A Foot on the Ground, And Steps to Fairer Taxes
Urban Matters: James, as you’ve pointed out to us before, property taxes are the biggest single slice – about 45 percent – of New York City’s tax pie. But key aspects of the property tax are determined in Albany, not City Hall. And this spring the State Legislature is considering changes to City property taxes.
That might include putting a tax surcharge on very high-valued residences – typically condo units – only occasionally occupied by the owners. Such a place is called a pied- à-terre, French for “a foot on the ground.” Before we get into the merits of that idea: How many pied- à-terres are there in the city?
James A. Parrott: I don’t have access to the detailed tax records to know for sure. But nearly a decade ago I noted that about 90,000 co-ops and condos in the city stopped receiving the co-op and condo tax abatement when a change in State law limited them to primary resident owners. Of course, over the past decade, there has been a spurt in construction of very high-end condos along “billionaires’ row” in Midtown, with seemingly endless news reports recounting purchases by the super-wealthy from around the world.
There’s a compelling rationale for a pied-à-terre tax: such owners don’t pay the City’s personal income tax and thus are not sufficiently helping to fund the public services that undergird the value of their property.
UM: What additional tax might be put on pied- à-terres, and how much revenue might be generated?
Parrott: For the past several years, State Senator Brad Hoylman has sponsored legislation that would impose an additional tax on non-primary residential properties in “any city with a population of one million or more,” i.e., New York City. It would only apply to properties valued at $5 million or more. The City’s Finance Commissioner would establish a graduated schedule for imposing the additional tax, at rates set by the City Council. In January 2021, the City’s Independent Budget Office (IBO) estimated that such a tax could generate $232 million under rates ranging from 0.5 percent to 4.0 percent of market value, as called for in a prior version of the legislation. The IBO acknowledged at the time that a lack of detailed data precluded making a precise estimate.
UM: You were a member of a New York City Advisory Commission on Property Tax Reform that published its final report in 2020. Where did the commission come down on this issue? And how does that fit in with its overall recommendations for achieving greater tax fairness?
Parrott: The final recommendations of the commission include such a pied- à-terre tax concept as part of a balancing act to eliminate various inequities rooted in the current tax system, equalize taxation of resident-owned non-rental properties, and adhere to a revenue-neutral mandate. The proposed reform package would make sales-based market valuations uniform across one-, two-, and three-family homes, co-ops, and condos, eliminate fractional assessments (that is, assess taxes based on full market value rather than some fraction of market value), and incorporate a circuit breaker that sets a limit on property tax liability for low- and moderate-income primary residents.
We also proposed a partial homestead exemption to further lower property tax burdens for lower-valued properties with primary resident owners. This would help moderate any higher future taxes for properties that have benefited from assessment caps or the peculiar rental equivalence valuations that now apply to co-ops and condos. These features have long contributed to the inequities in the current system, and reform would end them.
UM: In other words, additional taxes on pied- à-terres could help produce lower tax rates and a fairer tax set-up for most city homeowners, is that correct? Just how skewed are New York’s property taxes? And what exactly did the commission mean by a “partial homestead exemption?”
Parrott: To answer the last part of your question first: The partial homestead exemption embodies the pied-à-terre tax concept of higher taxes on non-resident owners. It would allow primary resident owners to exempt a portion of the value of their home from taxation, and limit that exemption to owners with incomes less than $500,000. By virtue of their non-resident status, pied- à-terre owners wouldn’t receive the homestead exemption, and they’d generally pay higher effective rates than they do now.
The partial homestead exemption plays a critical role in property tax reform. Our current property tax system generates significant horizontal inequities – properties of similar fair market value taxed differently – but also serious vertical inequities – higher-valued properties and higher-income owners generally pay lower effective rates than lower-valued properties and owners with more moderate incomes. So currently, high-valued pied-à-terres typically have fairly low effective tax rates. The commission’s proposal, including the partial homestead exemption and a property tax circuit breaker, addresses both horizontal and vertical inequities.
UM: A final question, about another property tax issue getting attention in Albany now. It’s whether to renew a decades-old property tax exemption intended to encourage creation of affordable housing, but frequently derided as a giveaway to developers. Did the commission take a position on it?
Parrott: Over the course of a dozen or so public hearings and many more working sessions over a three-year period we spent considerable time discussing the whole range of vexing property tax issues: business tax breaks; the soaring value of untaxed property owned by wealthy private universities; and also the $3.5 billion in housing development tax exemptions and abatements, including the so-called “421-a” provision you’re asking about. Our two reports provided some data on these other issues. But in the end, we decided to concentrate on rooting out structural factors that cause effective property tax rates to vary all over the place. We stayed focused on the need to lower effective property tax rates for most New York City residential owners. Now it’s up to new leadership in City Hall to work with the Governor and State Legislature to study our recommendations and enact needed reforms.