The Quest For Perfect Fairness And Justice In Property Taxation, New York City Edition

Before leaving my current round of posts on New York City real estate issues, it occurs to me to make some fun of one of the funniest policy issues in that arena, namely the question of “fairness” of the property tax system.

New York has a crazy patchwork of laws and rules for who pays how much property tax. Those laws and rules have arisen from a long history of the usual attempts to create perfect fairness and justice in the system. For a brief summary of how we got here, you can go to this link, which is to a recent (January 31) Advisory Commission Report on Property Tax Reform, and read pages 19-22. However, I wouldn’t really advise taking that time unless you own some property in New York City and want to learn how to best deal with the system.

For today’s purposes, here’s what’s important: When trying to create a perfectly “fair” property tax system, there are two main goals which are, unfortunately, completely inconsistent. Goal one is that in a “fair” system, properties of equal value “should” be taxed at equal amounts. Really, who could disagree with that? But goal number two is that in a “fair” system, people of modest incomes “should” not be driven from their homes by rapidly accelerating property tax bills.

If you think about these two”fairness” goals for a moment, you will quickly realize that they cannot both be achieved at the same time. The more you strive to achieve one of them, the farther you get from the other. The reason is that, over time, property values change, and at different rates in different neighborhoods. In some neighborhoods property values will increase rapidly; in other neighborhoods, values may increase more slowly, or even decline. If we pursue goal number one (equal taxation for properties of equal value), then people who bought homes in the increasing-value neighborhoods eventually end up getting smacked with huge property tax bills. Some of these people may by this time be retired, perhaps with enough money to pay the taxes they anticipated, but not remotely enough if the tax bill multiplies by ten. Others in this situation may be hard-working middle-class people, who however don’t earn nearly enough to pay upper-class-level property taxes. Are we to drive these people from their homes, where they may have lived for decades?

The people subject to massive and rapid property tax increases have a way of organizing politically to avoid being forced from their homes. It’s only fair! Next thing you know, the politicians have enacted various exemptions and caps on allowable tax increases, all of which seem perfectly reasonable at the time. Ten, twenty and thirty years later, you find some properties of equal market value paying property taxes that differ by a factor of ten or more. Meanwhile, commercial and rental properties — whose occupants don’t pay the taxes directly — inevitably end up getting stuck with a disproportionate share of the tax burden.

And it gets worse. Of course, the neighborhoods with the rapidly increasing property values got that way because somehow they came to be perceived as desirable by high income people. These people bid up the prices in these neighborhoods, and then move in and take advantage of capped tax rates that go up more slowly than values. If you collect the data on who is paying the lowest tax rates as a percentage of property value, there will be a plurality of high income people in there. Outrageous!

To me, the most fascinating part of this whole phenomenon is that nobody in the political class seems to be smart enough to figure out that they are pursuing two completely inconsistent goals that cannot be reconciled.

Recently the type of “unfairness” that has been in the news is the differential taxation of equal-valued properties. Owners of commercial and residential rental buildings have been making a big lobbying push, pointing out how the current system operates dramatically to their disadvantage. Since few voters particularly care about hardships suffered by landlords, these people have been clever enough to enlist as allies some groups whose members include homeowners in the neighborhoods where values have increased more slowly; and it won’t surprise you to learn that many of these people are racial and ethnic minorities. And thus we get a piece in the New York Times of February 24 with the following headline and sub-headline: “A New York Issue That Unites Landlords and the N.A.A.C.P.; A coalition of developers and civil rights activists is pushing hard for property tax changes in New York, but the obstacles are formidable.” Apparently, the lobbying effort has been going on for several years. The piece gives some details on the group that has been assembled:

Calls went out to a former city finance commissioner and a veteran Albany lobbyist. They hired the law firm of Latham & Watkins, where the former chief judge of New York State, Jonathan Lippman, is of counsel. They recruited overtaxed homeowners from each borough.

And yes, the N.A.A.C.P. has joined this lobbying effort:

“This is nothing new that just happened in the last two or three years,” said Hazel N. Dukes, president of the New York State chapter of the N.A.A.C.P. “But we weren’t getting any traction.”

The issue is coming to the fore now because the lobbying effort succeeded in getting Mayor de Blasio to appoint a Commission to consider property tax reform. That Commission came out with a big (72 page) Report on January 31 titled “Preliminary Report: New York City Advisory Commission on Property Tax Reform.” You can get a sense of the gist of the Report from this quote from a January 30 New York Times article on its issuance:

Tax System Favoring Central Park Co-ops and Brooklyn Brownstones Could End . . . . New York City’s antiquated method of calculating property taxes has long allowed owners of multimillion-dollar brownstones in Brooklyn and high-rise co-ops by Central Park to pay less in taxes than working-class homeowners in the South Bronx, relative to the value of their properties.

It seems that the landlord/N.A.A.C.P. lobbyists had the inside track on this one; so of course, it’s all about the “unfairness” of differential taxation of equal-value properties, without any mention or recognition that there is another and inconsistent “fairness” goal that we have also been trying to pursue at the same time. The Report itself recommends valuing all properties at fair market value, but then goes on with a series of very complicated things that I would suggest have almost no chance of getting through our legislative sausage grinder.

Do we have any hope of actually achieving something representing “fairness” in the property tax system? To aid your consideration of that question, I would suggest going back and looking at Monday’s post on the subject of the Penn South Houses. What do think would be a “fair” property tax for this complex of 2,820 “affordable” apartments in the otherwise very pricey Chelsea neighborhood of Manhattan? I don’t have an exact figure for the current deeply discounted property taxes that they pay, but it’s a safe bet that it’s under $5 million per year total for the whole complex. If they get valued at “fair market value” and then pay the standard tax rate on that, that’s going to be about $15,000 - $20,000 annual property tax per apartment, or more like $50 million annually for the complex. Their taxes would multiply by ten or more. But wait a minute! Aren’t these highly deserving “middle income” people? To get in to the complex, they have agreed not to sell their apartments for more than what they bought them for. They suffered a twenty year waiting list for the chance to get in. They relied on the low property taxes as part of the deal. If you multiply their property taxes by 10, you will drive the majority of them out of their homes. Alternatively, you might want to take account of the fact that they got a deep discount on their purchase price; or that they get to live in a fancy neighborhood; or that they are almost all white and many are socialists. And as a percentage of market value, they are paying a small fraction of the tax rates paid by the black homeowners in Harlem. Consider whatever factors you want. What is “fair”?