N.Y. High Court to Decide Fate of City Property Tax Reform Suit

A broad housing coalition has one more shot to convince a state court that its lawsuit to force reform of New York City’s arcane property tax system should move forward.

The suit, filed by Tax Equity Now New York, or TENNY, has the potential to upend how the city collects its largest source of tax revenue, a process that the organization—a group of real estate developers, civil rights groups, and city homeowners—says is constructed in a way that favors affluent homeowners over low-income New Yorkers and communities of color.

Originally filed in 2017, the suit argues that inequities in the city’s property tax system violate the New York and US constitutions, the state’s Real Property Tax Law, and the federal Fair Housing Act. But the suit was dealt a blow in 2020, when a mid-level state appeals court dismissed the organization’s constitutional challenge. TENNY appealed the decision to the state’s highest tribunal, the Court of Appeals, which agreed to review the case and is scheduled to hear oral arguments on Jan. 9.

The high court’s ruling could have major implications for a longstanding effort to force state lawmakers to overhaul the 40-year property tax code. The Court of Appeals could overturn the appellate division’s ruling, allowing the suit to go to trial in Manhattan, said Martha Stark, TENNY’s policy director and a former New York City finance commissioner. The Court of Appeals could even rule on the case’s merits, potentially finding in the housing group’s favor that the tax system violates federal and state law. Or the suit may finally be dismissed more than six years after it was filed, if the high court affirms the prior ruling.

Stark has long maintained that the courts are necessary to force change that lawmakers in Albany have avoided making, even though many acknowledge significant discrepancies in the ways the city assesses property taxes.

“This is both rickety and unfair and it just needs to be fixed,” she said in an interview.

In a response brief filed last year, the city argued “the fact that the tax system has been described as imperfect and in need of reform does not establish that it is unlawful,” and that reform should be left up to the state Legislature. The state has said the appeals court properly dismissed claims against it and that it plays a “limited role” in the city’s property tax assessment and collection.

“The dismissal of plaintiff’s case by the Appellate Division, First Department was firmly grounded in New York State law and we believe that the Court’s decision will stand,” a spokesperson for the city’s Law Department said in a statement.

Two tax attorneys said they expect the court’s ruling to focus on whether the appellate division improperly dismissed the case. Warren Dubitsky, a partner at Herman Katz Cangemi Wilkes & Clyne LLP, said he would be “shocked” if the high court went as far as to rule on TENNY’s arguments.

“Procedurally it’s possible, but I would deem it to be unlikely,” Dubitsky said in an interview.

Henry Zomerfeld, a senior associate at Hodgson Russ LLP, also said that he doesn’t “expect any decisions about whether the plaintiff’s challenge has merit and therefore will render a decision on the merits.”

“It’s absolutely a fascinating case to watch, but it is not going to be the be-all end-all of 2024,” Zomerfeld said in an interview. “At best if plaintiffs prevail, they’ll get back to the trial court and they’ll proceed in due course.”

A ‘Giant Can of Worms’

Property taxes are New York City’s largest revenue stream, bringing in $29.4 billion, or 42.3% of city tax revenue, in fiscal 2022. Under state law, New York City properties are divided into four classes, each of which are responsible for a specific share of the total tax levy—or the amount of property tax revenue needed to fund city services, after factoring in other funding streams and tax abatements.

Residential properties typically fall into one of two buckets: Class 1, which includes most residential properties with up to three units, and Class 2, larger buildings with condominiums, cooperatives, and rentals. Class 3 refers to utility properties, and Class 4 covers all commercial and industrial properties, including offices and retail.

Budget watchdogs and elected officials have long said the complicated structure for assessing property taxes means the tax burden isn’t shared fairly. One-, two-, and three-family homes and condos and co-ops have much lower effective tax rates than large rental and commercial properties. Homeowners in lower-income neighborhoods pay higher taxes relative to home values than similar properties in wealthy areas. In 2019, the Wall Street Journal reported that billionaire Ken Griffin’s $238 million Manhattan condo had a lower effective tax rate than a house on the south shore of Staten Island.

Among the factors contributing to the disparities, state law constrains the share of property tax revenue that can come from Class 1 properties, placing a higher burden on other forms of housing. Class 1 properties are also assessed at 6% of their market value, compared with 45% for all other properties.

There are discrepancies within tax classes. State law limits how much the assessed value of Class 1 and certain Class 2 properties can grow in a given year, benefiting affluent neighborhoods like Park Slope, Brooklyn, that have seen property values soar in recent years, and shifting the tax burden onto areas that have experienced more moderate growth, such as in Staten Island and the Bronx. Condos and co-ops are also generally not assessed based on sales price, but instead on the value of similar apartments, including rent-stabilized units—artificially lowering assessments of expensive Class 2 properties.

In a September report, State Comptroller Thomas DiNapoli said these factors meant “lower-valued properties more often bear a far greater tax burden than the city’s highest valued properties,” a disparity that worsened during the Covid-19 pandemic. Between 2021 and 2023, family homes in the top 20th percentile saw their tax bills rise 3.5%, while those in the bottom 20th percentile recorded tax bill increases of 4.6%, according to the report. In that same period, multifamily residential properties in the top 20th percentile experienced tax bill bumps of only 2.3%, compared with a 33.4% spike for those in the bottom 20th percentile.

In a December amicus brief, the New York chapter of the NAACP wrote the property tax system “disproportionately disadvantages African-American residents in particular.” Homeowners in districts that are at least three-fifths African-American pay effective tax rates that are roughly 20% higher than districts that are at least three-fifths white, the group wrote. LatinoJustice PRLDEF and the Citizens Budget Commission have also filed separate amicus briefs.

Past efforts to address property tax disparities fizzled. In 2018, then-Mayor Bill de Blasio (D) put together an advisory commission with the aim of creating a fairer property tax structure. A few days before de Blasio left office, the group released its recommendations that included ending fractional assessments that differ by property class and removing assessed value growth caps.

City Comptroller Brad Lander in December called for creation of a new tax class for new large rentals, condos, and co-ops that would lower the tax rate on new rentals and avoid under-taxation of new co-ops and condos. He said the change would help incentivize new multifamily development, reducing tax rates for new large rentals by roughly 30%.

Finance officials under Mayor Eric Adams (D) said in October they were working on their own proposal to push with state lawmakers, which would aim to remove the current class shares system. They may face renewed pressure to get something done, depending on how the high court rules.

“There’s sort of an old sense among lawyers that the Court of Appeals generally does not grant leave to appeal or take up an issue unless they’re seeking to make a statement on it or do something about the issue,” Dubitsky said. “So there’s a lot of speculation of what will they do—this is the giant can of worms, and a very complex tax system that affects millions of people.”

The case is Tax Equity Now NY LLC v. City of New York, N.Y., No. APL-2022-00049, argument 1/9/24.