As New York City moves to reform its property tax structure, a two-year-old report that called the current system “opaque” offers some clues about where city officials might focus their reform efforts.
The December 2021 document from the New York City Advisory Commission on Property Tax Reform points to ways the current system, which raises some $34 billion in annual property taxes, cause inequitable tax distribution.
Unfortunately, the report fails to address the big problem of entrenchment and expectations: Every class of property stakeholders impacted by the more than 40-year old assessment system wants it fixed but at someone else’s expense.
Tinkering with the labyrinthine system inevitably will lead to consequences that are difficult to predict, especially in light of a pending case before the state’s highest court, and will create unforeseen distortions of the real estate market. State lawmakers also will have to sign off on any changes to the city’s property tax system.
Caps on Assessment Increases
The most significant reforms the 2021 report proposed for residential properties would strip away a variety of city rules that tend to warp ordinary concepts of market value and replace them with valuations that align with the real estate marketplace.
The current tax system benefits some smaller residential properties at the expense of others through an artificial cap on assessment increases. Over more than 40 years, this limitation has failed to capture market appreciation in wealthier and gentrifying parts of the city. A middle-income homeowner in East Flatbush, for example, may incur a heavier tax burden than a wealthy owner of a lavish home in Park Slope.
The report proposes a new tax class that would include small single and multifamily homes as well as condominiums and cooperative apartment buildings, and then attempts to value them all for tax assessment based on potential sales value without a cap. It advocates a phase-in over a number of years and other mechanisms to protect some households from tax increase shocks.
Valuation of Condos and Co-ops
New York has long required ignoring the potential sales value of individual condominium and co-op apartment units. This means that instead of the tax assessor relying on comparable sales of dwelling units to establish assessed value, they’re valued on the fiction that they’re actually rental units (that can’t be sold individually) with hypothetical income and expense data imputed for the building as a whole.
The total building value is then allocated among the individual dwelling units. This tends to result in a lower value, but not necessarily a lower tax, for each unit than if assessments were based on comparable sales. Not surprisingly, the current method is poorly understood by many taxpayers and bears no relationship to the valuation methods applied to smaller residential properties.
The 2021 report proposes to discard the use of the hypothetical income-based method and, as with smaller residential properties, rely upon comparable sales of units. It contends this would eliminate complex valuation methodology and increase value clarity as a property owner could more easily determine whether the city’s value aligned with true market value.
Tax Class Share System
The city’s real estate tax levy is, in theory, distributed among four classes of real estate based on their proportionate share of the value of all real estate in the five boroughs. If Class 4—for commercial, non-residential buildings—amounted to 40% of the total, Class 4 ought to bear 40% of the tax burden. The distribution of shares was set based on the composition of the real estate market of the early 1980s, with annual adjustments to the share proportions made annually by the state legislature.
The legislature’s legal prerogative to limit the extent of shifts among the share proportions for any given class each year has caused an enormous disconnect between the market and reality. Today, there’s little resemblance between the market value of each class relative to the others and its share of the tax burden.
Between fiscal 1993 and fiscal 2019, the cumulative effect of lower class (such as residential) share growth caps reduced the levy on Class 1 and Class 2 properties by some $5.4 billion dollars, and the tax burden shifted some $3.5 billion onto non-residential commercial properties. The disconnect between values and tax burden is illustrated by Class 1 (one- to three-family homes) representing 48% of total city real estate value but just 15% of taxes paid.
The 2021 report recommends eliminating the tax class share system, with tax rates for each class fixed for five-year periods. If the City Council wants to adjust the rates, the percentage rate changes would be the same for all classes of property.
Impact of Potential Changes
While the report offers considerable detail on many of its proposals, there are several potential unintended consequences that policymakers will need to examine carefully.
New York City generates between $2 billion and $3 billion a year in mortgage recording and transfer taxes. The likely increase in taxes on the most valuable condos and co-ops will negatively affect prices and consequently mortgage and transfer tax revenue. The city will need to address the potential for shortfalls in other tax revenue streams that may result from a redistribution of the property tax levy.
The city generates almost $17 billion in personal income tax revenue with a top marginal rate of 3.876%. One of the implied trade-offs of owning a condo for upper-income families is that, though they will pay the income tax, they avoid the significantly higher property taxes levied in the counties just outside the city’s borders. The report is silent on the effects that its recommendations for condos and co-ops, which would see a spike in property taxes, might have on the decision to reside in the city.
As can be seen most vividly in the annual restrictions placed on shifts in the tax class shares, there is simply no good solution to solve the problem of lawmakers meddling with the new system once it is enacted, and the recommendations perpetuate the opportunity for class favorites.
Looking ahead, the city’s renewed interest in property tax reform is occurring in the shadow of Tax Equity Now NY, LLC v. City of New York, which aims to strike down large sections of the city’s current real estate tax scheme on both federal and state equal protection grounds.
The viability of the case remains on deck with the New York Court of Appeals, where it’s scheduled for oral argument in Jan. 9, 2024. Even if the city’s leaders cannot produce a legislative proposal to reform the property tax system, the court may force one.
If reform of New York City’s notorious system of tax assessment ever arrives, it undoubtedly will bring with it a massive alteration of some segments of the real estate market. Coupled with an unprecedented and growing volume of distressed office and related properties that will sharply impact future tax collections, great challenges are coming.
The case is Tax Equity Now NY LLC v. City of New York, N.Y., No. APL-2022-00049.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
David C. Wilkes is partner at Herman Katz Cangemi Wilkes & Clyne and president and co-founder of the National Association of Property Tax Attorneys.
Warren M. Dubitsky is partner at Herman Katz Cangemi Wilkes & Clyne whose practice focuses on New York City tax appeals and incentives.
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