Time’s Up for NYC to Fix Property Tax Inequity With Case Looming

For the second time in nearly 50 years, New York’s highest court issued an unexpected landmark decision that may upend New York City’s deeply entrenched property tax system.

The New York Court of Appeals’ March 19 decision in Tax Equity Now NY LLC v. New York City is a surprising course reversal following a lower court’s dismissal. What happens next will depend on several legal and political considerations that could dramatically impact real estate markets and population migration from the city to the suburbs.

The plaintiff, a coalition of housing and tax advocacy groups called Tax Equity Now New York, or TENNY, has been permitted to move forward with its claims that the system places a disproportionately heavier tax burden on low-income people and racial minorities.

While the decision limits the focus of the plaintiff’s original lawsuit to the methods by which residential properties are taxed by New York City, this encompasses a giant swath of urban real estate estimated to be worth more than $1.1 trillion.

That includes over 3.5 million housing units comprising single-family homes, condominiums, cooperatives, and apartment buildings throughout the five boroughs. If plaintiffs are ultimately successful, the envisioned changes to the current tax system will affect markets for nonresidential asset classes, such as office buildings, retail, industrial, and hotels.

The court observed that “New York has a longstanding history of housing segregation and remains one of the most segregated cities in the country,” and neither the city nor the state defendants disputed that the existing system results in great disparities.

In 1975, the same court rendered a historic property tax decision in Hellerstein v. Islip that caused the creation of a system for taxing New York City real estate that is in many respects distinct from the rest of the state. This same system has devolved over time into a different but just as egregious form of tax disparities as it was designed to correct, the TENNY plaintiff contends, concluding it must again be reengineered.

TENNY argues that the city’s complex system of artificially limiting increases in residential tax assessments—despite rapidly increasing market values in portions of the city—benefits wealthy taxpayers in those neighborhoods compared with taxpayers in more stagnant locations, and who tend to be racial minorities.

The court also found plausible TENNY’s contention that the city’s approach to valuing cooperatives and condominiums relied on inapt and illogical data. That skewed data allows luxury properties to be valued on the same basis as older, rent-regulated units, causing disparities.

Now the race begins. Through successive administrations, New York City has proposed sweeping tax reforms.

With the initial filing of the TENNY lawsuit in 2017, those proposals took on a greater sense of urgency. In 2021, the city delivered a report on tax reform that opens by conceding the system is “Opaque. Arcane. Inequitable.” Yet no real action has occurred.

Perhaps sensing the city’s hand might be forced by a decision in TENNY reminiscent of the court’s momentous Hellerstein opinion, Commissioner of Finance Preston Niblack announced last fall the preparation of a legislative proposal based on the work of a reform commission. It may now be especially in the city’s best interest to avoid a court-ordered system by coming up with its own, likely based on the proposals it has already outlined in its report.

The reform proposal acknowledges and addresses the principal claims of inequity charged by TENNY, so presumably there is enough common ground for the parties to work together to craft a settlement. Cynics may suggest that the recent victory is exactly the political cover the city was looking for to make needed changes.

Nonetheless, redesigning the system for raising some $34 billion annually from a real estate market controlled by widely divergent interests is daunting. It will produce unintended consequences that may not be apparent for years to come, as was the case with the system legislators introduced in 1981. Whether the case can be resolved without a trial is impossible to predict.

We will see a whirlwind of activity in the coming months focused on the challenges and impacts of leveling the tax playing field among homeowners by removing assessment tax caps, and applying more accurate market data in valuing condominiums, co-ops, and apartment buildings.

Taxes on New York City residential property today compare favorably to owning a home in the suburbs.

The tax hikes for many urban residential properties that are likely to follow changes in the tax system may cause city dwellers to rethink decisions about where to live—possibly driving a flight to the suburbs aided by preferences for remote work lifestyles.

Nonresidential properties—primarily the office, retail, hospitality, and industrial sectors—are also vulnerable as the most likely target for politicians’ efforts to shift taxes away from voting residents under any new tax system. This would come just as office vacancy rates are at all-time highs and many ancillary property owners that service office tenants, including local stores and business-oriented hotels, are operating on thin margins to remain viable.

Given the extreme challenges of balancing these interests and landing on a workable plan, it is inevitable that some form of court oversight and intervention will be required to keep the process moving. If it breaks down, the TENNY plaintiff could be put to its proof at trial. The city would then be in the position of defending what it has already admitted is indefensible.

The case is Tax Equity Now NY LLC v. New York City, No. APL-2022-00049, 3/19/24.

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 property tax and valuation strategy partner in Cullen and Dykman’s corporate department.

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