September 13, 2017
A Tax Rx for New York City: Make Property Taxes Fair for All
By James Parrott, Ph.D.
Now that Senator Chuck Schumer helped the White House engineer legislation to lift the federal debt ceiling and fund the federal government until December, much more attention in Washington will shift to tax reform. In New York City, unfortunately, no one expects much to happen soon on local tax reform – a pity, given how a highly regressive property tax system imposes a deeply unfair tax burden on low-income households.
Our property tax system is established in State law, and because Albany’s cooperation is needed, expectations are low about anything sensible happening. But politics has been anything but usual recently, and now-unseen stars might yet align in favor of a badly needed overhaul.
Property taxes make the overall local household tax burden unfair because of how they hit homeowners in poor neighborhoods and renters citywide with higher effective tax rates than others pay. Analysts across the political spectrum concur this inequity springs from a 1981 State law designed to protect small homeowners. As a result of that law, effective property tax rates (taxes paid as a percent of true market value) are now highly skewed. Most owners of 1-, 2- and 3-family homes pay the lowest effective rates, followed closely by owners of co-op and condo apartments. The owners of rental properties, on the other hand, pay much higher effective rates, which they pass on to their tenants. In fact, rental properties – the homes of about two-thirds of the city’s residents – now carry effective tax rates about five times the effective rates for condos and 1-, 2-, and 3-family homes.
Here’s the dollars and cents effect of local taxes on city residents: A progressive city income tax is dramatically offset by highly regressive property and sales taxes – expressed here as a percentage of annual household income.
Income and Tax Burdens in New York City
Note: Typical Four-person household with two dependents
Source: New York State Office of Tax Policy, New York State Tax Burden Study, Prepared for the New York State Tax Reform and Fairness CommiSsion, Final Report, Nov. 2013, pg. A-18.
These inequities have a marked class and race dimension. The median income of renters is only half that of home and apartment owners, and racial minorities account for three-quarters of renters, but are slightly fewer than half of home and apartment owners.
Two major problems account for these growing inequities. First, the 1981 law imposed assessment caps to keep taxes from rising too fast for 1-, 2- and 3-family homes, but didn’t apply those caps to multi-family structures with 10 or more units, whether co-op, condo, or rental buildings. As a result, the effective tax rates on 1-, 2- and 3-family homes declined relative to those on large apartment buildings. Compounding that is the wide variation in effective tax rates neighborhood by neighborhood. Assessment caps have done more to moderate assessment growth in higher-income and gentrifying neighborhoods than in predominantly working-class neighborhoods, where real estate prices haven’t grown as fast. For example, the Independent Budget Office estimates that condos in swanky parts of Manhattan such as the neighborhood just south of Central Park pay effective tax rates one-third that of condos in many parts of the Bronx.
Second, the 1981 law also requires that co-op and condo buildings be valued as if they were income-producing —that is, rental—properties. New York City has long had “rent stabilization” protections that limit rent increases for affected tenants. But tax valuations of co-ops and condos as if they were rental units means that they’re assessed at far below market value. In 1997, the City Council enacted a partial tax abatement for co-ops and condos, but it doesn’t apply to rental properties. The cumulative result: The effective tax rate on rentals has kept climbing relative to other owner-occupied units.
While these inequities have long been widely recognized, reform has remained elusive. Mayors David Dinkins and Rudy Giuliani both had some interest in reform but were never able to follow through. During his three terms, Mayor Michael Bloomberg seems not to have lost any sleep over income disparities or tax inequities, including those involving the property tax. And while Mayor Bill de Blasio has worked overtime to build more affordable housing, both he and Governor Andrew Cuomo lean heavily on giving property tax breaks to luxury housing developers on condition that they include a portion of affordable housing in new developments.
To the extent that Albany has weighed in at all on New York City property taxes in recent years, it was in a way that would have made things even worse. Last year, the State Senate overwhelmingly passed a measure that would have capped the growth in City property taxes at the rate of inflation or at two percent a year, whichever was smaller. That approach (which thankfully died in the State Assembly) would have locked into place the whole panoply of existing systemic inequities, providing the biggest benefits to owners of property whose value has increased the most.
For years, property tax reform has been considered untouchable in New York City because middle-class owners of 1-, 2- and 3-family homes have some of the lowest effective rates and likely would end up paying more. Still, in a city where renters predominate there could be a base of support for change.
Four ingredients are necessary for true property tax reform. First is a blueprint to correct the problems in current State law. Second, reform should include a “circuit breaker” provision, administered through the local income tax, limiting property taxes for renters and home- and apartment-owners in relation to family income. Third, tenants of rent-stabilized units need guarantees that savings will be passed on to them if property taxes decline on rental properties. Finally, unnecessary and hugely costly property tax breaks that have favored the biggest developers and corporate real estate owners (Exhibit A: Hudson Yards) should be curtailed.
The goal should be to reduce disparities in effective property tax rates among residential properties. Changes should be phased in gradually—a transition period of 10 to 15 years might be necessary. Lessening the burden on rental properties can only help the city’s considerable challenge in preserving affordable housing. Cutting out property tax breaks for Hudson Yards developers will lighten the burden on all other commercial property taxpayers.
The last thing Albany should do is extend the ill-fated two percent (or lower) property tax cap to New York City. Other municipalities throughout the state have been subject to just such a cap since 2012, at the urging of Governor Cuomo. As a result, they have been forced to curtail spending on local schools and in many areas that has degraded the quality of community colleges, public health, public safety, and local infrastructure.
Best case scenario: Rather than fit New York City for a similar fiscal straightjacket, Albany should invite city leaders to propose comprehensive property tax reform (while also revisiting the sorry impact of property tax caps outside the city). And a broadly representative collection of New York City leaders should begin the balancing act of transforming a broken property tax system into one that’s significantly fairer to the majority of New Yorkers.