Real Estate Board of New York, Statement Before the New York City Advisory Commission on Property Tax Reform, Public Hearing in Manhattan

New York City’s real property tax system has been flawed since its inception in 1983 and subsequent amendments have further burdened residential rental property and commercial property, particularly office buildings.

 

BACKGROUND

In a landmark 1975 case, Hellerstein v. the Town of Islip, the New York State Court of Appeals ruled that arbitrary fractional assessments violated state law requiring that all property must be assessed at full market value.

In 1981, over a gubernatorial veto, the State legislature enacted a new real property tax system, (in what is commonly called “S7000A”, after the bill which became law) repealed the full market value standard and codified the historical fractional assessment inequities into the new four class system.

As a result, income producing properties, particularly residential rental property in Class 2 and all of Class 4 properties, that had been taxed a higher percentage of their property’s market value than single family homeowners, would continue to pay a disproportionate share of the tax levy in the new system.

S7000A permitted local elected officials (City Council) to shift five percent of a class’ share of the tax levy to the other classes.  From 1983 when S700A took effect until 1991 when this authority was eliminated, local elected officials in New York City shifted the tax levy away from Class One (single-family homeowners) and on to the income-producing properties, especially Class Four.  During this eight-year period, Class One property’s share of the tax levy declined from 14.09 percent of the tax levy to 10.92 percent; Class Four’s share increased from 41.56 percent to 52.98 percent.   This favorable treatment of Class One properties was occurring as single family homes saw double digit increases in the average sales price, according to an analysis by the New York City Department of Finance.

One potentially redeeming aspect of S7000A was its call to readjust in 1989 the base proportions for class shares to reflect current market values.  Instead of proceeding with this equitable change, the state legislature amended the law and adopted the class shares used in 1991 which preserved the increased class shares for Class Four and reductions in the share for Class One noted above.

The State legislature also removed the City Council’s authority to adjust Class shares.  In its place, beginning in 1992, the legislature placed a five percent cap on the increase to a class’ share as a result of equalization, or market value, growth.

Over the last 27 years in which the five percent cap has been in place, state elected officials at the request of the city has lowered the cap in 22 of those years to 2.75 percent or less.  In four years, the cap was lowered to zero.  In each instance, this annual reduction in the cap increased Class Four’s share of the tax levy despite a decline in its market value share of real property.  (Residential rental property frequently saw its share of the tax levy rise even though its market value share declined.)  Class One properties were always the beneficiary of the reduction in the class share cap.

 

CURRENT CONDITIONS OF RESIDENTIAL RENTAL PROPERTY AND CLASS FOUR

These historical and structural inequities, the regular legislative actions which add to the real property tax burden of income producing property and the relentless rise in real property taxes has pushed the real property tax burden on residential rental properties and Class Four properties to the breaking point and well beyond the tax burden of other major cities around the country, according to a report by the Lincoln Land Institute.

Reviewing a randomly selected sample of our members property—residential rental and office buildings—real property taxes for:

  • Manhattan office buildings range from 27 to 32.7 percent of their gross income;
  • Residential rental buildings have a range of 28.6 to 37.3 percent of their gross income.

There was a time not long ago that this measure was roughly 20 percent for these properties.

Looked at another way using current market values (not the city’s under estimated market values) real property taxes on:

  • Office buildings are paying real property taxes of between 2.33 to 2.75 percent of their current fair market value;
  • Residential rental buildings are between 2.02 to 2.17 percent;
  • In comparison, Class One property which the city values based on sales is taxed at .77 percent of their market value.

The significantly greater tax burden on income producing property is consistent with the findings of the IBO study of effective tax rates for these classes of real properties.

 

CONCLUSION

The historic and structural inequities in the property tax system, the regular amendments to shift the tax burden on income producing property has resulted in commercial property and residential rental property having the highest effective tax rate of all the property classes.  This real property tax levy burden is excessive especially given the many other sources of revenue from real estate (transfer tax, mortgage recording tax, hotel tax and commercial rent tax) and other taxes (sales, personal income, and corporate).

A fairer, clearer and simpler real property tax system should tax all real estate uniformly at their fair market value and establish guidelines to ensure that the burden on any individual property is not excessive or confiscatory.

We must end the complicated, confusing and misleading process of claiming we are not raising taxes because we have maintained the average tax rate for all property.  How can this statement be true given the annual shifting of the real property tax burden on to Class Four and frequently on residential rental buildings.

Lastly, we should not let all the inequities, complexities and opaqueness of the current system distract us from an issue which has led all owners, including those significantly benefiting from the current system to complain loudly and often about their real estate taxes, namely that the real property tax burden is excessive.

In New York State, except in New York City, the levy cap on the real property tax has been an effective tool to rein in the unrestrained growth of the real property tax.

As part of property tax reform, New York should establish parameters based on the value of property (such as taxes being no more than one percent of its sales-based value) as well as revenue for income producing property (such as taxes not exceeding 20 percent of a property’s gross income) that ensure that the tax burdens are fair for all properties.  As you can see from the analysis above, income producing property is paying taxes well beyond these reasonable standards while Class One continues to be well below that threshold.

A fair real property tax system requires not only an equitable distribution of the levy but an equitable burden based on value and ability to pay.

Contact:
Michael Slattery
Senior Vice President
REBNY   
212-616-5207
mslattery@rebny.com