Manhattan Contrarian Quiz: Achieving Perfect Fairness In A Property Tax System

Every so often here at Manhattan Contrarian, we have a Quiz. For example, you may remember the big Climate Tipping Points Quiz back in October 2018, or the Racist And Sexist Remarks And Slurs Quiz from August 2018, or even the What Is Science Quiz from April 2017. That last one had only one question. Today’s Quiz is again a one-question test. The question is, How do you achieve perfect fairness in a property tax system? We will consider specifically the property tax system in New York City — which is widely criticized for being both convoluted and also greatly “unfair” — and examine two very different recent demands to fix the “unfairness.” Your task will be to determine which of the two demands will produce success in fixing the unfairness. Three other possible answers to the Quiz are “both,” “neither” and “it is not possible to have a perfectly fair property tax system.”

Before getting to the two demands, perhaps I should mention that the convolutedness of NYC’s current property tax system is very much the result of dozens if not hundreds of tweaks along the way, each seemingly intended to increase the “fairness” of the system as perceived by some particular bureaucrat or group of bureaucrats at some point in time. And yet the complaints only increase. Always, the complainer can point to some respect in which his or her treatment by the system is obviously and grossly “unfair.” This must be fixed immediately!

Our first demand originates with a group called Tax Equity Now NY LLC. TEN claims to be a group including both property owners and renters in New York City. They have picked up as pro bono legal counsel a team from Latham & Watkins headed by a guy named Jonathan Lippman, ex-Chief Judge of the New York Court of Appeals. In other words, some serious do-gooders. Back in April 2017, TEN actually filed a Complaint setting forth their demand and the basis for it. And the demand from TEN has been much more recently in the news, because their case only survived a motion to dismiss in the court system in September 2018, and the case has also inspired some kind of property tax fairness commission from Mayor de Blasio that was holding hearings through the fall of 2018.

So what is the big unfairness of the New York City property tax system according to Tax Equity Now? From their Complaint:

New York City’s property tax system . . . provides for “radically different tax treatment of equally valuable properties, depending on the use of the property and the form in which it is owned.” . . . [T]he City’s property tax scheme makes no attempt, rationally and neutrally, to determine each property’s “fair and realistic” market value or to require each property owner to “contribute equitably to the public fisc.” Instead, properties are taxed at artificial and largely arbitrary effective rates fundamentally divorced from the actual value of real property in the City. This results in drastic and unjustifiable interclass and intraclass disparities that discriminate based on neighborhood, wealth, race, and political power. . . . Absurdities abound. “[H]igh-end properties tend to pay probably lower effective tax rates than low-end properties,” such that “the highest value properties in the city [are] probably being subsidized by everyone else.”

Now really, that’s rather shocking. Charts appearing in the Complaint show disparities between “effective tax rates” (ratio of annual property tax bill to the property’s current market value) on single family homes in New York City ranging from under 0.5% in Manhattan (clearly the most valuable properties) to well over 1% in the outer boroughs; and effective tax rates on rental apartment buildings going up to in excess of 3% in the outer boroughs. Those are quite some disparities. Can we all at least agree that nothing could really be more unfair than the “high-end properties” paying lower effective tax rates than the “low-end properties”? For their relief the Tax Equity Now plaintiffs demand that the entire New York City property tax system be enjoined and restructured by the court system.

But then we must consider demand number two. This demand is set forth in the current issue of one of our local community newspapers called West View News. In fact, the issue is so new that they don’t appear to have posted the articles yet on their website. Presumably that will occur in a day or two. Meanwhile, I’ll have to type out some of the content. The lead article in this issue is headlined “Eviction by Property Tax.” The article contains a lengthy excerpt from a letter received from a long-time denizen of the neighborhood, identified only as a “Charles Street resident,” setting forth her heart-rending story. Excerpt:

A Charles Street resident, who wished to remain anonymous, confided, “The receipt of my latest Property Value notice made it clear that I will be driven out of the house I’ve lived in for nearly 50 years.” Retired, in her mid-70’s, she received an appraisal from the city in January that claimed her property had risen in value by 67% over the course of a year. She is now scrambling, desperately attempting to scrape together enough funds to pay a property tax bill of nearly $51,000.

The sympathies of the West View News people — good Greenwich Village progressives all — have clearly gone out to this nice old neighbor about to get pushed out of her home of 50 years. And, as much as you might think the progressives are crazy on many issues, who could disagree with them on this one? Really, could anyone be so cruel and heartless as to jack up property taxes so fast and so high as to throw a seventy-something old lady out of her long-time home? Clearly, to make the system fair, we need to slow down rapid tax increases for ongoing residents, if not stop the increases entirely.

OK, it’s time to cast your vote: Is demand number one (equal taxes for equal value properties) the right way to get rid of the unfairness, or is the right answer to follow demand number two (severely limited tax increases for ongoing residents)? Remember, you can also vote for “both,” “neither,” and “it’s not possible to have a perfectly fair property tax system.”

Perhaps I should give you some of the backstory on the West View News article — none of which, by the way, appears in the article itself. Charles Street in Greenwich Village has what are today some of the most valuable townhouses in New York City. In the 1960s and 70s, when this neighborhood was nice but somewhat seedy and out of fashion, you could buy one of these houses for around $100,000 to $150,000. Today, the same house would go for $10 - 15 million. Some might even go for $20 million. On the same block as the publisher of West View News (and, I would bet, his letter writer) live, for example, Sarah Jessica Parker and her husband Matthew Broderick. Even the $51,000 tax bill represents at most about 0.5% of market value of the letter-writer’s property, and more likely something in the range of 0.2 - 0.3%. The proposed tax increase may seem outrageous to the owner, but relative to all properties in the city, the effective tax rate is a bargain. If this house were taxed at the city-wide average effective tax rate for Class 1 properties (one-to-three family houses), its tax bill would be more like $150,000 per year.

The problem here is really inherent in any property tax system. Market values change over time. In some neighborhoods, values go up, and in others they go down. Sometimes the changes can be very rapid, even though they might not seem that rapid as they are occurring. But yes, some property values in the downtown area of New York have multiplied by a factor of 100 over the course of about 40 years. For various reasons — one of which is loud complaints from not-wealthy people hit with massive property tax increases, based on nothing more than having bought property in an area that increased in value over time — it is not possible for assessments to keep up with value changes. That principle applies both to increasing and decreasing property values. Result: in any given snapshot of effective tax rates, it will appear that the most valuable properties are undertaxed, and less valuable properties are overtaxed. If you want to find really high effective tax rates, go to a city like Detroit or Cleveland where property values have declined greatly over time.

Once again, we are failing miserably at achieving perfect justice and fairness, and all our tweaks to the system don’t ever seem to make it any fairer. Incidentally, the article in West View News adjacent to the one about the overtaxed “Charles Street resident” advocates for implementing a “single payer” healthcare system in New York State. Cost estimates for that range up to around $100 billion for year. Where in the world will all that money come from? Maybe by imposing a “fair” $150,000 annual tax bill on this Charles Street resident, and on all those similarly situated in newly-pricey Manhattan neighborhoods?