Rejigger property taxes now
In the rush to adopt the ill-conceived Tax Cut and Jobs Act, Republican leaders in Washington lavished the biggest cuts on the richest, despite our nation’s glaring income inequality. Here in New York City, Mayor de Blasio and other leaders rightly want to make the city fairer. They should start by fixing the various inequities that plague our property tax system and contribute mightily to the overall regressivity of the city’s local taxes.
In a city dominated by renters and challenged by high rents, it is untenable for renters to bear higher effective property taxes than owners of co-ops, condos or private homes. Nor should neighborhoods dominated by moderate- and middle-income families have higher effective taxes than homes in richer neighborhoods.
Yet today, rental properties — home to two-thirds of city residents — now carry effective tax rates about five times the effective rates for condos and one-, two- and three-family homes. We can do better.
There is broad agreement among policy experts across the spectrum that comprehensive residential property tax reform is long overdue. While the inequities spring from a 1981 state law stemming from a landmark court case, Albany is the biggest obstacle to reform. Over the last several years, Albany leaders have time and again put their own political interests above the interests of New York City residents.
Two major problems account for growing property tax inequities. First, the 1981 law imposed assessment caps to keep taxes from rising too fast for one-, two- and three-family homes, but didn’t apply those caps to multifamily structures with 10 or more units, whether co-op, condo or rental buildings. As a result, the effective tax rates on one-, two- and three-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 workingclass neighborhoods, where real estate prices haven’t grown as fast.
The Independent Budget Office estimates, for example, 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 requires that coop 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 valuing for tax purposes 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.
Some have proposed to cap the growth in city property taxes at the rate of inflation or 2% a year, whichever is smaller. That approach would lock into place the whole panoply of existing inequities, providing the biggest benefits to owners of property whose value has increased the most. And it would unduly constrain the city’s ability to fund essential services.
At least three 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 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.
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 years might be necessary. At the end of the transition, property taxes as a percent of market value would be similar across the city, and anyone for whom property taxes would be high relative to their income would have that reduced by the circuit breaker. And lessening the burden on rental properties can only help the city’s considerable challenge in preserving affordable housing.
The best thing Albany can do is step aside and permit city residents to decide their own fate. Then, a broadly representative collection of civic, business and labor leaders, appointed by the mayor and the City Council, should begin the balancing act of transforming a broken property tax system into one that’s significantly fairer to the majority of New Yorkers.