The Real Estate Board of New York to the New York City Advisory Commission on Property Tax Reform

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In our comments to this Commission in 2018, REBNY noted that New York City’s real property tax system has been flawed since it was first imposed in 1983.[1] That statement remains true today and fixing this failed system has only been made more urgent by the COVID-19 pandemic and resulting economic crisis.

As this Commission convenes hearings to consider its preliminary recommendations, it is important to be mindful that the context in which we find ourselves today is very different than when this Commission was convened or even when it issued its preliminary recommendations. Indeed, the task before all of us now is to develop reforms that not only create a more equitable and economically rational property tax structure but also support the economic recovery of the city and its residents.

That should start with a closer examination of the way New York City taxes commercial buildings. The pandemic has impacted all New York businesses, and that includes owners of office buildings. During the pandemic, occupancy of commercial office buildings plummeted. For months, occupancy in many buildings hovered around five percent or less.[2] In the first quarter of 2021, Cushman & Wakefield reports that in Manhattan the office vacancy rate climbed to the highest level since 1994, sublease supply reached the highest amount ever recorded, and asking rents falling.[3]

It has been well documented that commercial buildings face a significant burden under the existing property tax system. For instance, in an analysis of 2017 data, the Citizens Budget Commission wrote, “Commercial property is also subject to a relatively high average ETR, 3.87 percent; as a result, commercial properties account for fully 42 percent of the property tax levy, despite comprising less than 20 percent of total market value in fiscal year 2017.” [4] Unfortunately, the preliminary report includes no reforms to address the outsized tax burden paid by commercial buildings. Addressing this issue is more important than ever in light of the pandemic.

One prudent step that should be taken is the elimination of the Commercial Rent Tax. The Commercial Rent Tax generally applies a 3.9 percent tax to commercial tenants taking space south of 96th Street in Manhattan with annual rents in excess of $250,000. This tax punishes businesses who locate in a certain segment of Manhattan. Given the critical and urgent need to help current and future tenants in this part of the city, it is time to eliminate this unfair, duplicative tax.

The COVID-19 pandemic has also made New York City’s longstanding economic, racial, and health disparities even more clear. Perhaps not surprisingly, research from The Furman Center shows the impact of the pandemic falling most heavily on renters.[5]

Unfortunately, the preliminary report fundamentally failed to address the fact that the current property tax system heavily taxes those who rent apartments. We are a city of renters and yet too many New Yorkers are facing challenges paying their rent, which is in part caused by the fact that the property tax system imposes an unfair and misplaced burden on rental buildings. As the Commission’s own data shows, large rental buildings generally pay an effective tax rate that is 80 percent higher than single family homes. Citizens Budget Commission estimates the effective tax rate for Class 1 properties at 0.7 percent per $100 of market value but 3.7 percent for Class 2 properties.[6]

It is generally understood that the cost of property taxes is passed on to tenants in the form of higher rent payments, which explains why for the last two decades rent growth has generally tracked property tax growth.[7] With property taxes generally equal to about one-fifth of typical rent payments, reducing the property tax burden on renters is a critical component of addressing the city’s affordability challenges. [8] The Commission must put forward more direct proposals to reduce the burden the current system poses on those who rent apartments in New York City.

Finally, one way to help address the economic crisis stemming from the COVID-19 pandemic is to reduce the overall property tax burden facing New Yorkers. According to the Citizens Budget Commission, real property tax revenue rose from about $23 billion to almost $30 billion between 2016 and 2020. Over the same period, the property tax levy rose over 30 percent.[9]

With this in mind, it is notable that unlike the rest of the state where there is a 2 percent cap on property tax growth, the City is not subject to such a cap. Mechanisms like a property tax cap must be considered as part of any proposal to improve the City’s overall property tax system.

This kind of step would also be important to control the growth in the City’s budget. The pandemic and resulting economic crisis also made clear that the dramatic and unsustainable growth in the City’s budget poses serious risks. Had the federal government not provided significant financial assistance to the City (directly and indirectly), the City would have been facing significant budget challenges that would have necessitated significant cuts in services and layoffs and/or benefit reductions for City workers.[10] While that federal aid did arrive, however, the budget remains out of balance in future years with one-time federal infusions supporting new and recurring City expenses.[11]

Finally, it is important to note that these Commission recommendations are similar to recommendations that were made in 1993 at the end of Mayor Dinkins' tenure as Mayor. Those changes were never implemented. Similarly, 9 of the 10 recommendations made by this Commission require State legislative changes. Ultimately to get needed property tax changes adopted, this Commission should support the lawsuit brought to challenge the property tax structure and the request that the Justice Department commence an action under the Fair Housing Act.