Inconsistent + Indecipherable + Intractable = New York City's Property Tax Code

Andrew F. Kazmierski / Shutterstock
Small businesses along 2nd Ave. on the East Side of Manhattan, as they appeared in the summer of 2014.

Inconsistent + Indecipherable + Intractable = New York City's Property Tax Code

The city is notorious for its mind-numbingly complex method of assessing property taxes, which some experts say could be the worst in the country.
March 9, 2015

This year, New York City Mayor Bill de Blasio’s tax bill on his $1.41 million Park Slope townhome will total nearly $2,900. A few miles away in Borough Park, the owner of a home similarly valued at $1.42 million will have to pay more than $15,000—over five times as much as the mayor.

In Manhattan, Borough President Gale Brewer will be taxed $16,261 on her $4.82 million Upper West Side brownstone, for an effective property tax rate of 0.34 percent—a bit higher than the 0.21 percent rate enjoyed by the mayor, but still a bargain. In other residential neighborhoods like Kingsbridge and Spuyten Duyvil in the Bronx or Jackson Heights in Queens, the rate is nearly three times as high.

And in rapidly growing North Williamsburg, owners of one-, two- and three-family homes enjoy some of the lowest tax rates in the city. Meanwhile, in the further reaches of Brooklyn, the city takes a much bigger share from homeowners.

“I’m paying high taxes now, and I’m not happy about it,” complained Jaime Archeta, a longtime homeowner in Canarsie. Archeta’s home, which he has owned for two decades, is currently worth $462,000, according to the city. His tax bill this year? Almost the same as the mayor’s—$2,951.52, compared to $2,894.43 for de Blasio—even though Archeta’s property is one third the value.

“Some people like me, we’re not complaining because we don’t really know where to complain in the first place,” Archeta said. “Somebody has to correct this issue. Somebody has to move and do something to put equality in every section in Brooklyn.”

If the figures seem confusing, it’s because they are. New York City is notorious for its outdated, inconsistent and mind-numbingly complex method of assessing property taxes, which some experts say could very well be the worst such system in the country.

To begin with, there have long been questions about how accurately properties are valued, although the city’s performance has improved on that front. By statute, different types of properties—commercial versus residential, homes versus cooperatives and condominiums—are assessed very differently, and some bear a much larger burden than others. Even within a single property class—in this case, residential properties with one to three units—the tax bill can vary wildly from one neighborhood to the next. Yet at the same time, state law mandates that property taxes be equitable across the city.

“There’s an overall objective of equity, but the law also has all these particular requirements about how you do it, and some of those produce inequity,” said George Sweeting, the deputy director of the New York City Independent Budget Office. “It’s a conflict in the law.”

Behind the discrepancies in residential property tax rates is a decades-old tax cap that protects homeowners against rapidly escalating bills. While well-intentioned, the cap on property assessments has created others problems. In neighborhoods with surging property values, the assessments have not kept pace. The tax bill continues to rise for homeowners in such areas, but it makes up a smaller and smaller share of a home’s market value, leading to stark disparities from one part of the city to the next.

“They chose to offer that protection in a way that makes it difficult for the city to actually adjust taxes fast enough to keep up with the growth in market values,” Sweeting said. “You wind up with neighborhoods in which there’s been appreciation over the years and they’ve got a tax burden—not the actual tax, but tax as a percentage of the market value—that is a quarter or a third of what it is in neighborhoods where there isn’t much change.”

The trend is most striking in up-and-coming parts of the city, notably in Brooklyn, where property values have been skyrocketing with annual growth well into the double digits. At times, the city as a whole has experienced remarkable property value growth. Between 1998 and 2008, for example, the average annual market value increase for Class 1 properties—those with one to three residential units—was a robust 12.5 percent, according to the IBO.

Yet assessments can’t go up more than 6 percent a year for these properties in Class 1, and the growth is further limited at 20 percent over a five-year period. Any increase in value above those levels is essentially ignored, costing the city billions of dollars in foregone revenue. In gentrifying areas like Williamsburg or Fort Greene in Brooklyn, the lag is more extreme, resulting in tax rates there that are a fraction of what they are elsewhere in the city. Just by owning a residential property in Park Slope, the mayor and his neighbors have been paying far less than their fair share.

Bill de Blasio swept into City Hall on a platform of addressing inequality, repeatedly invoking “a tale of two cities” divided between the haves and have-nots. Exemplifying his commitment to leveling the playing field was a pledge to raise taxes on the city’s wealthiest residents to fund an expansion of pre-kindergarten. Numerous other administration policies fit neatly within that broader vision.

At first glance, then, property taxes would be a natural target for the mayor. The status quo benefits wealthier homeowners while hurting renters, who pay disproportionately more in taxes even though they typically have lower incomes. The neighborhoods where the cap saves homeowners the most money, at least in absolute dollars, are those with the highest incomes. Wealthy Manhattan has the lowest effective tax rate of any of the five boroughs.

But despite the well-documented inequities in the way New York City collects property taxes, which make up the single largest and most stable portion of the city’s revenue stream, the issue seems to have failed to gain traction under the city leadership that took over last year.

To be fair, de Blasio has acknowledged the flaws. The mayor’s concerns were echoed by Finance Commissioner Jacques Jiha, who committed to conducting a review of the system when he was appointed last year, and the matter has been discussed internally at City Hall since the mayor took office in 2014.

Yet there is no evidence that the administration is taking any concrete steps to overhaul the system, and the mayor now appears to be steering clear of the issue, at least publicly. Wiley Norvell, a de Blasio spokesman, declined to comment for this story, saying in an email only that the questions posed by City & State had been answered by the city’s Finance Department—even though a Finance Department spokeswoman had declined to comment.

The New York City Council also made a short-lived promise to tackle the issue. In April of last year, Council Speaker Melissa Mark-Viverito called for a commission to look into the property tax system and propose reforms. The commission, she said, would “study the issue and bring people to the table and really take a look at whatever criticism, analysis and concerns that are being expressed publicly” and try to “figure out if there are ways” to improve or overhaul it. A spokesman said the commission would be established in the “near future.” A few months later in late June, the Council allocated $424,000 for the commission, specifying that it would start work in the fall of 2014 and release a final report within 18 months.

Nearly a year after announcing plans for a commission, its prospects have dimmed. Last month, Mark-Viverito said that the Council had not set up the commission and that it now is “not looking to convene it in the near future.” “At the moment we put together a commission to look at tax subsidies and economic subsidies on behalf of the city,” she said. “We have continued to have conversations on the property tax commission.” A spokesman for Mark-Viverito declined to offer further comment.

New York City Councilman Mark Weprin told City & State that he still hopes the city will convene the commission or otherwise take a comprehensive look at property taxes, but that he had not heard of any concrete plans.

“It’s the third rail of policy sometimes because there’s a lot of controversy and the money has to be made up often somewhere else and no one wants to see their taxes raised,” said Weprin, who wants to cap taxes for co-operatives and condominiums at the same level as single-family homes. “There’s a lot of other stuff going on and this is not an easy task. This is not something people get in a room and figure out in an hour. We need to get people to focus on this because people have been punting on this for far too long.”

The story behind the city’s property tax structure starts several decades ago with a man named Jerome Hellerstein. A law professor and attorney, Hellerstein filed an unusual lawsuit in the 1970s disputing an assessment on his family’s Fire Island bungalow. The property had been assessed at a fraction of its actual market value, and Hellerstein challenged the assessment on the grounds that it violated a centuries-old state law. Although a legal victory would mean paying higher taxes, he battled all the way to the state Court of Appeals, which ruled in the family’s favor in 1975. The broader implication was that municipalities all across the state had to assess properties at full market value.

The state Legislature, worried about making politically unpopular changes that could raise taxes for constituents, delayed taking legislative action to comply with the ruling. “The truth is today there is no plan for guaranteeing equity that is not going to cost somebody,” said then-Lt. Gov. Mario Cuomo in 1981. “Since nobody is sure whom a solution will hurt, everybody believes it’s going to cost them.”

Later that year, however, lawmakers forced through a compromise measure, overriding a veto from Gov. Hugh Carey. The bill, known as S7000A, created New York City’s property classification system, which provided a basis for what had previously been illegal discrepancies between different kinds of properties. The law also imposed the residential property assessment caps, which ultimately gave rise to greater inconsistency over the years.

In the end, however, state lawmakers actually did relatively little, taking pains to minimize changes in how the property tax burden is divided up. That meant that owners of commercial properties and apartment buildings in New York City continued to pay a larger share—an unequal distribution that continues to this day.

Over the years intermittent endeavors at reform have come and gone. The last serious effort came in 1993, when Mayor David Dinkins set up the Real Property Tax Reform Commission. Dinkins then lost his reelection bid to Rudy Giuliani, who went on to sign a 1997 measure providing an abatement for apartment owners. Otherwise, Giuliani largely ignored the commission’s work.

New York City’s property tax system itself is so opaque and complex that it would take substantial time, resources and political will to change it. The inconsistencies within Class 1 are only the tip of the iceberg—lawmakers have also taken aim at how co-op and condo owners are treated, and industry lobbyists gripe about the huge burden borne by power plants, factories, shopping malls and other commercial properties. Each part of the system is so intertwined and interdependent with the others that altering the rules for one property class impacts all the other classes, making it virtually impossible to resort to minor tweaks.

Despite a poor track record of reform, there is no shortage of proposals for how to fix the system. One unlikely scenario would be to impose a single tax rate across all classes, essentially doing away with the distinctions between commercial, utility and residential properties of any kind. An upside to the proposal would be a far more transparent and understandable system, as well as one that is fundamentally fair. The change would also be attractive to the business community, lowering their rates considerably and making New York more competitive with its neighbors. The downside is that homeowners would eventually see steep increases, a dicey proposition for elected officials.

Some proposals call for other re-groupings, such as classifying all residential properties together in one group and commercial properties in another. One variation would categorize properties either for personal use or investment. Another idea is to simply eliminate the various caps and phase-ins, replacing them with a “circuit-breaker” that reduces tax payments based on the ability to pay. Any significant reform would be all but certain to raise the rates for homeowners, so new safeguards would likely be built into any major overhaul.

If New York City officials do one day arrive at an agreement to revamp the system, other challenges would arise. Adjustments would have to be phased in, over multiple years, to avoid sharp increases. The city’s elected officials would have to persuade lawmakers in Albany to pass legislation to enact the changes. The mayor, like his predecessors, has experienced the difficulty of getting the governor and state Legislature to support his policies. And for de Blasio, other initiatives like universal prekindergarten, affordable housing and rent regulations have been higher priorities, and will continue to take much of his time, attention and political clout.

Gale Brewer, the Manhattan borough president, said that despite the obstacles, it is critical that the city and the state take action to address the inequality in the system—even though it would likely mean higher property tax bills for herself.

“It would be a huge effort,” Brewer said, “but it has to be done.”

This story was reported in partnership with PIX11’s Marvin Scott, who aired a version of it in late February. Reporting was also contributed by City & State’s Sarina Trangle.

Jon Lentz
is City & State’s editor-in-chief.