March 10 (Bloomberg) -- Mayor Bill de Blasio’s vision of raising income taxes to pay for pre-kindergarten and after-school programs would generate $530 million a year. By revamping property taxes -- and taking on some of New York’s richest residents -- he could get eight times as much.
De Blasio, a self-described progressive Democrat, was elected on a promise to reduce income inequality in a city where the richest 1 percent took home almost 40 percent of all earnings in 2012. New York’s property-tax structure does little to reduce that divide and may even widen it.
The real estate levy, the city’s biggest revenue source, uses a methodology that undervalues condominiums on Park Avenue, Central Park West and other enclaves of the wealthy; limits tax increases for owners in brownstone neighborhoods such as Greenwich Village and Park Slope; and shifts the heaviest burden to renters, many of them poor.
While almost half of all city property value belongs to owners of one-, two- and three-family houses, they pay only 15 percent of the $21 billion in annual real-estate taxes, according to the Citizens Budget Commission, a business-backed watchdog. Making the system fairer could raise more than $4 billion a year, the New York-based group said.
“The city’s property tax is complicated and riddled with inequities,” said Carol Kellermann, president of the CBC, which researches the finances and management of the city and state. “We can generate more revenue from this tax simply by making it more transparent and equitable, without having to raise rates.”
For example, a four-bedroom penthouse condo at 15 Central Park West with two fireplaces and a library sold for $88 million in 2012. That gave it an effective tax rate, or the levy divided by the property’s market value, of 0.07 percent. In Brooklyn’s Crown Heights, a less affluent neighborhood, a house that sold for $989,000 in August had an effective rate of 0.6 percent.
The city average for homeowners is 0.8 percent, according to a report prepared for the CBC by Andrew Hayashi, a professor at the University of Virginia’s School of Law in Charlottesville. Rental buildings with more than 11 units bear the brunt, paying 4.72 percent.
New York City’s property-tax structure traces its roots to 1975, when the state’s highest court ruled that the decades-long practice of allowing assessors latitude in valuations was illegal. The court said favorable treatment of houses must end, and that all real estate should be assessed at 100 percent of market value.
After six years of delays and complaints from homeowners, the state legislature in 1981 passed a new law that essentially allowed all municipalities to continue using the old method.
For New York City and neighboring Nassau County, the law created four classes of property -- one- to three-family homes, apartment buildings, utilities and commercial property -- with each taxed under different formulas.
The intent was to lock in the percentage of total property-tax levy paid by each class at the 1981 level. That gave homeowners an advantage because historically they had received bigger breaks than other properties.
For homeowners, assessment increases were capped at 6 percent in a single year and 20 percent over five, regardless of rising market value. The state also required the city to value co-ops and condos, in which residents own their units or shares in the building, like less-valuable rental property.
In the ensuing decades, the rules and New York’s soaring real-estate values created wide disparities between market and assessed value. The system is now tilted even more against large rental buildings than it was 1981. In 1996, in response to complaints from condos and co-ops, the state passed an abatement program reducing their taxes by as much as 25 percent.
Critics say the system benefits wealthy homeowners at the expense of poor and middle-class renters, and prevents the city from reaping billions in tax revenue. The city’s Rent Guidelines Board estimates that property taxes represent 30 percent of an apartment building’s operating costs, which are passed through to tenants.
Three decades after the law was put in place, New York is a much different place. Then, the city was emerging from a brush with bankruptcy, subways were covered with graffiti and crime was rampant. In the 1970s, New York lost 10 percent of its population, census data show.
In the next 20 years, as President Ronald Reagan lowered income- and capital-gains taxes and bankers like Michael Milken and Lewis Ranieri pioneered ways to package corporate and mortgage debt, employment on Wall Street rose to a peak of 200,000 in 2000.
Wall Street bonuses hit a record $34.3 billion in 2006, compared with about $2.1 billion in 1990, according to the state comptroller’s office. Average wages in the securities industry rose more than 10-fold to $360,000 in 2012 from 1981, fueling the real-estate boom.
The distortions in the property-tax system are greatest at highest strata.
For instance, when former Citigroup Inc. Chairman Sanford Weill sold that 6,744-square-foot condo at 15 Central Park West for $88 million, the city valued it at only $2.8 million. The entire 201-unit building, which is also home to rock musician Sting and hedge fund manager Daniel Loeb, was valued at $242.6 million.
Weill’s real-estate taxes were $143,513, according to a June 2011 tax statement. The bill was cut in half to $59,490 because residents of 15 Central Park West also receive tax abatements under a program where developers subsidize affordable housing.
Weill didn’t respond to a telephone message requesting comment that was left with an assistant.
Central Park West owners aren’t alone in reaping benefits from the system. A 2006 report by the Independent Budget Office, a nonpartisan fiscal watchdog funded by the city, found that the average co-op and condo on the Upper West Side of Manhattan was undervalued by 81 percent.
By contrast, New York’s large rental properties are subject to the second-highest taxes among apartment buildings in the 50 largest U.S. cities, according to a 2011 report by New York University’s Furman Center for Real Estate and Urban Policy.
Using a single tax rate and market values would result in a levy cut for such buildings averaging $1,237 to $1,854 per apartment per year, the IBO said its 2006 report.
Condos and co-ops in large buildings would face average increases of $428 to $751 per unit, while homeowners would see bills rise by $2,039.
De Blasio’s View
De Blasio, 52, is open to studying changes to the system, said Marti Adams, a spokeswoman.
“It is clear that this is an issue, particularly in neighborhoods where property values have not reflected the gains the city has made in the decades since Albany created the rules,” Adams said.
Rosa Rodriguez, a single mother and nurse who lives in an apartment in Queens, and Ernest Robinson, a renter in the Bronx, aren’t waiting for government officials to act.
Last month, they filed a class-action lawsuit in state Supreme Court in Manhattan claiming that black and Hispanic renters bear the burden of higher real-estate taxes. The plaintiffs are seeking a court order forcing the city and state to equalize the system.
“Why should those that make less pay more?” said Rodriguez, 40, who grew up in the Williamsburg section of Brooklyn. She said neighbors had to move because they couldn’t keep up with rising rents.
Blacks and Hispanics are more likely to live in rental buildings with 11 or more units, according to the lawsuit.
Jasmine Carayol, a spokeswoman for the city Law Department, and Geoff Gloak, a spokesman for the state Taxation and Finance Department, said they were reviewing the case.
The assessment caps in the 1981 law are why Brooklyn’s Park Slope, where de Blasio and many other white-collar professionals live, has the lowest effective tax rate among all of New York's 59 community districts, according to the Furman Center. The average price of a home there has increased 89 percent in the past decade, according to New York-based real-estate brokerage MNS.
In December 2012, a two-family house on Eighth Street in Park Slope sold for $1.3 million, according to city Finance Department records. The effective tax rate is 0.2 percent.
About three miles (five kilometers) away, David Katz, a mechanical engineer, paid $989,000 in August for a house in Crown Heights, a less-gentrified neighborhood. He pays an effective rate of 0.6 percent.
“It doesn’t make sense,” said Katz. “I don’t get it.”
The biggest benefits flow to homeowners in neighborhoods with rapidly rising property values, such as Manhattan’s Greenwich Village, or gentrifying Park Slope and Fort Greene in Brooklyn. Many homeowners in those places have the means to pay more, said George Sweeting, the IBO’s deputy director.
The owner of a Greenwich Village townhouse would have paid as much as $40,000 more in taxes last year without the caps, according to Hayashi, the University of Virginia professor.
Removing caps on homeowners would raise $936 million in the next fiscal year, according to the Citizens Budget Commission. Removing caps and other breaks for all properties would yield more than $4 billion in 2015.
Revamping the structure absent a court order would be difficult. State legislators and the governor would have to approve it, and owners of homes, condos and co-ops -- who benefit from the system and are more likely to vote than renters -- form a potent opposition.
“That makes the politics difficult,” said Mark Willis, a research fellow at the Furman Center.
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