When Mayor Michael Bloomberg said in his victory speech that he believed his re-election sent a message “that you can make the tough decisions and be re-elected, as long as they are the right decisions," it seems clear what tough/right decisions he was talking about. At the top of the list has to be his tax hikes.
The boldest move of his first term was proposing and selling a $3 billion tax package, the key to resolving a $6 billion budget deficit. The package was a burden for most New Yorkers, but the public seems to have accepted his argument that this is an expensive city, and taxes are basic to essential services.
That is why there is hope among fiscal experts of both liberal and conservative perspectives that Bloomberg will devote his second term to reforming the city’s tax system, particularly its incomprehensible property tax, its roller-coaster personal income tax rates, and its mostly hidden corporate tax breaks.
In New York’s think-tank world, the conservative Manhattan Institute’s E. J. McMahon’s new study, “Pricing the â€Luxury Product’: NYC Taxes Under Mayor Bloomberg,” urges restraint on city personal income tax rates and calls for a city/state commission to reform the city’s property tax system.
The progressive Fiscal Policy Institute’s James Parrott, in a new study, “Hudson Yards Tax Breaks, Unwarranted and Fiscally Irresponsible,” analyzes an acceleration of corporate tax abatement and argues against long-term tax breaks for West Side developers. (Juan Gonzalez provided a short review of the study in the Daily News.)
The Property Tax
E. J. McMahon believes reform should begin with, if not end with, the city’ s property tax system, which produces nearly 40 percent of all city tax revenues. At a Baruch College School of Public Affairs seminar on the property tax held October 31, Independent Budget Office Deputy Director George Sweeting released new data that underscore the inequities and what McMahon calls the “Byzantine” complexities of the current system.
The current problems began with 1981 state legislation that set up the current system, which essentially protects city homeowners. But one kind of owner (1-, 2- and 3-family house owners) has a lower burden than most coop and condo owners. Commercial owners have a much higher burden, and renters, who pay a substantial share of their landlords’ property tax in their rent, have almost as high a burden as commercial owners.
So, for example, according to the new data from the Independent Budget Office, on a piece of property worth $300,000 â€“ if the property is a one-family house, the typical 2005 property taxes would be $1,602; if it’s a co-op, the typical property taxes would be $2,772; but if it's a rental property, even though it's worth exactly the same amount as the private home or the coop, the typical property taxes would be nearly eight or five times higher, $13,050.
These inequities are, in large part, created by a bizarre assessment process. In most localities, a property assessment is based on a property’s market value, and the tax bill is determined by simply multiplying that assessment by the current tax rate. Not in New York City.
Here assessments are only a fraction of market value. Assessments of houses, for instance, are targeted at six percent of market value. Thus a $300,000 house would be assessed at $18,000. Assessments of commercial and rental apartment buildings, on the other hand, are set at 45 percent of market value. A building with a $10 million market value would have an assessment of $4.5 million. Co-ops and condos are assessed as if they were rental apartment buildings, creating even more confusion.
To further protect homeowners, there are caps on annual assessments -- no more than six percent for house owners in one year, or 20 percent over five years. There are slightly higher caps for co-op and condo owners.
Recent data from the city’s finance department show the effects. A house with a market value of $350,000 saw its market value rise by 76 percent from fiscal year 2001 to 2006, but the assessed value rose by only 20 percent. The effect of the residential caps is that much of the increase in market value in owner-units is never “captured” in the assessment, thus reducing owner tax bills over the long run as well as short run.
The McMahon report says, “While all cities have real property taxes, few if any could rival the complexity, inequity, and opacity of New York’s system.”
Absent the overall reform that McMahon urges, attempts to fix property tax inequities have only created new problems. For instance, in order to lower the burdens of coop and condo owners, the mayor and city council in 1997 introduced a property tax abatement for them (since extended to 2008). The abatement ranges from 17.5 to 25 percent of the property tax bill.
The new Independent Budget Office data show that because of the convoluted assessment practices, over 78,000 co-op and condo units actually had lower tax burdens than the typical house owner before the abatement. And the abatement has moved several thousand more units into this privileged house owner tax status. In dollar terms, it means that nearly $100 million of the annual abatement is a “waste,” because it goes beyond the original equalizing goal.
Personal Income Tax
The second most important city tax â€“ now representing about 22 percent of city tax revenues â€“ is the personal income tax.
Looking to Bloomberg’s second term, McMahon and the Manhattan Institute fear an extension of the city’s temporary top personal income tax rates for the city’s highest earners (over $150,000), which under current law expire December 31, 2005. They fear many of the city’s millionaires will flee the city to avoid the 4.45 percent top tax rate â€“ which if extended beyond the end of this year would bring in approximately $500 million.
But a similar top 4.45 percent personal income tax rate was in effect through most of the 1990s, after being introduced by former Mayor David Dinkins and Council Speaker Peter Vallone during a recession and fiscal crisis in 1990. The fear of high-end earners flight seems exaggerated, since that rate apparently had no negative impact on the booming city economy of the late 1990s, and in fact, helped create huge Rudy Giuliani budget surpluses.
A city tax commission could take a look at the roller-coaster changes in personal income tax rates over the last 15 years and test McMahon’s dubious claim that the early 1990s tax increases triggered the loss of 300,000 jobs in the city. As McMahon suggests, personal income tax revenues can be volatile because of economic ups and downs, but that does not mean the rates can’t be set efficiently and progressively.
Commercial Tax Breaks
James Parrott’s study of commercial tax breaks â€“ which mayoral administrations sell as “economic development” -- is revealing: In the four years after 2000, these increased over 72 percent, from $334 million to over $575 million. Parrott argues for a review of the rationales for these breaks, many of which were arguably unnecessary, especially in Manhattan; the developments would have gone ahead without deep city subsidies.
Parrott also pulls the curtain on what’s happening in Manhattan’s West Side (Hudson Yards) development area. The city’s financing of the infrastructure that will support this development â€“ the extension of the #7 subway line is the biggest piece â€“ is not yet completely clear. The mayor and the city council agreed last winter to use city funds for the start-up of the financing, but long-term financing is based on using new property tax revenues generated from the development area.
The problem is that the mayor wants to use a pre-determined PILOT â€“ a payment-in-lieu-of-taxes â€“ for the whole development period. A PILOT is usually determined by a negotiation on a specific property between the city and a developer that sets a less-than-full-property tax payment. (The Port Authority, for instance, paid the city a PILOT for the World Trade Center that was about 25 percent of what it would have been had the property been fully taxed.)
But here, the city proposes, through its obscure Industrial Development Agency, to establish what is called a Hudson Yards Uniform Tax Exemption Policy that Parrott says “will likely permanently institutionalize the granting of across-the-board tax breaks for any commercial development in New York City.” The immediate Hudson Yards effect would be to grant a “uniform” break for all Yards developers through at least the year 2040.
Public economic development investments provide incentives for private development. Why assume decades in advance that further incentives will be needed at all, let alone at some arbitrary and uniform tax-cut level set in 2005? Parrott argues that what “gets locked in with this ill-advised economic policy are the inequities that result when large companies receive sizable property and other tax breaks that shift the city’s tax burden to smaller businesses and other taxpayers.”
The Industrial Development Agency will, according to Good Jobs New York (a joint venture of the Fiscal Policy Institute and Good Jobs First which monitors the secretive processes of New York’s public authorities), in the near future hold a hearing to determine just what this important uniform exemption will be. Will it be a 50 percent discount? A 20 percent discount? The long-term costs â€“ through lost property tax revenues â€“ could be in the hundreds of millions of dollars.
Another obscure public authority â€“ the Hudson Yards Infrastructure Corporation â€“ is the financing mechanism that controls the borrowing that will pay for the Hudson Yards infrastructure. It has a mayoral-dominated six-member board: the city comptroller, the speaker of the city council, three mayoral appointees, and one independent member, appointed by the mayor. They will have to approve any financial plan.
A City Tax Commission?
Before the city goes ahead with this dubious financing mechanism, there ought to be a serious public review of its long-term economic, revenue, and equity consequences. A city tax commission would be the perfect vehicle.
A city tax commission could take the long, comprehensive view. It could examine the overall impact of all revenue policies and recommend changes that would -- among other goals -- make the property tax fairer, simpler, and more efficient; stabilize and make more progressive the personal income tax; and analyze the revenue as well as economic impact of current economic development policy.
Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.