Residential property tax reform proposed, could foster equity, but untangling the current system will be fraught

"Affordable housing" and a fairer city requires a lot of changes, notably property tax reform, given that poster child Mayor Bill de Blasio's well-valued homes in Park Slope have a lesser tax burden that houses in less tony neighborhoods.

It's a problem, as Ben Adler wrote in August 2018 in City and State:

Property tax reform. The city currently disincentivizes dense development by taxing rental buildings more than co-ops, condos and private houses. The much-maligned 421-a program is a kludge intended to offset that. Instead, taxes should be distributed more equally on all units, regardless of building type. Then 421-a could be repealed and the increased property tax revenue could be used to fund affordable housing development through HPD. The mayor’s property tax reform commission is currently mulling just that.

Well, after more than 18 months of work, the New York City Advisory Commission on Property Tax Reform released its Preliminary Report on January 31, 2020, with ten recommendations, some of them likely controversial or complicated. Increasing fairness means increasing burdens, which could mean longtime homeowners who are house-rich but cash poor see a rise in taxes.

The recommendations include assessing properties at full market value (!) and then phasing in value over five years, with an exemption for resident owners with income below a certain threshold. That means non-resident owners could pay more. Overall, though, the changes are said to be revenue-neutral, just redistributive.

Note that it's not clear (to me, at least) what impact, if any, this would have on other tax breaks, like the 421-a exemption.

This is the beginning a process, with public hearings in each borough. The city can make only some changes unilaterally; the rest require state action.

I’m really happy, though, that things are finally moving along. To be sure, it’s a long, LONG road ahead, but NYC deserves an equitable property tax system that it can be proud of.

— Aaron Carr (@aaronAcarr) January 31, 2020

Meanwhile a lawsuit by the coalition Tax Equity Now is taking aim at the inequities from another angle. The coalition states:

The current system imposes higher tax rates on renters and homeowners in less affluent neighborhoods, as compared to the owners of higher value single-family homes, condos, and coops.
These inequities in the system have continued to widen, penalizing renters, business owners, homeowners in slower-appreciating neighborhoods, and minorities, who carry an unfair share of the City’s tax burden.

A bit of history

Note that the tax comprises approximately 45 percent of the City’s tax revenue. From the commission:

Any property tax system should be fair, predictable and transparent, and should not induce displacement among long-term homeowners and renters from the neighborhoods they’ve called home. These principles should be at the center of any system’s design, but this seemingly universal sentiment is constrained by a fundamental challenge – achieving a delicate balance between sustaining and enhancing essential government services that City residents expect while ensuring that the tax burden does not place an enormous strain on household budgets.

Various policy changes have delivered "today’s system made up of four property classes with market valuation restrictions, different assessment ratios, year-over-year caps in growth, transition mechanisms, a complicated class share system, and more." The last commission, in 1993, helped lead to a tax break enacted in 1996 for co-ops and condos.

After consulting experts, the commission cited flaws in current law, including:

• The under-valuation of some coops and condominiums as a result of state law restrictions that require that they be valued as if they were rental properties rather than based on comparable sales.
• The Assessed Value growth caps that have caused distortions in the Effective Tax Rates (taxes paid per $100 of sales-based market value) of 1-3 family homes.
Properties that have experienced significant appreciation have lower Effective Tax Rates than new homes or homes whose value has remained relatively flat.

The recommendations (most of them)

• Move coops, condominiums and rental buildings with up to 10 units into a new residential class along with 1-3 family homes. 
• Use a sales-based methodology to value all properties in the residential class.
• Assessing every residential property at full market value.
• Phase in value changes over five years at 20% per year, eliminating Assessed Value Growth Caps.
• Create a partial homestead exemption for primary resident owners, with an income cap.
• Create a circuit breaker within the property tax system to lower the property tax burden on low-income primary resident owners, based on the ratio of property tax paid to income.
• Have a gradual transition to the new system for current owners, with an immediate transition into the new system when a property is sold.

Some coverage

In Tax System Favoring Central Park Co-ops and Brooklyn Brownstones Could End, the New York Times reported 1/30/20 that Mayor Bill de Blasio and Council Speaker Corey Johnson (a mayoral candidate) "already appeared to be wary of embracing the recommendations," given the expected intensity of feeling.

That said, such changes could take years. And de Blasio, in some other interviews, was more supportive. During a Brian Lehrer Show "Ask the Mayor" segment, he acknowledged an "artificial dynamic" in Brownstone Brooklyn.

The Times explained:

Under the current system, most residences with up to three units, including single-family homes, are taxed under a complicated equation that begins with their market value, which is determined by the city based on recent sales prices for similar nearby properties.
A property’s assessed value is then calculated at 6 percent of the market value, but it cannot increase more than 6 percent a year or 20 percent in five years. That helps people who own property in neighborhoods like Park Slope where values have surged. Tax exemptions and credits, if they exist, are then applied and that total is multiplied by a variable tax rate that is currently around 21.17 percent.

In a follow-up 1/31/20, Battle Lines Quickly Form Over Radical Property Tax Proposal, the Times noted that Gov. Andrew Cuomo and Assembly Speaker Carl Heastie were also cautious in their response. Politico reported 1/31/20 that Property tax reform will be a heavy lift, despite mayor's optimism:

The Times got a pointed quote from Republican Council Member Joe Borelli of Staten Island:

“Outer-borough homeowners, especially black and Latino homeowners, have been subsidizing woke progressives in posh neighborhoods and billionaires in high rises,” Mr. Borelli said. “If you buy a $3 million home, condo or mansion you should pay taxes on a $3 million home, condo or mansion. It shouldn’t matter whether you are in Mill Basin or Midtown.”

Gotham Gazette in the 1/31/20 Commission Releases Long-Awaited Recommendations for Fairer City Property Tax System quoted the commission chair:

“It’s clear that there are certain properties in New York, in certain neighborhoods that have had a lot of appreciation, where people have lived there for a long time, where their taxes will go up,” said Marc Shaw, the commission chair, during a conference call just after the report’s release. “But by having a fairer system there will also be people that will have their taxes go down and the end result will be a fairer system that everyone will understand.”

Brownstoner portrayed some untoward consequences:

Worst-case scenario, the way we read it, the proposal could be a giveaway to developers that punishes longtime Brooklyn homeowners, causes Brooklyn townhouse prices to drop, and forces longtime residents, particularly those on fixed incomes, to sell and move out of the area. Even as elected officials say they are doing all they can to help black homeowners stay in their homes, the proposal could cause conditions to deteriorate even further in traditionally black enclaves such as Bed Stuy, Prospect-Lefferts Gardens, Flatbush and East New York, which continue to be devastated by predatory loans, foreclosure and fraud.