Change in New York's property tax could yield US$4b windfall

Watchdog urges mayor to reform property levy, which is skewed in favour of the city's wealthy at the expense of poor and middle-class renters

PUBLISHED : Wednesday, 12 March, 2014, 5:03am
UPDATED : Wednesday, 12 March, 2014, 5:03am

Mayor Bill de Blasio's vision of raising income taxes to pay for pre-kindergarten and after-school programmes would generate US$530 million a year, but by revamping property taxes and taking on some of New York's richest residents he could raise eight times as much.

De Blasio, a self-described progressive Democrat, was elected on a promise to reduce income inequality in a city where the richest 1 per cent took home almost 40 per cent of all earnings in 2012. New York's property-tax structure does little to reduce that divide and may even widen it.

The real estate levy, the city's biggest revenue source, uses a methodology that undervalues condominiums on Park Avenue, Central Park West and other enclaves of the wealthy; limits tax increases for owners in brownstone neighbourhoods such as Greenwich Village and Park Slope; and shifts the heaviest burden to renters, many of them poor.

While almost half of all city property value belongs to owners of one, two and three-family houses, they pay only 15 per cent of the US$21 billion in annual real-estate taxes, according to the Citizens Budget Commission (CBC), a business-backed watchdog. Making the system fairer could raise more than US$4 billion a year, the New York-based group said.

The city's property tax is complicated and riddled with inequities
Carol Kellermann, president of the CBC

"The city's property tax is complicated and riddled with inequities," said Carol Kellermann, president of the CBC, which researches the finances and management of the city and state. "We can generate more revenue from this tax simply by making it more transparent and equitable, without having to raise rates."

For example, a four-bedroom penthouse condominium at 15 Central Park West sold for US$88 million in 2012. That gave it an effective tax rate, or the levy divided by the property's market value, of 0.07 per cent. In Brooklyn's Crown Heights, a less-affluent neighbourhood, a house that sold for US$989,000 in August had a rate of 0.6 per cent.

The city average for homeowners is 0.8 per cent, according to a report prepared for the CBC by Andrew Hayashi, a professor at the University of Virginia. Rental buildings with more than 11 units bear the brunt, paying 4.72 per cent.

New York City's property-tax structure traces its roots to 1975, when the state's highest court ruled that the decades-long practice of allowing assessors latitude in valuations was illegal. The court said favourable treatment of houses must end, and that all real estate should be assessed at 100 per cent of market value.

After six years of delays and complaints from home owners, the state legislature in 1981 passed a law that essentially allowed all municipalities to continue using the old method.

For New York City and neighbouring Nassau County, the law created four classes of property, one-to-three-family homes, apartment buildings, utilities and commercial property, with each taxed differently.

The intent was to lock in the percentage of total levy paid by each class at the 1981 level. That gave home owners an advantage because they had received bigger breaks than other properties.

For home owners, assessment increases were capped at 6 per cent in a single year and 20 per cent over five, regardless of rising market value.

The state also required the city to value buildings in which residents own their units or shares in the building, like less-valuable rental property.

In the ensuing decades, the rules and New York's soaring real-estate values created wide disparities between market and assessed value. The system is now tilted even more against large rental buildings than it was 1981. In 1996 the state passed an abatement programme reducing taxes on condominiums by as much as 25 per cent.

Critics say the system benefits wealthy home owners at the expense of poor and middle-class renters, and prevents the city from reaping billions in tax revenue. The city's Rent Guidelines Board estimates that property taxes represent 30 per cent of an apartment building's operating costs, which are passed through to tenants.

Three decades after the law was put in place, New York is a much different place. Then, the city was emerging from a brush with bankruptcy, subways were covered with graffiti and crime was rampant.

In the next 20 years, as president Ronald Reagan lowered taxes, employment on Wall Street rose to a peak of 200,000.

Wall Street bonuses hit a record US$34.3 billion in 2006, compared with about US$2.1 billion in 1990, according to the state comptroller's office. Average wages in the securities industry rose more than 10-fold to US$360,000 in 2012 from 1981, fuelling the real-estate boom.

De Blasio, was open to studying changes to the system, said Marti Adams, a mayoral spokeswoman.

"It is clear that this is an issue, particularly in neighbourhoods where property values have not reflected the gains the city has made in the decades since Albany created the rules," Adams said.