The Worm In the Apple of Property Tax Bills: Unfair Assessments

Every administration since that of Mayor Edward Koch (1978–1989) has attempted to promote some kind of property tax revision, only to fall short or else create new, unintended inequities. A bid by current city leaders to revive a reform effort has stalled, and hopes for leadership from Governor Andrew Cuomo have not been realized. Yet concerns about property taxes aren’t going away.
 
“We need the property tax,” says Carol Kellermann, president of the Citizens Budget Commission (CBC), a nonpartisan, nonprofit civic organization. “It’s a stable source of income in a city where incomes go up and down, the population goes up and down, people come and leave. But we don’t have to keep it the way it is. We can change it. We need to rethink and reform the different classes. All of these things that we have done to try and ease the burden of tax increases – caps by how much the amount can increase, total caps within a class – all of these workarounds to deal with the changes in demographics and value [of residential and commercial property] need to be rethought. And we need to come up with a much more streamlined and understandable system – and one that is more equitable.”

The city calculates a property’s tax bill by applying a specified rate to a portion of the property’s market value, known as its “billable assessed value.” In turn, the billable assessed value is calculated in three steps. First, a property is assigned one of the four tax classes. Second, the property’s market value is estimated by the Department of Finance (DOF). For Class 1, for example, the DOF examines the sales of comparable properties in the prior year and uses that information to estimate the property’s market value. The third step is the calculation of the property’s assessed value. That value is equal to the property’s estimated market value multiplied by an applicable target assessment ratio. The target assessment ratio for a Class 1 property is 6 percent; all other classes have a target assessment ratio of 45 percent.

This difference in assessment ratios is at the root of inequality in the system. In 2013, residential homeowners in Class 1 owned 46 percent of all the residential market value in New York City, yet paid 15 percent of the property taxes collected. By comparison, Class 2 property owners – including co-ops, condos, and rental building owners – owned less than 25 percent of the residential market value, yet their share of the tax levy was 37 percent.

So the problem with the system is not the tax rate; the problem is how properties are assessed. “The tax rate that we refer to as the nominal tax rate [is] applied not to the market value of the property, but to the assessed value of the property,” explains George Sweeting, deputy director of the Independent Budget Office (IBO), a publicly funded agency that provides nonpartisan information about New York City’s budget to the public.

In a 2013 report prepared for the mayor by the Citizens Budget Commission, the lawyer and economist Andrew Hayashi pointed out that the difference in the effective tax rate causes buildings with similar market values to pay widely different tax bills. At the same time, tax assessments could increase even if the market value of a property was depreciating – “a source of anger and confusion for property owners,” Hayashi noted in the report.

(Editor’s note: This story first appeared as “Why the Effort to Reform the New York City Property Tax System Has Stalled” on citylimits.org. It is reprinted with permission and has been lightly edited for stylistic reasons.)