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IBO offers Budget Options, including repeal of MSG tax exemption and taxing vacant land (another tactic to remove blight?)

The Independent Budget Office yesterday released a new edition of Budget Options for New York City, evaluating 63 options—nine of them new—that could help close the city's budget shortfall. None are presented as recommendations, just options.

Among the biggies are the restoration of the commuter tax and the introduction of bridge tolls.

Below are a few regarding land use policy. Only the first is a new option.

Keep in mind that vacant lots are blighted, according to the Empire State Development Corporation's blight studies, which support projects to remove that blight. Others might consider tax incentives to develop such lots a more subtle solution.

Should certain vacant lots remain tax-exempt?

Repeal the Tax Exemption for Vacant Lots under 420-a and 420-b

Revenue: $17.5 million

Sections 420-a and 420-b of the New York State Real Property Tax Law provide for full property tax exemptions for religious, charitable, medical, educational, and cultural institutions. In 2010 the city issued exemptions to about 12,500 parcels with a total market value of $40 billion. Of these parcels, 58.5 percent were owned by religious organizations, 19.7 percent by charitable organizations, 9.2 percent by medical organizations, 8.3 percent by educational institutions, 2.5 percent were being considered for nonprofit use, and the remaining 1.7 percent are benevolent, cultural, or historical organizations.

Proponents might argue since the land is undeveloped, it is not being used in active support of the missions of these organizations, which is the rationale for providing the exemption. The tax would provide organizations with an incentive to develop their lots—expanding the services and benefits they bring to the communities. Additionally, the tax that would be levied on any one lot would be relatively small, though organizations with larger, more valuable lots would face greater costs and greater incentive to develop their lots. By excluding small lots, the option would not penalize agencies for owning difficult to develop parcels. Lastly, a further exception could be made for small organizations by allowing vacant land owned by organizations with annual revenues below a certain threshold to remain exempt.

Opponents might argue that repealing the exemption would place additional fiscal burden on organizations that are already stretched to provide critical services in their communities. Additionally, the opponents might argue against providing incentives for development of all vacant land. While technically vacant, the lots may serve a useful purpose for the organization and surrounding neighborhood, such as a playground or a community garden.

Should vacant residential property be taxed more?

Tax Vacant Residential Property the Same as Commercial Property
Revenue: $61.3 million in 2011, rising to $318.1 million per year when fully phased in

Under New York State law, a vacant property in New York City (outside of Manhattan) which is situated immediately adjacent to property with a residential structure, has the same owner as the adjacent residential property, and has an area of no more than 10,000 square feet is currently taxed as Class 1 residential property. In fiscal year 2011, there are roughly 25,000 such vacant properties. As Class 1 property, these vacant lots are assessed at no more than 6 percent of full market value, with increases in assessed value due to appreciation capped at 6 percent per year and 20 percent over five years. In 2011 the median ratio of assessed value to full market value is expected to be 1.6 percent for these properties.

Under this option, which would require state approval, each vacant lot with an area of 2,500 square feet or more would be taxed as Class 4, or commercial property, which is assessed at 45 percent of full market value and has no caps on annual assessment growth. About 13,600 lots would be reclassified. Phasing in the increase in assessed value evenly over five years would generate $61.3 million in additional property tax revenue in the first year, and the total increment would grow by $64.2 million in each of the next four years. Assuming that rates remain at their 2011 levels, property tax revenue in the fifth and final year of the phase-in would be $318.1 million higher than without this option.

Proponents might argue that vacant property should not enjoy the low assessment benefits of Class 1 that are meant for housing. They might also argue that this special tax treatment of vacant land discourages residential development, an unwise policy in a city with a critical housing shortage. Proponents might further note that the lot size restriction of 2,500 square feet (the median lot size for nonvacant Class 1 properties in New York City) would not create incentives to develop very small lots, and the city’s zoning laws and land use review process also provide a safeguard against inappropriate development in residential areas.

Opponents might argue that the current tax treatment of this vacant land serves to preserve open space in residential areas in a city with far too little open space. Opponents also might have less faith in the power of existing zoning and land use policies to adequately restrict development in residential areas.

Should MSG stay tax-exempt?

Eliminate Property Tax Exemption for Madison Square Garden
Revenue: $15 million in 2011

This option would eliminate the real property tax exemption for Madison Square Garden (MSG). For more than two decades, the garden has enjoyed a full exemption from its tax liability for the property it uses for sports, entertainment, expositions, conventions, and trade shows. In fiscal year 2011, the tax expenditure, or amount of foregone taxes, is expected to be $15 million. Under Article 4, Section 429 of the Real Property Tax law, the exemption is contingent upon the continued use of Madison Square Garden by professional major league hockey and basketball teams for their home games.

When enacted, the exemption was intended to ensure the viability of professional major league sports teams in New York City. Legislators determined that the “operating expenses of sports arenas serving as the home of such teams have made it economically disadvantageous for the teams to continue their operations; that unless action is taken, including real property tax relief and the provision of economical power and energy, the loss of the teams is likely…” (Section 1 of L.1982, c.459). Eliminating this exemption would require the state to amend this section of the law.

Proponents might argue that tax incentives are now unnecessary because the operation of Madison Square Garden is almost certainly profitable. Because Madison Square Garden, L.P. owns the Madison Square Garden Network and the Knicks, Liberty, and Rangers teams, it receives game-related revenue from tickets, concessions, and cable broadcast advertising. In addition, Madison Square Garden hosts concerts, theatrical productions, ice shows, the circus, and much more in its arena and theater, and it collects both rent and concession revenue on these events. Proponents also might note that privately owned sports arenas built in recent years in other major cities such as the Fleet Center in Boston and the United Center in Chicago, generally do pay real property taxes—as did MSG from 1968 when it opened until 1982—although some have received other government subsidies such as access to tax-exempt financing and public investment in related infrastructure projects. In the case of MSG, the continuing subsidy, long after the construction costs have been recouped, is at odds with the philosophy that guides economic development tax expenditure policy.

Opponents might argue that presence of the teams continues to benefit the city economically and that foregoing $15 million is reasonable compared to the risk that the teams might leave the city. Some also might contend that reneging on the tax exemption would add to the impression that the city is not business-friendly. In recent years the city has entered into agreements with the Nets, Mets, and Yankees to subsidize new facilities for each of these teams. These agreements have leveled the playing field in terms of public subsidies for our major league teams. Eliminating the property tax exemption now for Madison Square Garden would be unfair.

Here's January 2008 coverage of the City Council debate on the tax exemption; surely the only argument is whether the MSG deal is fair in light of other subsidy deals, because there's no risk that the teams using the arena are going to leave the country's biggest media market.

Should property tax abatement be adjusted?

Revise Coop/Condo Property Tax Abatement Program
Revenue: $115 million in 2010, rising to $145 million in 2013

Recognizing that most apartment owners had a higher property tax burden than owners of Class 1 (one-, two-, and three-family) homes, in 1997 the Mayor and City Council enacted a property tax abatement program billed as a first step towards the goal of equal tax treatment for all owner-occupied housing. A problem with this stopgap measure, which has subsequently been renewed twice, is that some apartment owners—particularly those residing east and west of Central Park—already had low property tax burdens. A December 2006 IBO study found that 40 percent of the abatement program’s benefits go to apartment owners whose tax burdens were already as low, or lower, than that of Class 1 homeowners. Another 14 percent gave other apartment owners benefits beyond the Class 1 level.

Under the option outlined here, the city could reduce the inefficiency in the abatement by restricting it either geographically or by value. For example, certain neighborhoods could be denied eligibility for the program, or buildings with high average assessed value per apartment could be prohibited from participating. Another option would be to exclude very high-valued apartments in particular neighborhoods from the program. With any of these examples, state approval is necessary.

The additional revenue would vary depending on precisely how the exclusion was defined. The current “waste” in the program is estimated at $192 million in 2010 and will grow to $241 million by 2013. While it is unlikely that an exclusion like the ones discussed above could eliminate all of the inefficiency, it should be possible to reduce the waste by at least 60 percent.

Proponents might argue that such inefficiency in the tax system should never be tolerated, particularly at a time when the city faces significant budget gaps. Furthermore, these unnecessary expenditures are concentrated in neighborhoods where the average household incomes are among the highest in the city. Since city resources are always limited, it is important to avoid giving benefits that are greater than were intended to some of the city’s wealthiest residents.

Opponents might argue that even if the abatement were changed in the name of efficiency, the result would be to increase some apartment owners’ property taxes at a time when the city faces pressure to reduce or at least constrain its very high overall tax burden. In addition, those who are benefiting did nothing wrong by participating in the program and should not be “punished” by having their taxes raised. The abatement was supposed to be a stopgap and had acknowledged flaws from the beginning. The city has had more than 10 years to come up with a revised program, but so far has failed to do so.

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