If you wonder why it’s so hard to reform the property tax system in New York City, you need look no further than homeowners in Queens. Or brownstoners on the Upper West Side. Or Mayor Bill de Blasio’s neighborhood of Park Slope.
Since the New York State Legislature codified the current tax system into four classifications in 1981 – Class 1 including one- to three-family homes; Class 2 for co-ops, condos, and rental buildings; Class 3 for utilities; and Class 4 for commercial properties – the property tax system, inequitable from the start, has grown into a patchwork of rates, assessments, caps, and phase-ins so complex and politically fraught that each time a proposal has been made for reform, the howls of protest have pushed it back. There is no touching the system without creating, in relative terms at least, winners and losers.
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.”
Assessing the Assessments
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.
Other features of the system magnify or complicate the problems caused by the assessment ratios. Chief among these are the caps. The assessed value on Class 1 properties can increase by at most 6 percent a year, or 20 percent in five years. This means that rapidly appreciating homes escape taxes that other homes pay.
A February 28 joint report by City & State, a website, and WPIX-11, a New York television news operation, reported that the mayor, whose home in Park Slope is valued at $1.4 million, was assessed $2,894 in property taxes in 2014. In nearby Borough Park, a similarly valued home was assessed $15,023 in property taxes – five times what the mayor was assessed. The explanation? Since the Borough Park home has been appreciating more slowly than the mayor’s home in Park Slope, its tax assessments “were able to keep closer pace with the increase in value” in that neighborhood, says Doug Turetsky, a spokesman for the IBO. “The property tax system was able to capture far more of the [market value] increase in Borough Park into the assessment, whereas in Park Slope the values went up so fast, the [tax] caps prevented it from being captured.”
The 2013 Citizens Budget Commission report also illustrated this problem. For example, the average benefit that owners of one- to three-family homes in Greenwich Village get from the assessment cap is between $32,000 and $39,000, in a neighborhood where the median household income is $105,000 for all residents and $200,000 for homeowners. In Queens Village, by comparison, the average assessment cap benefit was $394, where median income is $74,000 for all residents and $80,000 for homeowners. In rapidly appreciating Williamsburg/Greenpoint, the tax benefit is $4,080, where the median income is $50,000 for all residents and $67,000 for homeowners.
Meanwhile, efforts to offset the disparities in the tax system – the co-op and condo abatement tax for Class 2 properties, the 421-a tax abatement for residential real estate developers, as well as the Industrial and Commercial Abatement Program for Class 4 properties – have introduced distortions of their own.
When the co-op and condo tax abatement was created, it brought tax relief in line with Class 1 homeowners. But today, that relief has turned into a bonanza for many of the city’s wealthiest co-op and condo owners. Because of the way the DOF values co-op and condo buildings – by comparing their market value to rental buildings in the area – many of these buildings have been undervalued, according to James Parrott, deputy director and chief economist for the Fiscal Policy Institute (FPI), an independent, nonpartisan, nonprofit research and education organization. In fact, a number of units in these co-ops and condos have actually sold for more than the DOF’s estimated value of the entire building.
Backing up this point is a 2012 report prepared by New York University’s (NYU) Furman Center, a research partnership between the NYU School of Law and the Robert F. Wagner Graduate School of Public Service. It presented a list of 50 individual co-op and condo unit sales where the selling price of each unit exceeded the DOF’s estimated market value for the entire building. In the case of one 15-unit Upper East Side co-op, one apartment sold for $54 million, while the entire building was valued at $41 million.
Ripping Off Renters
The way the tax system stands right now, the people paying the highest taxes with the least amount of relief are New York City renters, many of whom are low- and middle-income families, say economists both at the Fiscal Policy Institute and at the conservative Manhattan Institute for Policy Research. “Renters are bearing the brunt of the property tax system as it stands,” says Parrott at the FPI, because the property taxes assigned to residential properties in Class 2 are passed on to renters in the form of higher rent.
While homeowners usually recognize the impact of property taxes on their wallet – and often make a stink about hikes – many renters do not realize how much they are bearing the brunt of the property tax system. “A lot of people who rent in the city don’t think they pay property taxes,” says Hayashi, the economist. “They make a rent check and the landlord pays [the] property taxes so [they feel,] ‘Why should I care?’ So that leads to this factual question: if you increase property taxes on large rental properties, where does the owner get the money? Some may come from their profits, but some of it may get passed along to [the] renter in the form of higher rent.” And the rest may be covered by deferring upkeep of the properties.
According to the Fiscal Policy Institute’s January 2015 report on the city’s property tax system, the inequities enshrined in the current system unduly affect low-income and minority residents, and they unfairly benefit well-off residents living in wealthy neighborhoods. These disparities play out “across the city by neighborhood, by income group, and by race and ethnicity,” the report notes. “Median household income for homeowners was $79,000 in 2010, more than twice the median income of renters, and the poverty rate among renters was more than four times that of homeowners (25.6 percent versus 6.2 percent).”
Last year, in an effort to force Albany to make changes to the current tax system, a group of black and Hispanic residents filed suit against the city and state, challenging New York City’s property tax classification on the grounds that it creates “a disparate and adverse impact upon the city’s African American and Hispanic residents.” The lawsuit was thrown out of court.
The Death and Life and Death of Reforms
Arguably, Mayor David Dinkins got the furthest in tackling the tax system’s problems with his 1993 Real Property Tax Reform Commission. Calling the system “opaque,” “confusing,” and “unfair,” the commission proposed three main suggestions for fixing it: (1) combine Class 1 and Class 2 to end the preferential treatment of homeowners over co-op and condo owners; (2) raise the effective tax rate as a property’s market value increases; and (3) use a homestead-exemption for some portion of the market value of owner-occupied houses – meaning, reduce taxes on homes valued at $150,000 or less when the homeowner actually lives in the home.
The commission produced its official report on the last day of the Dinkins Administration in 1993. Four years later, well into the administration of Mayor Rudolph Giuliani, the city created the co-op and condo tax abatement in an effort to create more parity between co-op owners and Class 1 homeowners – an effort that has unspooled in such unwieldy fashion that today, many co-op and condo owners actually pay far less than Class 1 homeowners, because their buildings are so demonstrably undervalued.
The lesson of the Giuliani attempt might be that trying to fix just one part of an unequal system is bound to create new disparities. That’s why critics have called for a more comprehensive approach. Hence, the proposed City Council commission on property tax reform, called for in 2014 by City Council Speaker Melissa Mark-Viverito and Finance Committee Chair Julissa Ferreras. In response, the City Council allocated more than $400,000 in the 2015 budget for two task forces to study taxes (property taxes and commercial tax expenditures). So far, the latter task force, created in January 2015, has met three times. The task force on property taxes has yet to be created.
One problem is that, ultimately, changes to the overall tax structure can only be made in Albany. While the City Council has the power to raise the tax rate assigned to each class – and did so in the early 2000s when it raised and then lowered the tax rate in response to changing city fortunes – the assessment rate for each class is set by the state. That keeps the percentage shares relatively consistent.
In April 2015, Manhattan Borough President Gale Brewer found herself in an awkward position during a question-and-answer period at a conference of the Regional Plan Association, a not-for-profit regional planning organization that focuses on recommendations to improve the quality of life and economic competitiveness of a 31-county, tri-state region in the New York metropolitan area. When asked why there had been no efforts to reform the current system, Brewer stuttered for a while before finally acknowledging it was “just too political” to do.
Brewer’s office declined to answer an e-mail and phone call regarding her comments. It’s fair to note that a borough president has no power over property taxes. But some critics of the tax system feel Brewer’s candor was revealing.
“That little line of hers is why there is no commission,” says the CBC’s Kellermann, who listened as Brewer hemmed and hawed her way through her answer. “She basically fumbled around and in broken sentences said, ‘It’s just too complicated and political, and nobody wants to touch it.’ I went back to my office and told my staff that her efforts to answer the question, as well as her answer, pointed out precisely how hard it is to reform taxes.”
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.