Instead of a New York City property tax cap, why not reform?

The New York state Senate approved legislation on January 26 that would cap the growth in New York City property taxes at the lesser of inflation or 2 percent a year. The 45-16 vote occurred while Mayor Bill de Blasio was testifying nearby at a Joint Legislative Budget hearing.

State senators in favor of this bill made a three-pronged argument: property taxes have become too burdensome for middle-class homeowners; the property tax caps for municipalities outside the city have been – according to Senate Majority Leader John Flanagan - “a tremendous success,” as well as a job creator; and that the city had benefitted so much from uncapped property tax collections that the mayor shouldn’t be surprised about the governor’s proposal to shift Medicaid cost to the city.

However, this defense of the proposed property tax cap fails to address what analysts across the policy spectrum agree are a host of inequities in the city’s property tax system that result from provisions of the state’s 1981 real property tax law.

Effective property tax rates (taxes paid as a percent of true market value) are highly skewed. Most owners of condos and one-, two- and three-family homes pay the lowest effective rates, followed closely by co-ops. Rental properties, however, pay much higher effective rates – roughly five times the effective rates for condos and homeowners. Keep in mind that two-thirds of city residents rent, the median household income for home and apartment owners is twice that of renters and nearly three-quarters of rental housing is occupied by people of color.

Moreover, property tax rates vary widely for homeowners depending on the neighborhood. The inequities have been widely recognized for the past quarter-century and partial measures like the co-op/condo abatement may have relieved one form of inequity at the expense of widening another.

The Senate’s proposed cap would only exacerbate these inequities, locking in the panoply of problems and providing the biggest benefit to owners of property whose value has increased the most. Maybe it should just be called “the latest ruse to make it seem like we’re helping the little guy while making deep pockets deeper.”

When elected officials can summon the patience and courage for true property tax reform, three key ingredients will be needed: a blueprint to correct the myriad cap, assessment and class share problems in current state law; linkage to a circuit breaker in the city’s income tax that will ensure that no family pays an inordinate amount in property taxes relative to their income; and a provision to ensure that tenants in rent stabilized units benefit if property taxes decline on rental properties.

The goal should be to reduce the disparities in effective property tax rates among residential properties. Changes should be phased in gradually – a transition period of 10 to 15 years might be necessary. Since effective rates would rise on many one-, two- and three-family homes, a circuit breaker – or a targeted property tax credit – is critical to provide an income tax credit to offset burdensome tax increases for families of limited means. Reducing the burden on rental properties will only help alleviate the city’s affordability challenges.

Property tax reform should be revenue neutral to help garner broad support. Regarding commercial property taxes, the best thing to do is to curtail unnecessary property tax breaks that have favored the biggest developers and corporate real estate owners. The Hudson Yards commercial property tax breaks are the most egregious, followed by poorly targeted industrial and Commercial Abatement Program reductions. Savings could be used to provide relief to small businesses through a circuit breaker.

The strength and dynamism of the city’s economy and the attractiveness of its quality of life have made it a national and international magnet for people and businesses. Consequently, property values have been appreciating and property tax collections have risen 5.6 percent a year since 2010.

The city has used these resources to settle the huge backlog of municipal labor contracts, restore essential human services, address the homelessness crisis, make up for years of neglect at Rikers Island, and invest in affordable housing, infrastructure and an expanded police force while building up a prudent reserve to hedge against an economic downturn.

Outside of New York City, municipalities throughout the state have been forced to curtail spending in many areas that have degraded the quality of community colleges, public health, public safety and infrastructure – all a result of four years under a rigid property tax cap.

Rather than punishing New York City by imposing a similar fiscal straitjacket, Albany should invite New York City to propose comprehensive property tax reform and should examine the impact of the property tax cap on local services outside the city.

James Parrott is the deputy director and chief economist at the Fiscal Policy Institute.