For all the relief among mass transit riders at having secured congestion pricing as a revenue stream, absent additional measures, repairs to New York City’s ailing subway system will remain underfunded. The measure is expected to bring in $15 billion over 10 years, while the MTA’s Fast Forward Plan for repairs and upgrades will cost an estimated $40 billion over a decade.
Aware of this shortfall, the state Legislature considered adding a tax to the state budget that would make the world’s most privileged denizens contribute a little bit to a city from which they profit handsomely: a pied-à-terre tax. The levy would have fallen on owners of homes worth $5 million or more in New York City that are not their primary residence and are not rented out to a full-time tenant. It would have been progressive, with gradually rising rates. According to a Wall Street Journal analysis, the pied-à-terre tax would have raised $471 million per year, half of which would have come from just 280 homes worth more than $25 million. New York City Comptroller Scott Stringer found the tax would have raised $650 million.
Under pressure from their generous benefactors in the real estate industry, Democratic legislators and Gov. Andrew Cuomo opted to instead tax a far broader range of actual New Yorkers and come up with less revenue, imposing a “mansion tax” surcharge on anyone buying a home in New York City for over $2 million and raising the real estate transfer tax on homes selling for more than $3 million. This is expected to raise only $365 million per year on average, and it is a much less consistent revenue stream than a tax assessed on a property every year because in years like 2009, when credit froze after the Great Recession, far fewer sales are made.
But upgrading a 120-year-old transit system won’t pay for itself, and every New Yorker sitting on a delayed subway train should know that some of the blame rests with the ultra-rich, luxury real estate developers and their lackeys in Albany.
Wealthy out-of-towners are distorting New York City’s housing market and harming its neighborhoods. In just the last three years, the number of uninhabited investment properties increased by 20,000 in New York City. They now comprise 2.1 percent of all the city’s housing. (This figure includes properties used for short-term rentals, like Airbnbs.) In a city with a vacancy rate that is half the national average, that is not a trivial share, especially in the neighborhoods where they are clustered, such as Manhattan’s Upper East Side. “In neighborhoods where large numbers of apartments are being left empty for much of the year, skyscrapers can become ghost towers, mostly dark at night, with few actual residents on each floor,” reported the real estate website Brick Underground last year. Last week, a West Village townhouse sold for $14 million for a buyer who intends to use the 6,000 square-foot property to house a collection of luxury cars.
So the pied-à-terre tax would have killed three birds with one stone: raising revenue, revitalizing neighborhoods and reducing the obscene cost of housing.
Then the real estate lobby got involved. As The New York Times reported, “Developers hired well-connected lobbyists and presented legislators with printouts of economic analyses. They wrote opinion pieces and warned that the high-end market, already weakened, would collapse … The abrupt rise and fall of the so-called pied-à-terre tax also illustrated the challenges in translating progressive rhetoric into policy, and the continuing influence of the traditional powers in Albany.”
Supposedly, Albany was swayed by the real estate industry’s arguments. These claims were transmitted uncritically in right-leaning business journals such as The Wall Street Journal and Crain’s. But upon examination, they are extremely flimsy, or plainly nonsensical:
-According to the Journal, the Real Estate Board of New York claimed, “if wealthy foreigners stay away, it could cut into revenues of restaurants, retailers, and even taxis.” That’s quite unlikely for a tax that would only apply to an estimated 5,000 homes in a city of 8.6 million – especially since the tax would apply to people who live elsewhere. People who don’t live in New York City obviously spend less of their money there than those who do. If the tax were passed, those property owners would have four options: just pay the tax and change nothing about their behavior, make New York City their primary residence and pay local and state income taxes, rent out their home to defray the tax’s cost or sell. In many cases, the buyer would be an actual New York resident. If pied-à-terre owners did nothing, it would have no effect on restaurants, retailers and taxis, while renting out or selling would help local businesses by increasing the year-round population. If pied-à-terre owners rent or sell their apartment to someone who lives here, it would expand the supply of housing on the market. Given that New York City has a dire housing shortage, this would be another benefit.
-Luxury developer William Zeckendorf wrote in Crain’s that New York would lose “brokerage revenues and construction jobs resulting from constrained market growth.” The notion that no one will build new luxury condo buildings if the pool of potential foreign buyers is slightly diminished is absurd. There is such an excess of demand to live in New York City that there will be plenty of incentive for developers to build, even if an apartment that would have gone for $10 million now goes for only $9 million.
–”The proposed tax will have a negative impact on the luxury housing market,” complained the fiscally conservative Citizens Budget Commission. “The significant progressivity and top rate would reduce demand for high-end homes by nonresidents and depress property values.” This argument is based on two questionable premises: that people who can afford a $5 million apartment they don’t even live in will be scared off by $25,000 per year in taxes, and that it would be a bad thing if they were. The mega-rich are less price-sensitive than most people – that’s why they’re paying these enormous sums for apartments they don’t even live in - and they can raise money for the taxes by renting out the apartment.
But, let’s assume that some out-of-towners were dissuaded from buying an apartment worth more than $5 million. Why is this is a problem? Because real estate in New York City isn’t expensive enough? The CBC argued that this would lower the revenue generated by the tax, since it would be based on assessed value.
If revenue projections fall short, other taxes – like New York City Mayor Bill de Blasio’s proposal to raise income taxes on those earning over $1 million per year – can be added onto it.
Meanwhile, rich Russians, Chinese, Floridians and suburbanites who want to spend a few weeks per year in New York City would still be able to. If they couldn't live with paying the pied-à-terre tax or buying a home worth less than $5 million, they could stay in hotels, Airbnbs or short-term sublets.
-Opponents said New York City lacked the resources to determine an owner’s residency. De Blasio and City Council Speaker Corey Johnson supported the proposal, so they obviously thought the city could implement it. It’s not that complicated. The metric for whether someone is eligible for the pied-à-terre tax is where they declare their residence for the purpose of filing their income taxes. If that place isn’t New York City, they aren’t a resident. Other cities, including Vancouver and Paris, have adopted pied-à-terre taxes. If these smaller cities can assess whether someone lives in their city or not, there’s no reason New York City can’t.
-Assembly Speaker Carl Heastie said a pied-à-terre tax could not be implemented because the system of valuing New York City co-ops and condos is broken. For once, pied-à-terre tax critics got their factual premise right: The city does not properly assess the values of co-ops and condos, badly underestimating the worth of the most expensive ones. But to therefore abandon taxing pieds-à-terre is an asinine response, using one greater injustice to justify continuing another. Why not simultaneously reform New York City’s property tax assessment system to introduce a modicum of fairness and raise more money from the owners of luxury apartments?
-Like many opponents of the pied-à-terre tax, the CBC noted that nonresident owners “pay property, sales, and other taxes.” But they don’t pay as much as New Yorkers because they don’t pay income taxes in New York. They don’t pay as much in sales taxes because sales taxes are regressive, taking a higher proportion of income from the less affluent, who spend a higher proportion of their income on necessities. So the super-rich are favored by sales taxes in general, and all the more so if they don’t live in New York and spend an even smaller fraction of their income there. And they pay less in property taxes than they should, because of the dysfunctional local property tax system. Moreover, many of these apartments were built with huge tax abatements. The end result is that the total tax burden in New York City is very regressive, with households making less than $25,000 per year paying 10.3 percent of their income in state and local taxes, and households making more than $5 million per year paying 5.3 percent of their income in state and local taxes.
In this context, the “mansion tax” is defensible in addition to a pied-à-terre tax, but not instead of it. I put “mansion tax” in quotes because many homes in New York City that go for more than $2 million are not mansions by any common sense definition. The pre-existing mansion tax, for sales over $1 million, hits many modest two-bedroom apartments in Manhattan and gentrifying portions of Brooklyn and Queens, as well as quite a few average-sized rowhouses in middle-class neighborhoods. The new additional taxes would have affected one-quarter of Manhattan sales last year. Many of those hit will include middle-class families who bought a brownstone on the Upper West Side or in Park Slope 40 years ago. These are longtime New Yorkers – often civil servants, educators, nonprofit employees. Albany, apparently, cares more about oligarchs who don’t even live here and the developers who profit from them.
This deference to the narrow interests of the most privileged at the expense of everyone else is a good example of why Politico New York called the state budget “a gut punch” to the liberals who just elected Democrats to unified control of the state government.
REBNY defends the real estate industry agenda, arguing that measures such as loosened zoning restrictions are in the public interest because the city needs market-rate housing and developers want to build it. But when the pied-à-terre tax, a proposal that would put more supply on the housing market for New Yorkers came up in Albany this year, they defeated it. And the result is a tax that will fall on a much larger number of real estate transactions. That’s why Gothamist observed that “what was being billed as a victory for the city’s real estate industry now seems like merely (another) win for the .01 percent.”