“To be the fairest big city, you need a fair tax system. For too long, New York City taxpayers have had to grapple with a property tax system that is too opaque, too complex, and just feels unfair,” Mayor Bill de Blasio said in May 2018 after announcing the creation of a commission to examine the issue. “New Yorkers need property tax reform, and this advisory commission will put us on the road to achieve it,” he said.
When the New York City Advisory Commission on Property Tax Reform releases its final report, promised by the end of the year, it has the potential to upend the city’s methods for collecting real estate taxes, impacting its most stable source of revenue — supporting roughly a third of the current $94.4 billion budget. The result is expected to be recommendations to create a more rational and equitable system, and with it a new field of winners and losers.
Commission Chair Marc Shaw told Gotham Gazette last week that the report would be “out soon,” at which point a slew of public debates will be triggered before the hard work of policy-crafting begins for city and state lawmakers. Much of the city’s property tax system is governed by state law. De Blasio has promised to push for reform once he receives the report and the next state legislative session begins in January.
“This commission is coming back this year with recommendations,” the mayor said in a July WNYC radio interview. “Two things then happen. Some [recommended changes] will be part of city law, which means they can be voted on by the City Council, and then I decide of course whether to sign or not, and the other [changes have] to be done by state law.”
“The state legislative session begins in January,” de Blasio continued. “We’re coming up to the point where these things are going to be put on the table and resolved.”
The commission was created by de Blasio and City Council Speaker Corey Johnson in May 2018 as a way to lay the groundwork for reforming a system described as byzantine, illogical, and unequal — and one that is largely controlled by state law. It was also partially a response to a lawsuit filed against the city and state calling the property tax system unconstitutional (the suit survived a motion to dismiss, which is currently being appealed).
The commission held a series of public meetings throughout the first half of 2018 to hear from experts and solicit recommendations. Since February, the commission has been working out of public view as it attempts to tackle a complex problem.
“It deserves some care. There is no single easy or obvious way to create a fairer system,” a spokesperson for Johnson told Gotham Gazette in May. But the spring turned to summer, then fall and now winter, with no commission report.
“Property taxes were a top issue in the Mayoral race and Mayor de Blasio committed then to establish a property tax commission to address the inequities with the current property tax system,” said Staten Island Assemblymember Nicole Malliotakis, de Blasio’s Republican challenger in the 2017 mayoral race, in a statement Wednesday asking for the results of the commission. “People across the five boroughs testified over a year ago and he promised that his commission would present a report of its findings and recommendations before the end of the year.”
Everyone feels the effect of property taxes, from small-home owners to local businesses to landlords and tenants. For almost all property owners — and those who pay property taxes through rent — property taxes have risen every year over the past two decades with the relatively stable growth in the real estate market. Almost everyone feels they are too high, even those who pay relatively little.
The property tax system, by and large, is a creature of state law, which dictates the criteria for valuing property in each of its statutorily-designated “classes:” small homes, apartment buildings, utilities, and commercial property. But the city controls the rate at which taxes are levied and the Department of Finance comes up with the formula for determining a specific property’s value based on the state’s broad requirements. Experts say each of these steps comes with flaws the commission could address.
“The Advisory Commission’s recommendations for property tax reforms should reduce inequities in property tax burdens both within and across the existing tax classes, while improving the system’s transparency and simplicity,” wrote Ana Champeny, Director of City Studies at the Citizens Budget Commission, in an email to Gotham Gazette.
With the promise of the commission’s non-binding recommendations, state legislators have been spurred to consider potential changes they may be facing, with some beginning to prepare their staff, committees, and constituents for potentially groundbreaking shifts. But the commission, which is mandated to avoid recommendations that would diminish city revenue, may also offer a reality check to local officials who have historically tried to insulate themselves from the political fallout of raising taxes or cutting services.
At the heart of the issue is inequity across the system. State law divides properties into categories, each to be valued and levied differently, based on the outdated logic of the way land was used when the current system was enshrined in the 1980s. A system of assessment limitations created at the state-level to shield property-owners from rapid market value growth, who would otherwise see their taxes skyrocket, has over the decades distorted the relationship between assessed value and market value.
In perennial attempts to ease the tax burden on particular constituencies, politicians have created a labyrinth of abatements and exemptions that experts say makes understanding one’s real estate taxes virtually impossible for everyday New Yorkers.
“Bottom line is right now owners of multi-million dollar brownstones are paying less in property taxes than people in my district who live in a two family attached house. If that’s not a tale of two cities, I don’t know what is,” wrote City Council Member Justin Brannan, a Brooklyn Democrat representing Bay Ridge, Dyker Heights, and Bensonhurst, in an email, with apparent reference to Mayor de Blasio’s 2013 campaign slogan.
The phenomenon Brannan describes is likely the result of multiple intertwined issues. The one experts point to most frequently, and which was raised at several commission meetings, is the inconsistent methodology with which different state-defined categories of property are valued.
In Class 1 are 1-, 2-, and 3-family homes, which are assessed on their market value (their actual or estimated sales price). In Class 2, are rental properties, valued based on the income they earn in a year. In Classes 3 and 4 are utilities and commercial properties, assessed based on the utility costs or net income, respectively.
Oddly, co-ops and condos — which include some of the city’s most expensive apartments — fall into Class 2 with rental property, valued based on the annual income “comparable” apartments receive in rent, even though they more closely resemble Class 1 properties, which also tend to be occupied by the owner.
What recommendations could be on the table?
>Property Classifications and Value Assessments
Among the suggestions most frequently raised by experts are to rationalize the classification of property types and to assess taxes based on market value (which is not often the case now), with a mechanism of relief for property-owners with low or fixed incomes. But changing that formula will mean some New Yorkers will see their taxes rise, including those who already feel constricted by tax collectors.
Many experts want to see classification changes with co-ops and condos in Class 1, where they would be evaluated based on sales price. Doing so would require a change in state law.
Then there is the way the city identifies comparable properties for the purpose of estimating value, which is done by the Department of Finance. Some of the inequities of the system may be helped by adjusting the department’s criteria for determining whether a property is comparable to another.
>Annual Assessment Increases and Circuit-Breakers
State law also imposes limits on the amount the assessed value of a property can grow over a one- or five-year period, which can result in inequity within a given tax class. In areas experiencing acute gentrification this can mean property tax rates lag behind the market value. Studies have found homeowners in the Bronx and Staten Island pay a much higher effective tax rate than the owners of similar property in Manhattan, Brooklyn, and Queens.
Many want to see the state eliminate those “caps and phase-ins.” But doing so could have consequences for homeowners with low, fixed, or even middle incomes — especially in up-and-coming neighborhoods — who purchased property when prices were low. To help them keep their homes when the market leaps, a number of experts and elected officials have called for “circuit-breakers,” which offer relief by mitigating property tax liability based on a household’s annual income.
Champeny said circuit-breakers are a more efficient and targeted form of relief than many of the piecemeal abatements and rebates currently in place.
But while contributing to inequities across the system, caps and phase-ins also provide a degree of stability, which is important to maintain the city’s largest revenue stream. When a small home experiences market growth that outpaces the statutory limits on assessment growth over a few years or decades, the assessed value will continue to increase even if the market slows. This provides a buffer for the city during periods of economic contraction. Eliminating caps and phase-ins without undermining the city’s fiscal stability will be one of the challenges the tax commission faces.
“The city’s fiscal health has benefited from the stability inherent in the structure of the current system,” Champeny wrote. “Proposed changes should not adversely impact the long-run stability and reliability of the tax as the City’s primary revenue source.”
>Adjusting the Tax Rate
The city under Mayors Bloomberg and de Blasio has harnessed the skyrocketing price of real estate to increase property tax revenue without changing the tax rate. One way to deal with potential fluctuations in property taxes, either as a result of market changes or changes in the law, is for the mayor and City Council to adjust the tax rate, which has been frozen since 2009.
The Citizens Budget Commission supports a system that favors residential over commercial property and utilities, which Champeny says can be achieved with differential assessment methods or through different tax rates. Class 1 should be saddled with the lowest tax burden (as measured by market value), followed by rental buildings, utilities, and finally commercial properties, she recently said in testimony to the state Senate.
If co-ops and condos are moved into Class 1, like many advocates and elected officials want, over half of the city’s roughly 3 million taxable residential units will fall within it. That new arrangement, along with any changes to the way co-ops and condos are valued, will have implications for the city’s tax rate if it is to maintain its current levy.
Property-owners are not the only ones squeezed by the system. Often the property tax burden for rentals is felt by both landlords and tenants. Some advocates and elected officials want to make sure tenants are considered when lawmakers approach reform.
“Tenants of rent-stabilized units need guarantees that savings will be passed on to them if property taxes decline on rental properties,” Brannan wrote. There are roughly 2 million tenants in about 1 million rent-stabilized apartments in the city.
“Lessening the burden on rental properties can only help the city’s considerable challenge in preserving affordable housing,” he added.
Property taxes make up about 30 percent of the operating cost of rent-regulated units and increased assessments contribute to the rising cost of housing, according to a spokesperson for the Partnership for New York City, an advocacy group for the city’s business community. Kathryn Wylde, the Partnership’s President and CEO, supports reclassifying rent-regulated housing to reduce the tax liability of those properties.
Suing for Reform
The city’s commission is not the only thing compelling lawmakers to act. The aforementioned lawsuit filed by Tax Equity Now New York, a group led by former Department of Finance Commissioner Martha Stark, is challenging the property tax system on constitutional grounds.
“The property tax system is in need of a complete overhaul that should be guided by legal principles enunciated by the court. While the Commission may come up with some good ideas, without the court’s guidance those ideas may fail to garner the support of those who need to enact any changes,” Stark wrote in an email to Gotham Gazette.
“The system is unconstitutional, illegal, and discriminatory,” she wrote, “the court is in the best position to offer the parameters for an overhaul that balances these fundamental issues.”
Source: Gotham Gazette