In the midst of the New York's budget woes, one bright note has been the steady revenue flowing from the city's biggest tax, its real property tax. According to the Independent Budget Office's March Analysis of the Mayor's Preliminary Budget for 2010, city property tax revenue will increase by 10 percent next year and an average of 4.1 percent annually over the next three years, 2011 to 2013. This includes the 7 percent increase in the tax rate, which became effective Jan. 1, 2009.
In the current fiscal year, property taxes are projected to be $14.4 billion, or about 41 percent of all city taxes. And while the IBO projects personal income taxes will fall next year by nearly 22 percent and business income taxes by 23 percent, property taxes will rise to $15.8 billion, making them account for more than 47 percent of all city tax revenues in 2010.
What explains such an increase at the same time both residential and commercial properties are so obviously declining in value?
While answering that question, the IBO report also discusses several continuing problems with the convoluted, often bizarre structure of the city's property tax system -- a system whose inequities and opaqueness the Bloomberg administration and the City Council have failed to address.
The IBO notes that inequities in tax burdens still exist among house and apartment owners. It notes that attempts to equalize tax burdens have created new inequities and that a promised city report on structural reform has been repeatedly postponed.
An increase in property tax revenues as the real estate market tumbles certainly presents an anomaly. The IBO projects that the total market value of all taxable city property for 2010 will decline by 2.2 percent from 2009, falling to $792.3 billion. From 2005 to 2008, total market value growth averaged 13.5 percent annually. Yet at the same time, the IBO projects that total property assessments in the city will increase by 5.5 percent to $140.3 million in 2010.
In most places, property tax assessments -- the value a tax assessor applies to a property -- are the same as market values. Not in New York City, where nearly $800 billion in market value translates into only $140 billion of taxable assessments. Because city and state legislators have wanted to protect certain classes of property owner -- particularly house owners -- city tax assessors have for over 25 years assessed different kinds of properties at different fractions of market value.
For instance, assessments of one, two and three-family houses are currently supposed to be 6 percent of market value (called an "assessment ratio"). In practice, however, given the complexities of the system, assessment ratios are well below 6 percent. In fact, the IBO suggests the median assessment ratio for houses in 2010 will actually be 4.4 percent. So a typical $400,000 house would be assessed at $17,600.
After the assessment is set, actual taxes for a property are then determined by applying a tax rate, say 15 percent, to the assessed value. In the case of the house worth $400,000 in the marketplace but with an assessed value of $17,600, the actual taxes would be $2,640.
Business properties, rental properties, and most coops and condos are assessed at 45 percent of market value, so that a $400,000 commercial property would be assessed at $180,000. Further complicating matters, co-ops and condos are assessed as if they were rental properties -- a bizarre formula that, as the IBO has pointed out, lowers their assessments and therefore their taxes.
In a 2006 report, Twenty-Five Years After S7000A: How Property Tax Burdens Have Shifted in New York City, the budget office pointed out the relatively high market values given coops and condos.
In New York City, increased market values are phased in over five years, rather than recorded immediately. This helps allow city property taxes to continue to rise in a down market. This phase-in (technically called a "pipeline") means that previous increases in value are still being reflected in the tax take even as values fall.
More specifically, the IBO points out that the 632,000 one, two and three-family houses in the city lost 5.0 percent in market value over the past year, but in 2010 will increase in assessment value by 4.3 percent, because the rising values of recent years have yet to be fully phased in. There is one limit on this though: Homeowner assessments are capped as well as phased in, which means some of the increased value may never be captured.
For the longer term, 2011 to 2013, the IBO projects the total assessed value of the 632,000 houses to continue increasing at an average rate of 1.4 percent a year, while their total market value continues to decline from a peak of $426.9 billion in 2008 to $333.9 billion in 2013, a 21.8 percent drop.
Commercial properties will also see the effects of the pipeline. From 2011 through 2013, their assessments will continue to rise at an annual average of 5.5 percent. At the same time their total market values will grow only by 0.4 percent in 2011 and decline the next two years by about 1 percent a year.
Political decisions have also affected property tax revenues. For one, effective Jan. 1, 2009, the mayor and the City Council canceled the 7 percent reduction in property taxes that had been enacted for fiscal year 2008 and continued through the first half of fiscal 2009. That move has increased revenues by $591 million in 2009 and will increase revenues by $1.3 billion in 2010 and by $1.5 billion in 2013.
For next year, the city also canceled the $400 rebate for house, coop and condo owners. Mayor Michael Bloomberg said in his November 2008 budget proposal that he wanted to cancel the rebate in this fiscal year, but the council rejected that idea and the rebates - totaling $256 million -- went out in December 2008. But the rebates are no longer in the city's current four-year plan, saving $256 million annually.
The IBO report also gives an update to the coop and condo abatement program, a 17.5 percent reduction in property taxes for most owners and 25 percent for a relatively few with very low assessments. This was established in 1997 as an attempt to reduce the disparities between the higher taxes paid by coop/condo owners vs. house owners.
The program has been extended several times, most recently in 2008 for four more years. According to the IBO, though, it does not address disparities among coop/condo owners and provides too little tax relief in some cases and too much in others. Further, the legislation mandated a city report that would address the inequities in the property tax on a more permanent basis, but that report has never been written, and the recent extension of the abatement program pushed the report's due date back to February 2011.
In its 2006 report, the IBO concluded that existing inequities in the system date back to a 1981 policy providing tax advantages to owners of private houses owners. Since then, the inequities have only increased. For instance, owners of one, two and three-family houses saw their tax burdens -- the amount of actual taxes paid as a percentage of full market value -- drop by 65 percent from 1984 to 2007, while the tax bill for coop and condo owners dropped also, by only by 29 percent and 28 percent, respectively.
On the other hand, tax burdens for commercial property increased by nearly 10 percent between 1985 and 1997. And on the rental side (about two thirds of New Yorkers are renters) elevator apartment buildings, where a majority of renters live, saw a 41 percent increase in tax burden during those same years.
The city's own January 2009 report on tentative property market values and assessments for 2010 highlights the ongoing disparities in tax treatment between house owners and other property owners. On average, house owners currently pay an effective tax rate of 0.53 percent. They pay an average of $3,230 in property taxes on average market values of $604,197.
At the same time, property taxes on the 1.3 million rental apartments in the city, with average market value of $128,532 per apartment, average property taxes of $3,913 per apartment, for an effective tax rate of 3.04 percent, nearly five times the that of house owners.
The city's statistics on coops and condos, however, highlight the bizarre nature of treating these homes for assessment purposes as if they were rental housing. According to the city's figures, coops have a very high effective tax rate -- 4.23 percent for coops and 4.02 percent for condos.
This is largely due to their artificially low market value. According to the city's January 2009 list of tentative market values and assessments for coops and condos, the 375,797 coops in the city, according, to the assessment methodology, have an average market value of $105,000; the 237,438 condos, an average market value of $96,133. In Manhattan, coops have an average market value of $172,759 and 152,680 condos an average market value of $120,981.
These citywide and Manhattan values have no relationship to the real world -- even during a recession. To take only one example, an April 2, 2009 report in the New York Times noted that even with a 20.9 percent decline from a year ago, existing coops and condos in Manhattan were selling at an average of $732,000 per apartment, with new ones going for a much higher price, in the first quarter of calendar 2009.
As this disconnect between assessments and market values shows, current procedures in the property tax system are far too complicated, hopelessly opaque and all too often inequitable. As property taxes, already by far the most important city tax source, account for a greater share of city tax revenues it would be in the public interest for those in charge - the mayor and the City Council - to pursue transparency and equity in the system. Unfortunately, no one seems interested.
Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.
Fiscal crises don't stop the legislative process.
Here is a sample of bills introduced at the City Council lately, some of which are destined to drift about in legislative purgatory. The council is ready to consider bills that include requiring food inspector grades be posted on street carts to mandating a super majority for tax hikes.
The city is eligible to receive millions -- if not billions -- of dollars in stimulus funding from the federal government as part of the stimulus package approved earlier this year. Already, the city has received $271 million in funding for transportation projects.
To keep track of it all, Councilmember Bill de Blasio, who is a candidate for public advocate, introduced legislation (Intro 957) that would create a Web site detailing all of the stimulus funds awarded to the city. Recipients of funds, according to the bill, would have to give monthly progress reports and detail how the project would increase economic activity in the city.
The site would be called SunlightNYC.
“Without accountability, we risk another AIG," said de Blasio in a prepared statement. "SunlightNYC will require all stimulus spending to be tracked and transparent. The public deserves to know how their money is being spent, down to the last dollar."
City agencies would also have to detail what projects did not receive federal funding that they applied for.
The Bloomberg administration has launched a stimulus tracker detailing the types of funding the city can receive, and the projects that have been awarded federal money.
The city already grades schools, why not pass or fail city food vendors? That is the question Councilmember Daniel Garodnick is asking.
Under legislation (Intro 958) introduced by Garodnick, the city would be required to give laminated grade placards to vendors 72 hours after inspections. Vendors would have to then post visibly on their carts at all times.
Under legislation (Intro 959) also introduced by Garodnick, any bank or individual issuing a foreclosure on a property with more than six units would have to notify all of the tenants of the building.
A similar bill introduced by Councilmember Thomas White (Intro 956) would require an entity notify tenants in buildings with between one and five units.
They would have to notify the tenants within ten days of the action, if not, the entity could be subject to a $1,000 fine per day.
In 2008, according to the council, bank robberies increased by 50 percent.
In hopes of curbing that trend, Councilmember Oliver Koppell introduced legislation (Intro 960) that would require all banks install bulletproof glass at teller windows. The legislation would not apply to atm machines.
If banks fail to comply, they could be fined up to $1,500 under the bill.
The council's Republican trio wants to curb taxes. Despite Democrats more than super majority over the governing body, members Jimmy Oddo, Vincent Ignizio and newcomer Eric Ulrich want to require an official super-majority for any approval of a tax hike.
The bill (Intro 961 ) would require any fee, tax increase or decrease be approved by two-thirds of the City Council instead of a simple majority. That means 34 votes in the affirmative instead of 26.
Councilmember Tony Avella, a mayoral candidate, introduced legislation (Intro 946) that would ban any City Council member salary increase within 30 days of a general, primary or special election. Any increase the council approves would not take effect until after the next general election, according to the bill.
Avella voted against the council's pay increase in 2006, which upped salaries from $90,000 to $112,500.
“The purpose of this legislation is to prevent the travesty that occurred in 2006 when the City Council voted itself a 25 percent pay increase," Avella said in a prepared statement. "It is sheer self interest when a legislative body votes to increase the salaries of its current members and only serves to further erode the public’s trust of the body as a whole and of each individual member."
After a drunken driver stole an idling car and killed two pedestrians in Middle Village, Queens in February, Councilmember Elizabeth Crowley set out to prevent it from happening again.
Crowley introduced legislation (Intro 947) that would increase the fine for leaving a vehicle unattended and idling from $5 to $250.
Though the city has had idling legislation in place since the 1970s, it has been sporadically enforced. Earlier this year, the council passed legislation to step up that enforcement by allowing sanitation and parks officials to issue tickets for idling. The council also recently passed legislation implementing stricter idling guidelines in school zones.
The city's fire commissioner has a lot of discretion. He or she can close firehouses -- if fiscal times require -- as he or she sees fit, but needs to notify the council.
Now, Councilmember de Blasio would also like to have the commissioner notify the council when ambulance routes are terminated permanently -- or for more than six months. The legislation ( Intro 949) would require the department notify the City Council 45 days before a route was eliminated. Ambulance services are within the fire department's budget.
The administration is proposing to do away with 30 EMS routes this budget cycle, which many council members were caught by surprise by.
Legislation ( Intro 953) introduced by Councilmember Peter Vallone would increase the city Police Department's mandatory retirement age from 63 to 65.
It's the tax season, and millions of working, poor New Yorkers are catching up on their bills. Whether it's paying for rent, childcare or groceries, tax time is an opportunity to reconcile past due notices, settle debts and start anew. While a range of tax credits targeting working poor tax filers has made the tax code a successful tool for alleviating poverty, the cyclical nature of the tax season creates a "feast or famine" condition for working poor families. That makes it difficult for these New Yorkers to achieve lasting financial security, but straightforward modifications to a popular and successful tax credit could change this for millions of people.
Working New Yorkers with low wages are eligible for the Earned Income Tax Credit (EITC), a refundable credit created by the Nixon administration as a type of "negative tax": If a household earns too little to incur a tax liability, the IRS sends the filer a refund. The Clinton administration seized the concept in an effort to "make work pay," and the EITC was vastly expanded. Now, families earning up to $41,646 can get a federal refund for as much as $4,824. With the New York State and New York City portions added, the credit can total up to $6,512.
These impressive figures make the credit a powerful anti-poverty tool. Each year, according to data from the Center on Budget and Policy Priorities, the credit lifts 5 million working poor people over the poverty line, and many of the beneficiaries are children.
EITC is also one of the most successful antipoverty tools. More people claim the EITC than any other publicly funded work support. About 85 percent of those eligible for the EITC claim it, compared to only 40 percent for food stamps (see related story) or 15 percent for childcare. While much of the successful uptake rate is because a routine filing of taxes -- all one has to do to get the credit -- carries less stigma than applying for Food Stamps, highly coordinated publicity campaigns have raised awareness.
Government and philanthropy also deserve credit for supporting large-scale free tax-preparation services, dramatically increasing the ability of working-poor families to access the EITC. By avoiding paid tax preparation services and costly refund anticipation loans, these New Yorkers also keep all the EITC dollars in their pocket.
But while the EITC combats poverty, it does not create financial security. The very purpose of filing taxes is to reconcile the income we earn over a year and the taxes withheld from our paychecks against the tax tables. However, poverty cannot be reconciled on a once-a-year balance sheet; it is a year-round condition. Not being able to make ends meet means that working-poor people are short on their rent in June, can't pay for school clothes in September or have to delay paying the babysitter in November. EITC does little to address financial insecurity, better one's ability to make ends meet or leave behind the paycheck to paycheck lifestyle.
A solution does exist, but barely. The Advance Earned Income Tax Credit (AEITC) distributes a portion of the EITC to a tax filer throughout the year in their earnings. For example, a parent with dependent children earning $11 an hour brings home about $1,665 every month. With the AEITC, that parent could bring home over $1,700, giving her a better shot at making ends meet. That same parent would still receive approximately $3,600 when she filed her taxes.
By adding a portion of the EITC to each paycheck, working poor New Yorkers would get a much needed raise. Research by the Center for an Urban Future and the Schuyler Center for Analysis and Advocacy indicates an overwhelming number of New Yorkers -- one in four -- do not have enough earnings to reach the threshold of a basic family budget. Without money to pay for necessities, they must make tradeoffs between rent, childcare or healthcare, and they cannot save for the future. These stark choices create "famine-like" conditions for families who work for low wages.
It is not surprising then that at tax time, the EITC becomes the "feast" by which families catch up on their obligations. In a study of low-income tax filers in North Carolina, the overwhelming majority (86 percent) said that most of their EITC would be spent on necessities. Another study revealed that half of the tax filers surveyed said that paying bills with their refund was their first priority, and for 83 percent of those surveyed, bill paying was among the top three priorities. It is clear that the EITC is a powerful tool for making ends meet.
Despite the fact that the AEITC can help alleviate this cyclical pressure by smoothing income throughout the year, the AEITC has the lowest uptake rate among all work supports: Less than 2 percent of those eligible for the credit apply for it.
Why does this solution barely exist? The most frequently cited reason is that many EITC recipients are unaware of the option. Tax filers also fear owing money to the Internal Revenue Service instead or do not let their employers know they are eligible.
Given the AEITC's ability to create financial security, and the immediate impact a universal raise would have on the economy, law and policy makers should consider modifying the AEITC program to increase participation. They could make the following changes:
Opt-Out Enrollment. Instead of allowing eligible tax filers to opt in to the AEITC, make it automatic so that filers who successfully claim the EITC every year receive payment year-round. Of course tax filers should have ready access to opt out at any time so they increase their tax-time refund.
Changing the default is a proven strategy for vastly improving enrollment rates. (Organ donation for European countries with opt-out policies maintain nearly universal participation rates, a stark contrast to countries with requirements to opt in.) The Obama administration is already considering an opt-out approach for low-income workers' retirement savings. A similar approach should be taken for the AEITC.
Seize the Opportunity. As the federal, state and local governments weigh strategies to help working-poor families cope with the recession, they will probably look to expansions of tax credits, including the EITC. This creates an excellent opportunity to expand the EITC automatically because, with an increase, working poor families would see more money in their paychecks and still maintain their tax-time refund at current levels. Effective April 1, workers will see about an extra $65 a month in their paychecks, a result of a payroll tax cut in Obama's economic recovery package. State and local governments could follow that lead by placing expansions to local EITCs directly into paychecks.
Marketing and Education. Community groups and advocates know how powerful a wide-scale marketing and educational campaign can be. In the last few years, many more working-poor New Yorkers have claimed the EITC and taken advantage of free tax preparation services because of highly coordinated public and private efforts. With the weight of government and philanthropic communities behind a similar AEITC effort, we could see similar accomplishments.
The EITC is a powerful elixir for working-poor New Yorkers who are struggling to make ends meet. The AEITC can ameliorate the "feast or famine" conditions working poor families face during the tax season by improving their financial security all year round.
Mae Watson Grote is the founder and executive director of The Financial Clinic, a nonprofit financial development firm that offers financial education, coaching and legal services to improve financial security for working poor New Yorkers. Through the United Way of New York City's MoneyUP Initiative, in which The Financial Clinic is the lead partner, the clinic prepared nearly 2,000 tax returns last year, securing $1.9 million in tax refunds and credits for working-poor New Yorkers while simultaneously providing free financial coaching services.