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New York Pied-a-Terre Levy May Undercut Property Tax Overhaul

Jan. 6, 2020, 9:46 AM

New York City’s ambitious plan to revamp its property tax system may hinge on a state legislative proposal to impose an annual tax on expensive second homes.

A city property tax reform commission is eyeing revenue from absentee residential property owners as pivotal to making its overhaul work. The problem: Some state lawmakers want to target that same niche of taxpayers—through passing a pied-a-terre tax on second homes in the upcoming session—and use that money instead to plug a budget hole. That would set up competing goals if lawmakers tackle both tax issues in the 2020 legislative session, which begins Jan. 8.

“The pied-a-terre tax being considered in Albany could jeopardize long-overdue property tax reform, by sucking up anticipated revenue needed to offset the effects of giving relief to low- and middle-income homeowners,” James A. Parrott, an economist and commission member, told Bloomberg Tax.

The potential clash looms as the city’s Advisory Commission on Property Tax Reform prepares its much-awaited preliminary report for release early in the new year. Its report will form the basis of the city’s lobbying position for legislative changes to fix the widely criticized system. The preliminary report was due by the end of 2019.

Homestead Exemption

Parrott, who is director of economic and fiscal policy at the Center for New York City Affairs at the New School, said the use of pied-a-terre funding is an issue if the reform plan relies on a homestead exemption, which gives more favorable tax treatment to taxpayers who reside on their property than to taxpayers with parcels that aren’t owner-occupied.

The concept of taxing big-ticket properties the owners don’t keep as their primary residence is popular with progressive activists who complain about high-priced New York City apartments and townhouses with disproportionately low tax burdens. But it could hurt the chances for the homestead exemption provision, even if the money goes into the city’s coffers, by staking a claim on revenue needed for broad property tax reform, Parrott suggested.

Parrott wrote a 2014 report that spurred the initial pied-a-terre tax bill when he was an economist for the liberal Fiscal Policy Institute. He also critiqued the city property tax in a second analysis a year later.

The property tax advisory commission was named in 2018 by Mayor Bill de Blasio (D) and City Council Speaker Corey Johnson (D) to recommend ways of fixing the widely criticized system without reducing city revenue—which means that any tax cuts for some property owners would have to be offset by increases for others.

The commission’s preliminary report will come out as the Legislature is facing a $6.1 billion hole in the upcoming state budget, and lawmakers may look to fill a fraction of the deficit with proceeds from a proposed pied-a-terre tax. The proposal, pending since 2014, would raise an estimated $650 million in revenue by adding a tax surcharge on second homes worth $5 million or more.

Giving owner-occupied properties better tax treatment than properties held as second homes or investments—through a homestead exemption, rebates, or “circuit breakers” that would reduce the shock of steep property tax increases relative to income—is among the proposals the city advisory commission has been studying.

Testimony by the Citizens Budget Commission, a business-supported think tank and fiscal watchdog, recommended making circuit breakers available only to owner-occupied properties, for example. The circuit breaker in the CBC plan would provide rebates of property taxes on owner-occupied residences when they exceed a set share of household income.

The CBC has questioned the pied-a-terre tax proposal, saying it was “appealing but problematic” when it was pending before the Legislature in the 2018 budget season. The group suggested that it would hurt the luxury housing market and reduce the city’s competitiveness with “nonresident property owners who make important economic contributions.”

‘Comprehensive Reform’ Urged

The pied-a-terre tax wouldn’t be a substitute for “comprehensive reform” to address disparities in the city property tax, said Ana Champeny, director of city studies at the CBC.

Layering the pied-a-terre tax on top of the existing property tax system “would have an impact on the city’s ability to redistribute tax burdens among city taxpayers,” Champeny said.

She also questioned the validity of using a tax on expensive properties in the city to address a possible statewide budget shortfall, saying that property tax in New York is a local levy intended to fund local government activities.

A consensus seems to have formed in the advisory commission process around the need for improved circuit-breakers and the likelihood of moving cooperatives and residential condominiums into the same taxation class as one-, two, and three-family homes, rather than with rental properties as they are grouped now, Champeny said.

But ironing out the details of implementation remains a challenge, she said.

“We would have liked to have seen a preliminary report from the commission by now, but it’s understandable that they are still working on it,” she said. “It will be important to have that information out there, to move to the next level of conversation. The process is losing momentum.”

The city’s property tax is complex, and the advisory commission “was charged with evaluating all aspects of the system to arrive at a set of comprehensive recommendations,” mayoral spokeswoman Laura Feyer said in a statement. “The commission has been working hard with its top-down review and analysis and will have more to say soon.”

A City Council spokeswoman, Jennifer Fermino, said that “it is our understanding” that the commission has reached agreement on a number of points and is close to releasing the preliminary report.

“We understand people are frustrated with the slow pace, and we share that frustration,” she said in a statement. “But this is an enormously complicated issue, and the commission is committed to releasing serious and thoughtful proposals. That takes time.”

Link Questioned

The state budget gap has “no real relationship” to city property tax reform, said Martha Stark, a former city finance commissioner who is policy director for Tax Equity Now New York (TENNY), the coalition of real estate and civil rights groups that challenged the city system in a pending lawsuit that led to the appointment of the advisory commission.

The only way the issues might intersect, Stark said by email, would be if lawmakers are “too distracted trying to figure out how to close the state budget gap” to give enough time to “consider thoughtful and meaningful property tax reform.”

Basing the city property tax for co-ops, condos, and small homes on market values would address the problem of high-value properties with relatively low effective tax rates, she said. She called a pied-a-terre tax harmful to the luxury market and “really bad piecemeal tax policy.”

Nothing would prevent the city advisory commission “from recommending some kind of exemption or credit for people who use a property as their primary residence” a credit for seniors, or one based on longevity of ownership, she said.

The TENNY lawsuit, filed in 2017 and pending in a mid-level state appeals court, sought to have disparities in the city system declared unconstitutional.

“Reform is very difficult to do, as many taxpayers, homeowners in particular, are likely to face higher bills, and that has been a key reason why the city has delayed,” said Mark A. Willis, a senior policy fellow at the New York University Furman Center for Real Estate and Urban Policy. “It’s hard to see how it can happen without a court decision that forces the city’s hand.”

Any legislative attempt to single out a subset of a class of property owners based on wealth or where they keep their primary residence also would be vulnerable to a constitutional challenge, said Jeffrey Golkin, a longtime property tax attorney who teaches at New York Law School.

“It’s easy to say we should hit these out-of-towners who pay tens of millions of dollars for a property, but the law has to be applied equally to everyone, whether well-to-do or not,” he said.

To contact the reporter on this story: John Herzfeld in New York at jherzfeld@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com

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