COMPLEX. INEQUITABLE. OPAQUE. CONVOLUTED. ARCANE.
“While New York City boasts innumerable characteristics of a vibrant metropolis, a fair, simple, and transparent property tax system is not among them.”
The NYC Advisory Commission on Property Tax Reform released its final report, The Road to Reform: A Blueprint for Modernizing and Simplifying New York City’s Property Tax System, on December 29, 2021, during Bill de Blasio’s last week as mayor. Though no system is perfect, the Commission put years of effort into producing a roadmap to improve the system. Reform is now in policymakers’ hands to write the laws. With a new mayor, governor, city council, and state legislative session, anything (or nothing?) is possible. But wholesale tax reductions are not in the cards because the Commission’s recommendations are net revenue neutral.
Though small residential properties would be most impacted, the Commission had a few global recommendations:
- Assess at 100% of market value. End fractional assessments which are currently 6% of tax class 1 and 45% of tax class 2 and 4 market value. A $1M property would be taxed at $1M, not $450k or $60k.
- Fix the tax rate proportions for five years. Changes in tax rates must be applied proportionally so the city can’t favor one class. Also, no mid-year changes. Finally, study the sales-ratios every five years to equalize the market values amongst the four tax classes.
- Mandatory comprehensive review of the system every 10 years.
- No relief for renters through the property tax system.
- eep all exemption and abatement programs, including 421-a, ICAP, J-51, ICIP, etc., except end the Co-op & Condo Abatement.
Large Rentals and Commercial Properties. These are tax class 2 residential rental properties with more than 10 units, and tax class 4 commercial properties including offices, hotels, retail, etc. They suffer from unfavorable tax treatment: they pay 58% of the taxes but comprise only 45% of value. The Commission recommends no substantive change, thus perpetuating the unfairness. Apparently, the unfairness is by design. The Commission feels that these taxes aren’t excessive on their own, they only appear excessively high due to the preferential treatment given to small residential properties. Additionally, the value of these properties is in “flux” due to the pandemic, so any change would be premature.
- Continue to value current use by capitalizing the net income.
- Study the pandemic’s impact on property value.
- Continue to tax commercial properties at a median effective tax rate of 1.38%, which is 67% higher than small residential properties.
- Continue to tax residential properties at a median effective tax rate of 1.53%, which is 86% higher than small residential properties.
- No change in the overall tax levy.
Small Residential Properties. The Commission’s recommendation would redistribute $1.8B of taxes amongst small residential properties (under 11 units). These properties are currently tax class 1 one- to three-family homes, tax class 2A & 2B rentals with 4- to 10-units, and tax class 2 & 2C residential co-ops and condos. They receive a tax preference: they pay 33% of taxes but comprise 51% of value. The Commission recommends keeping this preferential tax treatment, and proposes the following tax changes to be phased-in over five years, but accelerated upon sale:
- Structural changes
- Merge into one tax class – the small residential properties or homeowners tax class, if you will. Most likely, tax class 2A, 2B, 2C, and residential co-ops and condos would move into existing tax class 1.
- Value using sales-based market value, like DOF currently does for tax class 1 properties. DOF would stop valuing residential co-ops and condos using comparable rental value, and small rentals based on estimate rent. Ask: how much might the property sell for? Assessments would rise and fall based on estimated sales prices rather than hypothetical rents.
- Inflict transitional assessments. This would end the 6%/20% and 8%/30% limitations on assessment increases for tax classes 1, 2A, 2B, and 2C. Formerly capped small residential properties would get to be bewildered by changes in assessment phasing-in 20% per year over five years, just like tax classes 2 and 4 currently get confused by.
- After implementing these structural changes alone, all property taxes would be 0.814% of market value. That’s $8,140 of property tax for every $1M of market value. (Prior to existing exemptions and abatements.)
- Homeowner relief programs to reward primary residency
- Partial homestead exemption. No, you don’t get this exemption for settling land in the American West. The Commission’s alternative proposals: (1) A flat rate up to 20% regardless of market value, or (2) a graduated marginal rate of 30% for the first $500k of value, where the effective rate decreases as the property value increases, and a 0% marginal rate for value over $5M. In either alternative, the exemption starts to phases-out when the primary resident owners’ income exceeds $375k, and hits 0% when income exceeds $500k. In this case, you can be too rich or too thin.
- Circuit breaker abatement. You don’t get this for finding your electric circuit breaker panel in the dark. It’s an abatement up to $10,000 for primary resident owners with incomes under $90,550. The benefit percentage starts phasing-out once income exceeds $58,000.
- End the Co-op and Condo Tax Abatement because it would be superfluous.
- After implementing these homeowner relief programs on top of the structural changes, property taxes would top-out at 0.94% to 0.96% of market value for non-primary residences or primary residences worth over $5M or where the owners’ incomes exceed $500k. That’s a maximum of $9,600 of property tax for every $1M of market value. (Prior to existing exemptions and abatements.)