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 HGS students long to figure it out: New York City has been the Crown Jewel of American real estate for many, many years -- it is only fitting that the mechanism for securing and protecting unearned increments here should attain such a degree of impregnability.
Take a stroll down Third Ave., for instance. You'd think that these adjacent properties would have just about the same land value, per square foot, wouldn't you? But, according to the City, the land under that one-story warehouse is worth much less than the land under its neighbors! |
Did I say impregnable? Perhaps not. Yes, there have been endless studies and commissions aiming for reform, and nothing has changed. But could it be that we at the Henry George School could provide the hitherto-unconsidered analytical key that can lead to meaningful reform?
You never know! Our first order of business, anyway, is to get up to speed on this whole mess. Here we present a list of questions regarding NYC's property tax system: questions that veritably cry out to be meaningfully, muckrakingly researched.
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:
- One-, two-, and three-family homes
- Condominiums of three stories or less that were originally built as condominiums
- Condominiums of three dwelling units or less that were previously a one-, two-, or three-family home
- single-family homes on cooperatively owned land, also known as "bungalows"
- certain vacant land zoned for residential use or, if not located in Manhattan south of 110th Street, vacant land adjoining improved Class 1 property.
In Class 1 for 2006-07, a tax rate of 15.746% 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 2006-07, a tax rate of 12.396% 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 but no land at all, has nothing to do to do with our current analysis.
Tax Class 4 includes all other properties, such as stores, warehouses, hotels, and any vacant land not classified as Class 1.
In class 4 for 2006-07, a tax rate of 11.306% 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 15%. (And that is up half a percentage point from the previous year!) Yet that rate is applied to only eight 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.
The annals of Class 1 provide us with an embarrassment of riches:
Class 1 homes are 73% of the parcels in New York City. How is Class 1 divided between, for example, high-priced brownstones in Manhattan and modest single-family homes in the Outer Boroughs?
- What are the average incomes for Class 1 homeowners in Manhattan?
- 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?
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 UNLESS it is in Harlem (where there are, as we all know, huge tracts of vacant land that have sat for decades), or in the outer boroughs.
- Does this mean that a vacant lot can be taxed at Class 1 rates until a building qualifying as class 2 is built on it?
Fifteen percent of Class 1 properties are classified as "three-family homes or mixed-use property". Does this include things like brownstones that are vacant except for a ground-level rental to a "taxpayer" business (such as those that line Court Street in downtown Brookyn)?
The law provides for each class to contribute a specific portion, or "Class share", of the overall revenue raised annually by the property tax. These class shares show huge penalties for commercial real estate. For FY 2004:
- Class 1: 46% of total Assessed Value; 14% of Revenue
- Class 2: 19% of Assessed Value; 35% of Revenue
- Class 3: 4% of Assessed Value; 7% of Revenue
- Class 4: 28% of Assessed Value; 44% of Revenue
Assessment procedures differ for the various classes. Sales data are ONLY used in Class 1! Classes 2 and 3 are assessed on the basis of income streams (they are required by law to do so!). Class 3 is only capital, no land -- and hence uses a cost approach.
This leads one to wonder how many Class 1 properties actually get sold -- especially in Manhattan. Here are the Finance Department's numbers on single parcel sales for 2003:
- All 4 classes, All 5 Boroughs: 12,403
- Class 1, All 5 Boroughs: 4,765
- All 4 classes, Manhattan: 2,447
- Class 1, Manhattan: 163
Did you get that one, team!? Only one hundred and sixty-three sales of Class 1 properties in Manhattan! How many of those were "arms-length" sales? And, how rapidly and accurately are neighboring assessments revised to reflect the changes in value? With so few sales, might not large blocks of rapidly-appreciating Class 1 parcels see their effective tax rates shrink to microscopic levels?
Even when they are reassessed, however, residential properties are shielded from increases in value. 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. (But only for some class 2 properties -- which ones?) Also, changes in the class shares of total revenue 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.
Using the Assessment Department's figures for "full market value" the city has determined "effective tax rates" for each class. These are: 1% for Class 1, 5% for class 2, and 4% for class 4. This raises questions:
- What would the true effective rates be if real market values were used?
- How different is the divergence between the city's version of market value and real market value, borough by borough? (Or neighborhood by neighborhood?) Do relatively more accurate assessments in lower-value areas make the reported "effective tax rates" seem much higher than they really are?
- In other words: how much are homeowners in the outer boroughs subsidizing speculators in Manhattan?
And while we're on the subject of effective rates: the way assessments are done in Class 2 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).
Because of that, the reported effective tax rate of 5% for class 2 really only applies to renters. Co-op and condo owners have an effective tax rate of less than 1.5% -- by the city's figures. In reality it is almost certainly lower. (How much lower? How prevalent is this divergence in different boroughs/neighborhoods?)
It keeps getting better! 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. Of 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. According to the City Council, in 2003, one-third of Class 1 owners did not apply for available exemptions from school taxes for owner-occupied primary residences -- indicating that there are more than 200,000 absentee owners of Class 1 properties! There is now (for 2004) a 50% surcharge for absentee landlords. But, the city estimates that the surcharge will raise a mere $44 million in 2004, so it won't go far toward making absentee landlordism unprofitable.
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?
Well... I suppose that's enough to go on with.