold jurisdiction over this decision. New York State also stipulates specific services which are taxable. To calculate the sales tax, each expenditure has to be evaluated accordingly. (Note: sales tax has been removed from expenditures in Wake-Up section) The Consumer Expenditure Survey (CES) which tracks consumption of goods across the US is the backbone of data the study uses to estimate purchases. The CES organizes data into groups and subgroups. Each of these groups were analyzed to the product level when possible and included if they were considered taxable in New York. For example, at an income of \$108,977 the CES shows that a household consumes \$132 dollars of candy and chewing gum in a year. In New York, candy and chewing gum are taxable goods. By cross-referencing the list of taxable goods in New York State, with all dollars spent by a household, we can calculate total expenditures on taxable goods. We can then apply that total against a local sales tax rate to derive annual dollars spent on sales tax. As with all data, a proper sample size is important for accurate estimation. One of the deficiencies of the CES data is the decreasing sample size as we move further from the median. In this study it was important to project expenditures at all incomes level, thus modeling was used to estimate consumption at income points toward the ends of the spectrum. For example, we ll use the candy and chewing gum consumption habits to illustrate the model. 5

6 RECLAIM NEW YORK By taking a given income bracket we can model consumption habits at other income points. At the \$88,974 level, candy expenditures falls to \$99. By identifying consumption relationships between goods we can then estimate other income levels. This method is not perfect, nor applicable to all people, but it is the most comprehensive data available. The results it has produced appear reasonable and the logic is repeatable for assessment purposes. Other key factors in consumption in addition to income level include size of household and location. The CES accounts for all of these variables and provides data point that isolate for each. Again, the data is limited by the sample size and collection accuracy. * Description of excise tax is given below the Wake-Up Cost sections Wake-Up Cost In addition to the oppressive tax burden, this study assesses how much New Yorkers have to pay just to Wake-Up each morning. No matter what state you happen to live in, you ll need to pay for transportation, housing, and 21st century necessities like cellphone service. But in New York, all these things cost far more because of our inefficient government. The CES is again used to estimate consumption. But, where local data like energy consumption or the cost of LIRR passes can be supplemented, this data was used. Below, the data and assumptions for each Wake-Up Cost are described. (Note: sales tax has been pulled from the following expenditures) Wake-Up Cost Food 2.6 people consume \$ 9, in food annually, We normed 17 for regional adjustments (1.07% decrease) and family size (4, instead of 2.6 for 24.8% increase) and then removed sales tax (8.625%), Sample family in Shirley, \$7,242 annually, \$603 monthly. Wake-Up Cost Transportation Shirley spends \$12,996 annually or \$1,083 monthly. Normed for household size, regional change and decreases in sales and excise taxes individually for each cost item below. LIRR costs are projected for one monthly ticket to Penn Station. Total Transportation Expenses Vehicle Purchase/Payment: \$3,878 annually, \$323 monthly, Gasoline: \$2,357 annually, \$196 monthly, Other vehicle (insurance, maintenance, finance, rentals): \$2,237 annually, \$186 monthly, LIRR (assumed to leave from Ronkonkoma, zone 10): \$4,524 annually, \$377 monthly. Wake-Up Cost Energy Electricity: \$2,027 annually, \$169 monthly Usage of 10,8884 kwh per year 18 Rate.193/kwh 19 (2014 statewide average) 6

7 NEW YORK AFFORDABILITY CRISIS REPORT Natural Gas: \$985 annually, \$82 monthly Average NYS household consumption = 68 mcf 20 Average NYS price per mcf = \$ Wake-Up Cost Water Billed quarterly by the Suffolk County Water Authority for annual cost of \$241 Consumption of gallons of water per day per person (or 1,950 gallons per month). Household consumes 260 gallons per day (or 7,800 per month) Rate of plus quarterly service charge of \$ Wake Up Cost Health Insurance A family of four (non-smokers) qualifies for a bronze Empire plan of 12,000/year. 24 The Kaiser Family Foundation 2013 Report on Employer Health Benefits reported that employees who have health insurance coverage through work pay an average of 18% of their premiums for single coverage and 29% of their premiums for family coverage. 25 Our sample household would pay \$4,329 per year Wake Up Cost Renter s Insurance \$210 annually, \$18 monthly Policy for \$50,000 worth of property protection Only applies to non-home owners Wake Up Cost Media Cell Phone The following are the average monthly cell phone bills for a family plan (4 lines) for the four major cell phone providers: Verizon: \$ Sprint: \$ AT&T: \$ T-Mobile: \$ \$1,384 annually, \$115 monthly (before taxes & surcharges) Wake Up Cost Media Telephone/Internet/Cable Current rate for Optimum Triple Play \$79.95/month for first year, \$89.95/month for second year \$1,020 annually, \$85 monthly 30 7

8 RECLAIM NEW YORK Excise Taxes Excise Tax Motor Fuel Average price per gallon of gasoline in New York: \$ \$2,955 / \$2.56 = 1,154 gallons purchased. 1,154 gallons x \$ (NYS Fuel Quality Tax 32 ) = \$ ,154 gallons x \$ (NYS Business Petroleum Tax 33 ) = \$ ,154 gallons x \$ (NYS Oil Spill Fund Tax 34 ) = \$ ,154 gallons x \$.08 (NYS Excise Tax 35 ) = \$ ,154 gallons x \$ (Federal Excise Tax 36 ) = \$ Total Motor Fuel Oil Excise Tax Burden = \$ Excise Tax Alcohol Beer Average price per gallon of beer: \$ \$ (amount spent) / \$15.00 (average price per gallon) = gallons purchased in year One gallon = 128 ounces gallons = ounces purchased in year ounces / 12 ounces = ounce cans purchased in year cans x \$0.05 (Federal Rate 38 ) = \$ gallons x \$0.14 (New York State Rate 39 ) = \$1.73 Total Excise Tax Burden on Beer = \$8.32 Excise Tax Alcohol Wine Average price per gallon of wine: \$ \$ (amount spent on wine) / \$76.80 (average price per gallon) = 1.80 gallons purchased in year 1.80 gallons x \$1.07 (Federal Rate 41 ) = \$ gallons x \$0.30 (State Rate 42 ) = \$ 0.54` Total Excise Tax Burden on Wine = \$ 2.47 Excise Tax Alcohol Liquor Average price for a 750 ml bottle of distilled spirit at 80 proof in U.S. in 2012: \$ \$ (amount spent) / \$14.42 (average price per bottle) = bottles purchased in year 750 ml =.750 liters x bottles = 8.28 liters purchased in year One gallon = 3.70 liters 8.28 liters purchased / 3.70 liters = 2.67 Gallons purchased in year 8

9 NEW YORK AFFORDABILITY CRISIS REPORT bottles x \$2.14 (Federal Rate 44 ) = \$ gallons x \$6.43 (New York State Rate 45 ) = \$ Total Excise Tax Burden on Liquor = \$

10 RECLAIM NEW YORK (Endnotes) (effective 03/25/15) 11 15% is currently the lowest percentage down payment that we found to offer a home loan. Offering below 15% does produce an online quote An average of 1.5% of total home value is used to calculate annual upkeep expense (p.67)

11 NEW YORK AFFORDABILITY CRISIS REPORT Ibid. 34 Ibid. 35 Ibid There is no average price of beer as the price of beer varies per brand, therefore the study takes a sample price of a \$10.00 six pack of beer which equate to \$15.00 per gallon of beer There is no average price of wine as the price of wine varies, therefore the study takes a sample price of a \$15.00 bottle of wine which equates to \$79.20 for a gallon of wine

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