What Would it Take to Fix NYC'S Inequitable Property Tax System?

If anyone has been wondering why it’s so hard to reform the property tax system in New York City, you need look no further than to homeowners in Queens. Or to Brownstoners on the Upper West Side—or out to Mayor Bill de Blasio’s 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 comprising co-ops and condos and rental buildings; Class 3 comprising utilities and Class 4 comprising commercial property—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 Mayor Edward Koch has attempted to promote some kind of property tax revision, only to fall short—or create new, unintended inequities. A bid by current city leaders to revive a reform effort has stalled and hopes for leadership by Gov. Andrew Cuomo have not been realized.

Yet concerns about the property tax aren't going away. They're a major talking point for landlord advocates in the debate in Albany about rent regulations and the discussion at the city's Rent Guidelines Board about rent hikes on stabilized apartments.

“We need the property tax. 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,” says Carol Kellermann, president of the Citizens Budget Commission. “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. The billable assessed value in turn 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. 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. A property’s assessed value is equal to the property’s estimated market value multiplied by the 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 tax levy collected. 

By comparison, Class 2 property owners, including co-op and condo owners and residential building owners, owned less than 25 percent of the residential market value in 2013, but whose share of the tax levy was 37 percent.

So the problem with the tax system is not the tax rate; the problem is how properties are assessed, because the tax rate is not applied to the true market value of a property. 

“The tax rate that we refer to as the nominal tax rate, that’s 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.

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 similar market-value buildings to pay widely different tax bills. At the same time, tax assessments can increase even if the market value of a property is depreciating, “a source of anger and confusion for property owners,” Hayashi noted in the report.

Caps complicate things

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 only increase by 6 percent a year or 20 percent in five years. This means that rapidly appreciating homes escape taxes that other homes pay.

According to a February 28 joint report by City & State and PIX11 investigative report, 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.

Doug Turetsky, a spokesman for the Independent Budget Office, explains the difference: Because the home in Borough Park has been appreciating more slowly than the mayor’s home in Park Slope, the tax assessments for Borough Park “were able to keep closer pace with the increase in value” in that neighborhood, Turetsky says. “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 Budge Commission report also illustrated this problem. For example, the average benefit owners of one- to three-family homes in Greenwich Village get from the assessment cap was between $32,000 and $39,000, where the median household income for residents is $105,000 and for homeowners is $200,000. In Queens Village, by comparison, the average assessment cap benefit was $394, where median income for all residents is $74,000 and for homeowners is $80,000.

In rapidly appreciating Williamsburg/Greenpoint, the tax benefit is $4,080 while the median income for residents is $50,000 and for homeowners is $67,000.

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 first created, it brought tax relief into 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, says James Parrott of the Fiscal Policy Institute—because of the way the Department of Finance values co-ops and condominium buildings, comparing their market value to rental buildings in the area, many of these buildings were undervalued and many times units in these co-operatives and condominiums sell for more than the building has been valued.

In a 2012 report created to illustrate the severity of the problem, the Furman Center at New York University compiled a list of 50 individual co-op and condominium unit sales where the sales price of each unit exceeded the Department of Finance’s estimated market value for the entire building. In the case of one 15-unit Upper East Side co-op, one co-op unit 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 them low- and middle-income families, say economists both at the Fiscal Policy Institute as well as the conservative Manhattan Institute.

“Renters are bearing the brunt of the property tax system as it stands,” says Parrott of the Fiscal Policy Institute, 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. They make a rent check and the landlord pays [the] property taxes so ‘why should I care?'” says Andrew Hayashi. “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 made up in deferring maintenance, according to Hayashi.

According to the Fiscal Policy Institutes 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 unfairly benefit wealthy 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 death and life and death of reforms

Arguably, former Mayor David Dinkins got the furthest toward tackling the tax system's problems with his 1993 Real Property Tax Reform Commission.

Calling the then-system “opaque,” “confusing,” “inequitable,” and “unfair,” the commission proposed three main suggestions for fixing the tax system – combine Class 1 and Class 2 to end the preferential treatment of homeowners compared with co-op and condo owners; raise the effective tax rate as a property’s market value increased; 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 where the homeowner actually lived in the home.

The commission produced its official report on the last day of the Dinkins Administration. Four years later, and well into the Giuliani Administration, the city instituted 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 condominium 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 last year by City Council Speaker Melissa Mark-Viverito and Finance Committee Chair Julissa Ferreras.

In response, the City Council allocated over $400,000 in the FY 2015 budget for two task forces to study taxes—property taxes and commercial tax expenditures. So far, the Task Force on Commercial Tax Expenditures, created in January, has met three times. The property tax commission 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, notably, during the first Bloomberg administration, which raised and then lowered the tax rate in response to changing city fortunes—the assessment rate for each class is set by the state, to keep the percentage shares relatively consistent.

This past April, Manhattan Borough President Gale Brewer found herself on the wrong end of a question and answer period at the Regional Plan Association’s April 24 conference at the Waldorf Astoria. 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 email 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 Carol 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.”

EDITOR'S NOTE: Some portions of this article were changed after initial publications to remove inaccurate information about reform proposals.