Last month, a diverse group of homeowners, real estate developers and advocates filed a lawsuit charging that the city’s property tax system is racially biased. Mayor de Blasio subsequently acknowledged that there are pervasive problems with the way the city taxes real property. He has pledged that if reelected he will undertake an effort to suggest changes to make the property tax, which is paid directly and indirectly by owners and tenants alike, more fair.
One of the first questions one might ask is: If the mayor thinks the system is flawed, why doesn’t he change it? The answer isn’t simply a lack of political fortitude. The fact is he can’t. The rules for taxing property in the city are set in Albany, not at City Hall.
Albany legislators enacted our current property tax system in 1981. To mark the system’s 25th anniversary, IBO took a look at the effects of the legislation and found that the burden of paying the property tax was not shared equally. Many of the problems we highlighted 11 years ago remain today and some have grown worse — especially wide differences from neighborhood to neighborhood in tax burdens carried by homeowners. Many of these problems can be traced to provisions in the 1981 state legislation.
Faced with a court decision that state law requiring equal treatment was not being followed, and with evidence that the property tax system at the time was rife with inequities, the Legislature choose in essence to legalize the disparate treatment rather than create new winners and losers. State lawmakers crafted a system so complex and so opaque that some of those who complain the loudest, particularly owners of one- to three-family homes, benefit the most.
Today, these homes comprise 34% of real estate market value in New York City, but generate just 15% of property tax revenue. Conversely, commercial property — offices, stores, and warehouses and other industrial buildings — make up 19% of market value in the city but pay 43% of the tax.
Another way to gauge the disparities is by comparing effective tax rates — the tax rate paid on every $100 of full market value. The effective tax rate for rental apartment buildings, where tenants pay at least part of the landlord’s taxes in their rent, is almost six times higher than for condo buildings.
But tax bills aren’t based on effective tax rates. The city is obligated to assess coops and condos as if they were rental properties, using nearby rental buildings as the basis for comparison, often resultiong in a substantial undervaluation. To calculate the effective tax rates, IBO adjusts the city’s reported values for coops and condos based on their actual sales prices.
Wide disparities in tax burdens among similar types of property abound. Coop and condo owners in some of the most expensive parts of the city typically enjoy lower tax burdens than owners in many other neighborhoods. For example: Condo owners in Coney Island have effective tax rates almost seven times greater than owners in downtown Brooklyn.
These differences are worsened by a poorly designed abatement intended to help reduce the difference between tax burdens for owners of coops and condos and those of one-, two-, and three-family homes. That tax break delivers its biggest benefits to owners in neighborhoods near Central Park, Greenwich Village and brownstone Brooklyn who already benefit the most from undervaluation resulting from the state law.
Although owners of one- to three-family homes generally fare the best under the current property tax system — just as legislators intended back in 1981 — effective tax rates for similar properties frequently vary widely between different neighborhoods across the city. Homes in Todt Hill on Staten Island have effective tax rates three times greater than those in Park Slope.
The inequities in the property tax system undercut public confidence in our largest source of tax revenue. The mayor’s latest budget estimates the property tax will bring in $25.6 billion next year, roughly 45% of all the tax revenue the city expects to collect. And while some homeowners benefit from relatively low tax burdens, the city also has one of the highest tax burdens in the country on commercial property, hurting the city’s ability to compete for firms and jobs.
The property tax is too essential to the city for it to remain this flawed.
Lowenstein is director and Sweeting deputy director of the New York City Independent Budget Office.
