Property taxes are new york City's largest revenue source, totaling slightly over a third of the city's collected taxes in 2002. That makes them a prime target for increase as the city faces its largest budget gap in nearly 30 years. Sitting at the center of this discussion is Martha E. Stark, New York City's commissioner of finance since February 2002. To find out what she thinks and what the potential for co-op and condo tax treatment is in the coming years, we invited her to inaugurate HABITAT:'s new series of interviews with important public officials and members of the private sector who help shape opinion.
Stark has led a distinguished career in the public sector. From 1990 to 1993, she held several senior management positions in the Department of Finance. In 1993, she was chosen as one of 17 White House fellows charged with analyzing the budget and international treaties for the U.S. Department of State. After she left that post, she served as director and deputy counsel for policy and development in the Manhattan borough president's office. Prior to her current position, she was a portfolio manager at the Edna McConnell Clark Foundation. During college at New York University, Stark was captain of the varsity basketball team, and since then has spent many years coaching basketball at the Greenwich Village Girls Basketball League.
HABITAT: It's my understanding that the city's property tax system last underwent fundamental reform in 1981, which was just about when HABITAT: magazine was started and just about when the co-op conversion boom took off. So, in '81, when the state created four tax classes, there really weren't very many co-ops and condos in New York City. Then, 16 years later, in 1997, the partial tax abatement program for co-ops began. Today, there are 556,000 co-op and condo taxpayers in Class 2 as compared to 633,000 one- to three-family taxpayers in Class 1. Does that sound about right?
MARTHA E. STARK: That sounds about right.
HABITAT: I'd like to begin by looking at the tax abatement program and it's origins. So, if you would address the program and how it works.
STARK: Sure. Basically, as early as 1990, the city had identified an issue about co-op/condo owners and homeowners, and tried to make sure that there was horizontal as well as vertical tax equity. So, if you owned an apartment in a building that was vertical, the question was: why should you be paying different taxes than a homeowner in a house? A couple of task forces were put together and looked at the property tax equity issues. Essentially, the abatement program in 1997 was an attempt to try to figure out how to equalize taxes between co-op/condo owners and homeowners.
I would actually go back a little bit further, because there was a movement afoot for small co-op/condo buildings and brownstones back in the mid-1990s - 1994 and 1995 - when those properties were treated like similar brownstones that might be rental buildings. So, you talked about one-, two-, three-family homes, but there's also a subclass of buildings that have four to six units and seven to ten units. And, so back in the mid-1990s, there was a law passed that created a subclass for condominiums and co-ops in buildings with less than eleven units that gave them some favorable tax treatment. Or, at least treatment that was comparable to what rental buildings had been having in that size. So, the origins of the abatement program were how to fix this inequity.
I think it's important to note that lots of different people talk about the inequity and I think the simplest way to think about is, if you have a $300,000 co-op or condo, how do your taxes compare to a $300,000 house? The law was pretty clear in 1981-82; it basically said that one- to three-family homes would be valued at eight percent of their market value. Each year, your assessment can only increase by six percent; no more than twenty percent in five years.
HABITAT: And, that's market value?
STARK: That's actually on the assessed value side. So, if you were to look at market value, you would see that our market values have pretty much kept pace with the market on one-, two-, three-family homes. The assessment cannot keep pace with the market, because the law limits how much they can increase each year; so six percent a year; twenty percent over five years. For co-ops and condos, I think that it's fair to say that even though they were not in existence - there weren't as many in the early 1980s - the legislature was especially concerned about conversions. And, so they actually enacted a provision of the law called Section 581 of the real property tax law. What that section says is that we, as assessors/appraisers, have to value co-ops/condos as if they were rental properties. And, if they would have been subject to rent regulation, we have to value them as if they were subject to rent regulation. As a result of that, it actually does reduce the value that we're able to use for assessment purposes.
I like to use my co-op as an example. I just recently refinanced my co-op in Brooklyn. I bought it for $90,000 back in 1984 and I actually don't know how much it's worth, but what I do know is I convinced a bank that it was worth at least $286,000 because they were willing to loan me money on it and they needed a value of at least $286,000. If I'm not mistaken, my taxes on that property are at $2,100. The only way that they could have come up with that - it's not 45 percent of my market value - is if they used a rental income. And, since it was built using tax abatements they're also using a rent-regulated income, if you will, on it.
So, all of that is to say that when all is said and done, co-ops and condos have, depending on which ones you look at, paid more in taxes than similarly valued homes. And, the abatement program was an attempt to correct for that inequity. That's why they put it together.
HABITAT: Has it been effective? Is it still effective?
STARK: Well, I guess I would frame the question a couple of ways. Effective at achieving what? The abatement program has some problems in that it is, pretty much, a two-tiered system that basically gives the benefit to everybody based on their current taxes. So part of the problem is that 581, which basically requires that we value properties not at their "real" market value - and I put real in quotations - does understate the value of co-ops, and it understates the value of more high-end co-ops, I would say.
So, co-ops in the boroughs, especially in neighborhoods where they're converting existing apartment buildings, are paying a higher percent in taxes than the Manhattan Upper West Side apartment that gets the benefit of being treated like a rent-regulated apartment but still gets this abatement. Regardless of the type of place you own, you should be paying similar taxes. In order for that to happen there are a couple of things that need to fall by the wayside. One is that you can't have 581-related values because, although there are limits on how we can assess homeowners, we value them using sales.
The market values that we use come from a pretty sophisticated computer model that looks at sales, crunches down the numbers, and tries to find comparable sales information and values them. To then say that we're going to value co-ops and condos the same way that we value homes creates a little bit of a windfall for some co-ops and condos. So, the first thing that has to happen if you really want a true, fairer system is to value all of these properties in a similar way.
You know, if we wanted to value homes by the income approach, we could do that, too. But, the important thing is to have that base be the same. Once you do that then I think the question is: what is really the appropriate level of taxation for homes, and co-ops and condos?
And, I think that everyone believes that they should be the same. I actually might even make the argument - I know this has been a debate about ownership versus non-ownership - that the most overtaxed properties are actually apartment building rentals where they actually have less money than most owners do and their tax rate, effectively, is much higher than everybody's is. And one of the things that we liked in working with the Council of New York Cooperatives was that they actually wanted to include the rentals and wanted to try to think about one residential class of properties wherein you figured out what is the appropriate amount of taxes that those classes should pay to support the police, the firefighters, and the schools.
Property taxes are a key funding mechanism for schools and all of us have concerns about public schools and that they be adequately funded. So how do you make sure that the right amount of taxes is being paid to support those services?
HABITAT: What are the various options if you wanted to move away from the abatement to some kind of normality among the classes or equality? What are the various options that the city has; some being realistic, some not being so realistic?
STARK: There are an unlimited number of options. The first option, I would say, is to eliminate the 581 section of the law. I think that's not actually that difficult to do. It would require a legislative change.
HABITAT: On the state level?
STARK: Yes. The real property tax law is a state law. So, 581 would have to be repealed. And, then I think there could be a possible merger of the classes; at a minimum, all of the co-op/condos. If you wanted to create an ownership class you could do that. I think that's harder to do depending on what your ultimate goal is. If the goal is to raise the taxes on homeowners - and I think that's difficult to do, though not impossible - I think that more and more people are saying they'd be willing to pay more taxes if they knew where the money was going. I think if we were able to talk about this money going toward schools, for example, people might be willing to pay these taxes for specific services.
I don't think that's out of the question; that's a harder lift. That said, assuming you cannot just merge the classes together, [you would need] a repeal of 581 and then [have to create] an abatement program that targets those in need. What's clear about the abatement program now is everybody benefits and the prime beneficiaries are the more high-valued cooperatives. What you want to do is make sure that the cooperatives that really are paying effectively three to five times more taxes on similarly valued homes get relief and they get brought closer to what those homes are being charged. And, it would be better to use those abatement dollars that way.
HABITAT: Would you have to still have an abatement program? There's not a way of doing this where you don't have an abatement?
STARK: Sure, but it means merging those classes and treating them similarly. Again, you asked me to tell you what's realistic, what's not. I would say that it's harder to do that merger. And, the abatement program is already on the books, so just as a result of it being there, the question is: how do you want to target those resources a little bit better?
HABITAT: Who, of the housing groups, would have to support this for that to happen?
STARK: You can make change in a system, but I think that you have to be painfully honest about it. You have to be a truth-teller. And, part of truth-telling is saying to people, here is really the deal; let's talk about effective taxes and lay out the picture. I think that if you were to survey homeowners and ask, "Do you think it is right that you have this house with three- or four-bedrooms and a backyard and you are paying less taxes than a person across the street in an apartment building who has a one-, two-bedroom apartment?"
Most homeowners would answer that question and say, "No, that's not fair." So, I think when you present a question this way most New Yorkers want to do this in the [fairest] way possible, so I actually don't think of this as a major hurdle to convince them that this is a system that is not fair. There's a lot of effort that we've got to spend on truth-telling and giving as much detail as possible to the general public and building a consensus on what is the fairest rational way to do tax policy.
That's my best guess about how you do it. And, then you really engage a movement and go forward with how you can do this. A lot of that work was done in the early '90s, and we got an abatement program as a result of all of that early truth-telling. The work that needs to be done now is to really get homeowners convinced that this is in everybody's long-term best interests.
We have an opportunity right now with the assessor scandal to rethink the system and figure out how to best simplify the system; make it as transparent as possible. And, there are a couple of things. First, 581 is not transparent. Also, the differences between Class 1 and Class 2 are not making the system transparent and fair and we have some opportunity to do that.
HABITAT: Stepping back, if this process were to occur given that the city forecasts a budget shortfall, is this the time to be equalizing the tax classes?
STARK: I think that depends on what you're focused on. What are the goals? Again, if the goal is to try to figure out how to equalize taxes, then you would have a program. No matter what you want, [you should have] a program that's simple, transparent, and easy for people to understand...the question is really, "What is the goal?" What you don't typically want to do when you're making dramatic changes in a system is have that also linked to a tax increase. So, is the ideal scenario to do it when we're in such a sort of budget deficit? Probably not, because you don't want to link it to a tax increase. It's better to sort of fix a system and then figure out how the taxes sort of play themselves out.
It's important to understand that fixing this tax does not need to mean more revenue. It will mean that there would be some winners and losers within a shift of revenue, but the combination of having the abatement dollars already there would allow one to figure out how to give that benefit more effectively to the people who need it, and to make sure that you're not giving it to people who don't. And, I realize that there could be a debate about how you decide who needs it and who doesn't.
I said I would tell a sort of property tax joke, it being, "Don't tax me, tax thee; tax the one behind the tree." That's what people always talk about, so nobody really wants to pay taxes, but I think that if you have a system that shows people what's really rational and how to best do it that people will pay their fair share.
And then the question is really: how are we best using those resources? Ideally, you don't want to do tax reform linked with tax increases. It would be great to be able to do it in a tax-neutral way where you're creating some winners and losers, but winners and losers who have bought into this as being a sort of necessary change in order really to create fairness in the system.
HABITAT: So, does that mean that this would not be the year, or next year, perhaps, not the year to do this kind of tax reform?
STARK: Here's what I would say. The property tax has been going up for the last, what, six, seven, eight years? So, I wouldn't say that this is not the time to do this reform. I think we have to separate the issues. We have to talk about what's a reasonable reform and then what's an appropriate amount to raise from the property tax. And, those two are not inextricably linked; in fact they can be separated. And, then how do you really gradually smooth over who's going to pay? I love it if it was a system where what we could do is just say, "Alright, all co-op/condo owners and all rental owners, you get to pay 69 cents per 100 dollars of value like the homeowners pay." That would be great. Actually, there are some co-op and condo owners that pay less than 69 cents per 100 dollars of value. It would be great to bring those people up to 69 cents and bring everybody down. The city can't really afford that nor do I think that that's the right tax policy perspective.
The question as to "What is the right amount of taxes for any local person to pay?" can probably be debated forever. But are property taxes in New York City right? I'm not sure that I think they are. You can just look what they pay in Nassau or in Westchester and what they'll say is, "Well, but we have to pay for our schools." And New Yorkers will say, "Their schools are better and so I'm not going to pay."
So, the question is, "What's the right investment to make our schools better? What's the right investment to make sure that New Yorkers feel safe and how do you rationally come up with a tax system that supports that?" I wouldn't say not to do it now. But, we have to remain clear on what are the issues; what are we trying to accomplish with each thing?
HABITAT: What would be a realistic timetable for tax reform?
HABITAT: Is it on somebody's plate who says, "We want to now," or isn't it?
STARK: What we're going to probably be doing, just coming out of this assessor scandal, is look at the entire property tax and what were contributory factors to the assessors being able to for the last, basically, 35 years, be involved in a bribery scheme. And, I think what we're going to be looking at and thinking about, along with the law department, industry, and others, is: what were those factors and how can we simplify and make more transparent the work that we do? And, again, a part of it is: why do we value at a percent of market value? Just like Habitat magazine, it's 20 years since we've been living with this law; what's worked, what hasn't worked?
A lot of the complicating factors are [because] we're assessing Class 1 at eight percent of value, Class 2 and 4 at forty-five percent of value. Why do we need to do that? Wouldn't it be simpler for me to say to you, "We think your co-op is worth $400,000?" And, when you see that number, either it strikes you as real or you think we've lost our minds and you offer it to us to buy for that price if that's right; or you duck, because you actually think it's worth a million dollars. What we want to do is have more people invested in, "Is this the right number? And here's how we determined it." You don't get that anywhere; you don't get it for Class 1, because if we say your house is worth $100,000, we send you an assessment that says $8,000 if you're lucky; sometimes it's $6,000.
But, we send you this notice and you look at it and you say, "$8,000? Well, I really think my house is worth $400,000, and they think it's worth $8,000? Those idiots," you know? So, you're not invested in making sure the number is right. If you're a co-op and we think your house is worth a hundred thousand dollars, the law requires us to really value it as if it's $65,000. Then what we do is take 45 percent of $65,000, and so we say to you - and by now your eyes have glazed over and you look at me and you think, "My God, has this woman lost her mind? What is she talking about?" But, the bottom line is, at the end of the day, we say, "Your property assessment is worth $30,000." And, you think, "$30,000? Well, I think it's worth $100,000." So, that's okay, too.
What we want is a system where you're invested in letting us know if the $100,000 is right or not. And, that's true throughout the system. There's a difference between what you assess at and what you tax at. So if you value properties at a hundred percent it does not mean that you're taxing them at a hundred percent, because you could just drop the rate.
What we could do right now is value all Class 1 property at a hundred percent of value and drop the rate to 69 cents instead of the 12 dollars or 13 dollars it currently is. And we could value co-ops and condos at a hundred percent of value and drop that rate accordingly. All of it is on the table, because we have an opportunity to really change the way we do our work and do business.