The Manhattan Institute’s
Center for Rethinking Development
Ideas that shape the city’s planning, housing, and development
A Monthly Newsletter by Julia Vitullo-Martin, MI Senior Fellow

Mayor Bloomberg Rethinks a Misguided Tax

Julia Vitullo-Martin, November 2003

What a mess! In its search for new revenues to balance the city’s 2004 budget, the City Council last winter came up with what seemed to be a no-lose idea: impose a 25% tax surcharge on any absentee landlord who owned but did not occupy any one-to-three-family home. After all, the longstanding and deliberate policy by which the city undertaxes single-family homes in relation to multiple dwellings and commercial real estate is meant to favor homeowners. Indeed, traditional homes constitute 46% of New York City’s property value but pay only 14% of its property taxes.

Why, the reasoning went, should this benefit be extended to landlords who live elsewhere? Who likes absentee landlords anyway? Mayor Bloomberg signed the surcharge into law in July.

IBO weighs in. The first salvo in the defense of absentee landlords—often called investors in other cities—came from the Independent Budget Office. In August it issued a report whose title announced its argument: “Unintended Consequences: New Absentee Landlord Tax Will Hit Poorer Neighborhoods Hardest.”

Such landlords are not evenly distributed throughout the city, said IBO. While only one percent of their buildings are in Manhattan, 80% are concentrated in black and Latino, low-income and working-class areas in Brooklyn and Queens. The neighborhoods of East New York, Bedford Stuyvesant, and Bensonhurst—all in Brooklyn—have the most, with at least 3,400 properties each.

With fewer than six units, these properties are not covered by rent regulations. Landlords would be free to pass on the surcharge—roughly $570 per building—to their tenants. After the IBO report, advocates for low-income tenants also urged rethinking the tax. The Pratt Area Community Council and the East New York Nehemiah Homeowners Association, for example, held a rally on City Hall steps to urge that a “slumlord surcharge” be imposed instead on “verified” bad landlords.

Enraged homeowners speak up. But the second salvo came from enraged homeowners. It turns out that the tax is ludicrously difficult to administer. Because city officials have no way of identifying who lives in a one-to-three-family dwelling, they have to rely solely on what they’re told by taxpayers. The only exception has been the relatively few homeowners who had already claimed owner-occupancy in filling out a STAR exemption form, requesting the $185 rebate provided by the state’s School Tax Relief Program.

As the Staten Island Advance reported in late September, the commissioner of the Department of Housing Preservation and Development had sent letters to Staten Island homeowners warning them to register their buildings with the agency. Some 7,400 Islanders had been ordered to record their multiple dwellings as part of an HPD “registration amnesty program”—or face fines of up to $500. Irate homeowners were told they had to take a copy of their certificate of occupancy to the local HPD office at Borough Hall to prove they owned a one- or two-family house. The Staten Island borough president made HPD back down.

At the time, very few people understood what was happening. HPD’s commissioner apologized publicly, though in fact she was simply trying to solve an immense administrative problem. A quirk in the City Council’s legislation forces owners of one-, two- and three-family homes to prove they live in their homes. If they fail to fill out the city’s “Application to be Excluded from the Absentee Landlord Surcharge,” they must pay the surcharge and then apply for reimbursement. Homeowners called this the city’s “guilty until proven innocent” policy.

This was all too much for Mayor Bloomberg, who had the good sense to back off from his previous support, saying that he had always regarded the surcharge as “ill-advised.”

Stark attacks. In front of a hostile City Council hearing on Nov. 6, Finance Commissioner Martha Stark called the surcharge “a terrible mistake that can only be corrected by immediately repealing the law.” Not one to beat around the bush, Stark said the surcharge was bad tax policy, unnecessary, and heavy-handed. She urged its repeal.

She also gave the council a brief lecture on tax distortions. One stated rationale for the surcharge, she said, is to level the tax burden between one-to-three family homes (Class 1) and 4-6 unit apartment buildings (Class 2A). But the actual difference between the two classes is fairly small—less than 20% across the city. What is significant is the variation by neighborhood. In some neighborhoods, the effective tax rate on two-to-three family homes, which are supposed to be assessed at 8% of market value, is higher than on Class 2A properties, which should be assessed at 45%. The discrepancy stems from the city’s system of valuation. The city values homes based on sales but apartment buildings based on income.

In Astoria, Queens, for example, the effective tax rate on small apartment buildings is 7.4% less than the rate paid by homes. The surcharge will have the unintended effect, said Commissioner Stark, of making that gap larger.

Surcharge is just too cumbersome. But the real brouhaha from City Hall’s point of view comes with administration of the surcharge. It cannot easily be imposed because the city has no idea of who does and doesn’t live in the targeted homes. An absentee landlord is exempt from the surcharge if the house is occupied by the owner’s mother, father, son, or daughter—even if they pay rent. The landlord is also exempt if the house is vacant, or if the house is occupied by a non-family member who does not pay rent. “There is virtually no way to verify whether an owner rents to his mother, father, son or daughter without questioning neighbors,” testified Commissioner Stark, raising the Big Brother specter that inevitably unnerves New Yorkers. Just to rub it in a little more, she added, “How are we supposed to determine whether someone’s mother lives in an owner’s house, as opposed to a stepmother? In the latter scenario, the owner is considered an absentee landlord who is liable for the surcharge. How does one prove that his tenant is his mother? Should we collect birth certificates?”

Further, since non-income producing property is exempt, the Department of Finance would have to verify rental income to impose the surcharge. Short of spying on people, said the commissioner, her department has no way to verify that someone is getting income from a Class 1 property.

A non-chastened City Council nonetheless intends to pursue the surcharge. As Brooklyn Councilmember Lew Fidler said during the hearing, “I am not backing away from the absentee landlord surcharge and I don’t think this body should either. It is the first step in making the real property tax in this city a little fairer. And all I have heard from the administration on this subject has been nonsense and gobbledygook that has confused and frightened taxpayers.”

While the City Council has relatively few good-government groups on their side, Henry Stern’s NYCivic had earlier supported the surcharge, writing in late May that “not every non-resident landlord is a rogue. There are perfectly legitimate reasons not to live in a property you own. And it is better that property be wisely used than lie idle. But people who do this should pay their fair share of taxes.”

How a bad idea got this far. It didn’t look like that bad of an idea when it was first proposed in 1993 in quite a different form by Corey Bearak, president of the North Bellerose Civic Association in eastern Queens. Urging the Giuliani administration “to formally embrace the traditional preference for owner-occupied housing units,” Bearak proposed a homestead exemption for Class 1 properties. In an October analysis for Fernando Ferrer’s Drum Major Institute, he argues that, while not a substitute for property tax reform, a homestead would provide “relief to overburdened working and middle-income households.”

Bellerose is a middle-class neighborhood whose residents were rightly worried about middle-class flight in the early 1990s. New York City’s relatively low property tax gave its homeowners a competitive edge, especially in areas that border Nassau County, such as Cambria Heights and Floral Park.

Property tax hits the poor. Absentee landlord surcharge aside, the underlying property tax has tended to discriminate against poor and working-class neighborhoods, as the New York Public Interest Research Group pointed out in July. A NYPIRG survey of more than 600,000 properties concluded that homeowners in poor neighborhoods paid more than twice as much in property taxes as owners of similar houses in more affluent neighborhoods.

The culprit is a 22-year-old tax calculation system that has led to unequal assessments in a third of city neighborhoods. The most over-assessed areas are in northern Manhattan, the northern Bronx, Staten Island, and Brooklyn’s Coney Island and Bergen Beach. Annual taxes on a $300,000 single-family house in Brooklyn’s upscale Park Slope, for example, are about $1,066. A similar house in Brooklyn’s working class Bergen Beach pays $2,600.

The surcharge on absentee landlords applies disproportionately to property in over-assessed areas, exacerbating the problems of poor neighborhoods—many of which are just making a comeback now.

City Council speaker Gifford Miller won the Nov. 6 round when the council voted 40 to 2 to postpone billing the surcharge, amended with a simplified exemption process, until March. (Only Republican Dennis Gallagher from Queens and Democrat Madeline Provenzano from the Bronx voted no.) The mayor has neither signed nor vetoed the bill. At a minimum, the surcharge’s $44 million will be part of the next set of budget actions.

The acrimony is intense. Council Speaker Gifford Miller blames the Finance Department for having failed to identify which landlords must pay the tax nearly a year after Mayor Bloomberg put it in his budget. “Tax collection is not rocket science,” he said.

But Mayor Bloomberg seems to be winning the bout. Commissioner Stark is hoping that the surcharge will be repealed before March, and she knows how to land a punch. Testifying in front of the Council she pointed out that Gifford Miller’s Upper East Side district has the third-lowest number of homeowners likely to be affected by the tax.

The administration will lobby over the next few months to repeal the tax. If it fails, the Department of Finance will start sending out the surcharge bills on Mar. 15. What’s more, the surcharge isn’t the only City Council activity on the property tax. On Nov. 19, the City Council made a “tax adjustment,” that’s going to reap another $244 million from owners of one-, two- or three-family homes.

November 2003
Department of Finance studies and releases
Independent Budget Office’s “Unintended Consequences”
Gotham Gazette’s council hearings summaries
Another point of view: Drum Major Institute
New York Public Interest Research Group survey
Gotham Gazette’s Community Gazettes–best source on web for following each council district
“I have a lot of respect for this body but the law proposed today does not address any of the fatal flaws in the original absentee landlord surcharge law and is unnecessary, heavy-handed, will cause even more confusion, and will jeopardize the $44 million that the council hopes to generate.”
Martha E. Stark, Commissioner, Department of Finance, testifying before the City Council’s Committee on Finance, Nov. 6, 2003
“Every member of this council has a better use for $44 million than to give it back to people who get a break that frankly they don’t deserve.”
G. Oliver Koppell, Councilmember, the Bronx