The New York City Property Tax System: A Nice Mess

by Lindy Davies

It's hard not to be impressed by the sheer brain-teasing complexity of New York's property tax system. Elsewhere, although property taxes are often hated, they are a pretty straightforward affair: a revenue target is set by the legislature; a percentage of real estate value is levied to meet it. Not so in NYC: our property tax system is a surreal gumbo of interlocking influences. Why do you suppose that is?

It shouldn't take long to figure it out: New York City is the Crown Jewel of American real estate -- fortunes are made there; it has its own big section in the New York Times. Thousands of "LLC" corporations are set up to manage NYC real estate holdings, every single one of them worth many millions. It is only fitting that the mechanism for securing and protecting such a vast amount of rent should attain such a degree of impregnability.

Did I say impregnable? It certainly seems so. Despite general agreement that new York City's property tax system is broken and must, must be fixed, leading to endless studies and commissions -- it's still there. But -- though we at Common Ground NYC recognize the immensity of the challenge, we are just crazy enough to believe we can provide a hitherto-unconsidered analytical key that can lead to meaningful reform.

You never know! But if we're going to reform the system, our first order of business is to hold our noses and get up to speed on how it works.

The current system, which was enacted in 1981 over a gubernatorial veto, classifies all real estate parcels into four classes, as follows:

Tax Class 1 indicates the following types of primarily residential property:

In Class 1 for 2009, a tax rate of 16.196% is applied to 6% of the "market value."

Tax Class 2 is for all other primarily residential properties, including any residential condominiums not in Class 1. This includes co-ops, but does not include hotels, motels, or other similar property.

In class 2 for 2009, a tax rate of 12.596% is applied to 45% of the "market value."

Tax Class 3 includes real estate of utility corporations and special franchise properties, excluding land and certain buildings. Class 3, which includes utilities' capital, is ambiguously under-reported in the published tax rolls. But, it is a small fraction of the city's overall real estate value, and, because it contains no land values, has little to do to do with our current analysis.

Tax Class 4 is all commercial real estate. It includes all other properties, such as stores, warehouses, hotels, and any vacant land not classified as Class 1.

In class 4 for 2009, a tax rate of 10.241% is applied to 45% of the "market value".

Soon, we begin to see how this system is set up to give homeowners preferential treatment. But note how this is disguised! It looks as though Class 1 is subject to a fairly high property tax of over 16%. (And has been slowly climbing for some years!) Yet that rate is applied to only six per cent of the market value. Is the plot starting to thicken? Stay with us, Dear Reader, for we have only begun to plumb the subtleties.

If it's weirdness we want, the annals of Class 1 provide an embarrassment of riches: Class 1 homes are 73% of the parcels in New York City. The reason there is such a thing as Class 1 is the political demand for "tax relief" for homeowners -- and it has, to a certain extent, provided that. But the way it has done so raises many questions:

  • What are the average incomes for Class 1 homeowners in Manhattan? In the Outer Boroughs?
  • How do the ratios for single family/one or two family/mixed use, within Class 1, compare in the different Boroughs?
  • How much of Class 1 is vacant residential land? How does this compare in the different boroughs?
  • Do the tax advantages of Class 1 contribute to absentee landlordism and urban blight?

Note the provision about vacant land in Class 1. It includes vacant land that is zoned for residential use, OR vacant land that is next to improved Class 1 property IF it is in the outer boroughs. Up until just this past year, when the law was changed due to a push by Manhattan Borough President Scott Stringer, this applied to Harlem as well (where there are, as we all know, huge tracts of vacant land that have sat for decades).

A building is classified as class 1 as long as its current use fits the class 1 requirements. A 5-story building could house one family -- or could be vacant except for the one poor leaseholder left in it -- and still qualify for the preferential tax treatment indended for middle-class hnomeowners. Most of those middle-class homeowners, however, live in the outer boroughs! There are about 6,000 class 1 parcels in Manhattan, worth fantastic amounts of money -- and over 700,000 class 1 parcels in the rest of the city. One is led to strongly suspect that hardworking taxpayers in the outer boroughs are subsidizing high-flying speculators in Manhattan, aided and abetted by the property tax system!

Fifteen percent of Class 1 properties are classified as "three-family homes or mixed-use property". This include things like brownstones that are vacant except for a ground-level rental to a "taxpayer" business. Such parcels are, of course, everywhere one looks in New York.

Assessment procedures differ for the various classes. Sales data are ONLY used in Class 1. Classes 2 and 4 are assessed on the basis of income streams (they are required by law to do so). This means that a building that is only 20% used (such as a "taxpayer" with four vacant stories above a retail rental at street level) is listed as having a "market value" based on that meager income stream, and is taxed accordingly. It's true market value is many, many times that, and it is based on the land value alone. (The cost of demolishing an obsolete building is added to the proce of lots that are already vacant.)

And! The city's assessment procedures are modified by law in ways that make it virtually impossible for them to present actual market values. Increases in value for Class 1 are capped at 6% in any given year and 20% over 5 years. Increases in value for Class 2 are capped at 8% in any given year. Also, changes in the class shares (the portion of total revenue that each class will contribute) are capped at 5% per year. If one class increases in value more than that, then its effective tax rate goes down. These provisions have led to widely divergent assessments in neighborhoods with differing rates of growth.

The way assessments are done in Class 2 (larger residential) leads to whopping inequities. The law requires class 2 properties to be assessed by income stream. Alas, co-ops and condos don't have income streams, so they are compared with comparable rental properties for assessment. But, the rental properties are regulated, leading to a consistent undervaluation of co-op and condo properties (whose owners, by the way, have far higher average incomes than either renters or Class 1 homeowners). The city reports "effective tax rates" (the percentage of market value actually paid in tax) for each class; for class 2 it is 5%. But, that really only applies to renters. For condo owners, the city says their effective tax rate is less than 1.5%. In reality it is lower, because the city's "market value" figures for condos are consistently much lower than actual sale prices.

But there's more! A 17.5 to 25% abatement for co-op and condo owners, intended in 1996 to be temporary, has since since renewed twice, and is still in effect! The NYC Dept. f Finance reports that 75% of the savings from this abatement go to coop and condo owners in Manhattan, who have much higher-than-average incomes. (Note that there are condos in Class 1, as well.)

Then there are Class 1's legions of absentee landlords. The city levies a 50% property tax surcharge on absentee owners, which brings in about $44 million in annual revenue. This year, Mayor Bloomberg proposed to repeal it on the grounds that it is difficult to administer. According to the City Council, one-third of Class 1 owners fail to apply for the available exemptions. Could there really be something like 200,000 absentee owners of Class 1 properties? If so, the present program has done little or nothing to address the problem.

About 30% of the real estate in New York City is tax-exempt. But it is assessed, and its value shows up on the rolls as part of the aggregate real estate value, even though it doesn't add to revenues. There's no incentive to under-assess tax-exempt properties. How are they assessed? How much do the higher recorded assessments for tax-exempt properties hide the underassessment of taxable real estate? How much of this goes on in Manhattan compared to the other boroughs?

New York City's property tax system is gigantic, abstruse, genuinely malignant. What would work better? That question is easy, yet challenging. To the folks who run this Web site, it is, like, 100% obvious -- but for most educated readers it requires work on preconception-busting. (There is an online course devoted to explaining it.) In brief, there is a way to:

How? It's simple -- deceptively so. Forget about taxing buildings, improvements and houses. Forget about assessing them. Avoid all the hassle and expense of doing that. Instead, assess the full market value of land, independent anything that might be built on it, and use that for the property tax base. It works; its advantages are legion. Copious literature exists on how it has been successful, whenever it has been tried. And hey! New York City is already the best place in the world -- but this is the way to make it a whole lot better.

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