New York City’s announcement that it will pursue a property tax overhaul to settle a lawsuit from the city’s housing coalition is a milestone in a years-long battle. But it’s only the first step in what’s likely to be a lengthy and politically contentious process.
Whether meaningful changes can survive the legal, political, and fiscal obstacles that lie ahead will depend on navigating the widely disparate interests of stakeholders—and it seems disposed to leave key constituencies out of the discussion.
The expected settlement framework draw on recommendations made by the 2021 Property Tax Reform Advisory Commission. Among the most significant is the creation of a new tax class for small residential properties and changes to the valuation of condominiums and cooperatives so that assessments more closely reflect true market values.
The city’s own recommendations have been dormant for half a decade, which suggests challenges ahead.
Transformation is less about lowering taxes than redistributing tax burdens more fairly. For instance, because the city’s current valuation methods for condos and co-ops effectively disregards sales value, the proposed changes could lead to much higher assessments for luxury apartments, some of which tend to be occupied by politically influential taxpayers.
The most likely winners of a court settlement that would track the city’s own recommendations would be homeowners in the Bronx and Staten Island, along with some in eastern Queens and southern Brooklyn. Groups in these locations have long contended that they bear a disproportionately high effective tax burden relative to property values.
The city’s system of capping taxable value increases has created inequities between wealthier neighborhoods that have greater appreciation in real estate value and those with slower growth. This means homeowners may pay similarly sized tax bills on properties that differ dramatically in value.
The anticipated changes would target owners of high-value Manhattan condos and co-ops, along with high-value brownstones and townhouses. Under the current system, many of these properties are taxed at values substantially below market.
Any significant shifting of tax burdens would have a long-term valuation impact in the real estate market. Luxury homes facing higher carrying costs would fetch lower sale prices. Property taxes are a carrying cost of real estate. If they increase for these properties, their sale prices (values) will respond by decreasing. In other words, the more they cost to own, the less a buyer will pay.
The same dynamic would apply to other types of real estate that legislators decide should bear a greater tax burden. A tax overhaul undoubtedly would spur widespread and potentially unpredictable market changes.
The current discussion omits vast segments of the city’s real estate. Much of the focus centers on owners of one-, two-, and three-family homes, condominiums, and cooperatives. Yet rental buildings, which are a substantial portion of the city’s housing stock, have long been the subject of debate over inequities in the system, and those concerns could remain unresolved.
Renters indirectly bear the cost of property taxes through their rents, which are at the heart of the city’s debate over affordability. Yet the tax settlement doesn’t focus on landlords.
Still further removed from any proposed reforms are owners of office, retail, industrial, and other commercial properties who pay among the highest effective US tax rates and generally face an arcane system for addressing their grievances that provides little relief.
Even if policymakers can agree on the broad outlines of changes, transitioning from the current system to a new one without causing significant disruption to many property owners would be difficult. Significant increases in assessed value or tax liability for some could produce considerable political resistance.
Lawmakers are likely to consider so-called “circuit breaker” mechanisms such as phased implementation schedules, assessment caps, tax caps, or targeted relief provisions designed to soften the impacts. Those measures—each a challenge to design—create an inherent tension in the reform effort itself. The more protection that is layered onto the system, the longer it will take to correct inequities.
The greatest obstacle to change, even with a settlement in principle, is Albany, because nearly every major reform proposal requires state legislative action. Many of the structural features of New York City’s property tax regime are products of state law.
A settlement framework would depend on the cooperation of Gov. Kathy Hochul (D) and the legislature, which respectively would need to balance competing interests from homeowners, apartment owners, and renters; businesses that rely on real estate; and the city government. Property tax reform has been a perennial subject of debate among city and state lawmakers. And despite the release of the 2021 advisory commission report and the introduction of related bills, state lawmakers have enacted no legislation.
In the current court discussions, the plaintiffs indicated a willingness to settle if the city has a set timeline to propose legislation to Albany, recognizing there is no way to compel state lawmakers to pass the required measures. Securing political consensus on a path forward is essential to meaningful progress in the wake of a possible court settlement.
Tax advisers should expect a lengthy period of wait-and-see before acting. Owners of high-value condominiums, cooperatives, and appreciating residential properties are the most likely to face a substantially different tax environment if an overhaul becomes reality.
This article does not necessarily reflect the opinion of Bloomberg Industry Group Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
David C. Wilkes is property tax and valuation strategy partner in Cullen and Dykman’s corporate department in New York.
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