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Event Transcript
April 22, 2009


What's Wrong with New York City's Property Tax? And How We Can Fix It


HOPE COHEN: Good morning, everyone, and welcome to "What's Wrong With New York City's Property Tax? And How We Can Fix It." I'm Hope Cohen. I'm the deputy director of the Center for Re-thinking Development at the Manhattan Institute where CRD works to foster a new understanding of the importance of development to our city's wellbeing. We focus on areas such as zoning and planning, housing issues, and the infrastructure needed to make development successful.

In research reports, opinion pieces and forums like this one, we put forward concrete, feasible proposals for reform. We're here today sponsoring this program and distributing "Assessing New York City's Property Tax—Yet Again" because along with a range of analysts, academics, commentators and good government groups, we are concerned about the implications for the city's future of the inequities, imbalances, complexities, and, yes, sheer wackiness of the property tax.

For decades a broad consensus has accepted overtaxing certain real property so that other property can receive a break. Technological advances and improved management techniques have helped correct some disparities, but other inequities have worsened over the last 20 years or so.

When rivers of revenue are sloshing around the system, nobody seems to care, but when the streams start drying up as they have over the past few months, property owners start noticing and complaining about the deep preferences built into the system to protect single-family homes and classic co-ops. Maybe this time renters will notice as well.

So, let's start with Rosemary Scanlon presenting some key findings and observations from the last few months of examining the checkered past and present of New York City's property tax. Finance Commissioner Martha Stark is here to provide the facts of the case. I'm sure REBNY President Steve Spinola is eager to discuss the injustices to commercial real estate exacerbated in these troubled economic times. And the Manhattan Institute's own E.J. McMahon will bat clean-up with his special insights into the New York-Albany political and fiscal axis. We'll get to what I anticipate is going to be a very animated Q&A as quickly as possible. I'm going to introduce Rosemary now, and I'll introduce the other panelists as each of them speaks, so that you can get a further flavor for what they bring to the table today.

Rosemary is anc associate professor of economics at the Schack Institute of Real Estate at NYU. She is also a consultant in urban and regional economics. In the late 1990s, she was a visiting research fellow at the London School of Economics, where she served as project director of the London-New York Economic Study. Before that, she was the New York State deputy comptroller for the City of New York, monitoring the budget and the economy of the city. But she is probably best known in the city for her tenure as chief economist at the Port Authority from 1983 to 1993, during which she initiated a wide range of research programs on the economy and demography and commissioned economic impact analyses of capital investment projects. She does a wide range of research reports even now. She has a major art study out, was part of the Downtown 20/20 team, and you'll see out on the table her last project for the Center for Rethinking Development on the cost of construction in New York City.

ROSEMARY SCANLON: Thank you, Hope, and good morning, everyone. I should tell you that when Hope and I began to look at the current issues surrounding the property tax burdens in New York City, this first necessitated a search of the history of the studies and many appointed commissions over time. And I found myself going back and plunging into some very old and dusty documents at the municipal library with yellowing pages from the pre-digital age trying to catch up. There were days when I thought the ghost of Dick Netzer was sitting over my shoulder saying, Rosemary, how come you're looking at all my work over the period of time? Because there are notable documents from those years reflecting the many concerns and the public outcry that New Yorkers had over periods of time say in the 1970s and even going back to the '60s. There was, of course, Dick Netzer's very famous and well-known study from 1980, just at the end of 1980. There was again the NYU, the Wagner School study. Then there was the NYPIRG—the New York Public Interest Research Group—study of 1981 called "City of Unequal Neighbors," which was a powerful little study at the time. All of this was leading up to the passage, the very turbulent passage of what we call S7000A in December of 1981, which effectively has set the whole system of class shares and the statutory framework under which we all work under today or live under today.

Then in 1993 the Grayson Commission, which had been commissioned at the time by then Mayor Denkins and by the City Council issued its report (also in December) that recommended the replacement of the system of class shares to allow the assessment of co-ops and condos at true market value. Back in the 7000A report co-ops and condos had been classed with rental buildings. But that didn't happen. What we got instead was the co-op/condo abatement that went into place in about 1998. Subsequent developments in that history of time have been captured very well in an excellent report by the city's Independent Budget Office in December of 2006 called "25 Years After S7000A." I think if there was one comment I would make to anybody else in the future who does a study on property tax I would say don't publish it in December, especially December 31st, since nobody ever seems to read it then. So, that's why Hope and I are coming out in the springtime with this.

So what's the story in 2009? I mean it was evident to us as we poured over all the numbers in the documents that the earlier problems of inequity within the classes, the four class shares, had been largely remedied through much better assessment practices and the full-scale computerization of records that has taken place. And these days there's much more information on the Department of Finance web site on what's going on in all classes of building. So, that's a major step forward. But the limitations imposed by the 1981 law have compressed against rapid changes in market values over the last two decades and especially in this past decade as prices of buildings and houses, and co-ops have gone up so much so that the inequalities and the disparities have clearly increased. We've got glaring inequalities and this peculiar assessment of taxes on co-ops and condos, which were laid down in that 1981 law that result in taxes as we've noted for you in our bulletin that where taxes and some of the priciest co-ops—prewar co-ops—can be lower than even those on a brownstone in Park Slope or on a single-family house in Queens. For example, let me just take you through a couple of the slides that are in our document, but this first slide shows the tax rate and the assessment ratio starting this year in January of 2009. Then the second slide here, and I'll take a minute to just point out some of the issues here. For example, in Class 1—these are all small one to three-family homes and small condo and co-op units—their portion of the citywide tax levy was 15% in fiscal year 2008. But their portion of the citywide market value was 54%. That's Class 1. Class 2, which has rental buildings as well as co-op and condos, have 22% of citywide market value as we begin this or end of fiscal 2008 and yet their portion of the citywide tax levy was 37%. This is heavily on rental buildings as opposed to the co-op and condo issue. Class 3, which are utilities, account for, as you can see here, 2% of citywide market value and yet pay 7% of the total tax levy. Then Class 4, which is all of our commercial buildings in the city including the major office buildings in Manhattan and in Brooklyn as well, account for 22% of citywide market value but take 41% of tax levy. So, that's the situation as 2008 ended. I think what was surprising to us as we were looking at all of this and talking to people in our interviews is how little protest there is and has been and sort of public outcry to these disparities whereas the past history has been punctuated by great public outcry. I mean there was a little bit of fuss over it this year when the $400 property tax rebate was rescinded in January, but there doesn't seem to be any real fuss about all of this that's going on.

So, you know, we also found ourselves asking why is there no protest from renters? Is it just that renters don't know what they pay, what proportion of their monthly rental payment is in taxes from their building? So, in looking ahead at the forecast for the next few years of the city's budget cycle, one of the things that becomes obvious is that the dependence on the property tax will heighten. Let me take you through two or three slides here. These next slides are taken from the March report on the city's financial condition from the State Comptroller's office in New York—the New York City oversight office. This data is from the Department of Finance, and this is their estimate of what will happen to market values as we go through this year, their forecast for 2010 as well as assessed values, which, you know, takes slower and roll into the average through this period of time. So, clearly property values are going down, and then if we could have the next slide, again this is the situation with Manhattan's commercial property. Again, the dots are the city forecast here and from Office of Management and Budget but asking rents are going down and the vacancy rate as we know is going up at the moment. The forecast is that it will come back down within the four-year financial plan period, but clearly here is the forecast for the real property tax revenues. This takes us back to 1997, and we can see how these have grown through the completed year of fiscal 2008. The red part of the bar of the forecast reflects what happened in the beginning of this year when the $400 tax rebate was rescinded, etc., and it's carried through the full fiscal years in the forecast. So, that's property tax revenues, and here again this is OSDC's forecast based on the city numbers of what happens to all of the red and the non-property taxes. These are the economy-sensitive taxes, personal, corporate income, etc., and where the blue part is the property tax. So, as we go through this forecast period, the property tax will move from just under 34% of all taxes up to 43% by 2013. So, perhaps as this all happens maybe this will—plus all of you being here today—will start to focus more of the attention back to what's happening between classes. I am pleased now to turn the program over to my colleagues, and we'll all be happy to take questions later.

HOPE COHEN: Thanks, Rosemary. Just one note of clarification before I introduce Commissioner Stark, and that's that the change in January was actually the moving up of a 7%—there had been a 7% reduction that was supposed to go away on July 1st of this year, and it was moved up to January 1st. There was a whole different set of issues around the $400 rebate that happened in the fall. The Commissioner will correct me if I'm wrong, but the $400 rebate is gone, gone, gone, but there's this other 7% thing that happened.

So, our next speaker is Martha Stark, New York City's finance commissioner, who leads the agency charged with helping people and businesses pay the right amount of city fees and taxes on time. The Department of Finance collects and safeguards $22 billion in annual tax revenues, protects records for more than a million properties, conducts thousands of tax audits and adjudicates more than a million parking tickets each year. Martha Stark has been commissioner since February 2002 and has worked quite hard to transform Finance into a more efficient and transparent organization. I think Rosemary mentioned how much more information is available and understandable on the Finance Department web site now. Commissioner Stark has implemented an agency-wide performance management system that enables the agency to measure results, use data to make decisions and gather regular feedback from customers and employees. Under her leadership the wait times for agency help line, document recording and parking ticket hearings have all been reduced, and they have worked hard to simplify the billing process, administer a successful business tax amnesty program and the now defunct $400 property tax rebate. Her work at Finance builds on a previous successful tenure in Finance in the early 1990s. She held a range of senior positions there and worked on a number of projects including responsibility for a comprehensive analysis of the city's real property tax structure. Commissioner Stark really is a scholar of the property tax as well as its chief collector. She has written extensively about it and taught budget and finance courses at Hunter and business Law at Baruch. And I have to say that when Rosemary and I embarked on this project a few months back, we were lucky enough to have essentially a private seminar from Commissioner Stark on the property tax, which was just incredibly valuable as we started to do this project.

She's also been a White House fellow. She's also worked in the Manhattan Borough President's Office, and she's also worked at NYU, her alma mater, from where she has bachelor and law degrees. Commissioner Stark.

COMMISSIONER STARK: I started all of that when I was two. Thank you, Hope, for that introduction. It's great to see everyone here this morning. I thought I would do a couple of things. It's a pleasure to be at the Manhattan Institute to discuss what actually is one of my favorite topics, the property tax. I want to thank the Manhattan Institute for convening such a distinguished panel. I thought I would do several things. I basically have been allotted ten minutes. I may take twelve because Rosemary was a little shorter than she would otherwise have been. I'm not going to make any recommendations during my presentation. I want to be clear about that. I'm making no recommendations during my presentation. I actually don't know what the answers are because how we fix the property tax needs to be done with policy makers who agree on a set of principles and the public participating based on their understanding and how they'd like those principles to play out. So, I am making no recommendations. I will probably say that about five more times during this presentation because if the press is here, I'm certain they'll say I made a recommendation—and I didn't. And I expect you all to confirm that I did not.
What I'm hoping to do is present data about the current state of the property tax, and at the end of my presentation, I lay out several thoughts for consideration and hope that if not today that some time in the near future we're able to actually discuss these considerations that I think are important if we actually want a property tax for the city that it can rely on in the future.

So, let me take you through a couple of things. The property tax in context, Rosemary talked a little bit about this, I'm using fiscal year 2008 data for most of this since that fiscal year is completed. We're in the middle of 2009, but if you take a look, the city's budget in fiscal 2008 totaled about $62 billion. And the property tax was 21% of the city's budget, more than $13 billion. Steve Spinola and I were just discussing revenue versus the levy. The levy is actually a little bit higher, but the revenue numbers, which is after you net out a bunch of things, is a little bit lower. And so you'll see these numbers.
I just want to point out that other revenue tied to the real estate market represented another 5% of the budget, or $3.1 billion. The reason why I put those numbers in there is because as the real estate market goes, we have to be mindful of those other taxes as well because there will be an impact.

Just wanted to point out New York City's reliance on the property tax compared to other localities. We have a different tax structure than most other local governments. Unlike most local governments where the property tax is 72% of their revenue, they rely very substantially on the property tax, here it's about 35% of tax revenues. Again, the first chart was the budget. This is it as a percent of tax revenues. That's 2006 data. The changes aren't that great. Rosemary pointed out it's probably going to become a little bit more over time, but that's sort of this. I want to apologize at the outset because I'm going to throw a lot of numbers at you, and it's very early in the morning. And it doesn't look like you guys can go get any more coffee. But let me just say this—some core beliefs I have about the property tax, and again I want to say I'm making no recommendation here, so I'm going to tell you about those core beliefs, and then what I'm going to do is show you some data that says how the current state of New York City's property tax measures up against those beliefs. So, I listed five. I think New York City needs a property tax. We have to have a property tax. I believe the basis for the property tax should be market value. I think people who own property that sells for the same price should pay the same tax. I know that's novel. It's a crazy idea, but I do think that. That's what I believe.

I think property owners should understand the property tax, and I think it should be predictable for both owners and government. And I do believe that it is okay to provide relief to owners if their incomes are low or if they make New York City their primary residence. I think that's an okay thing to do. Okay, so let's go to the data. Next chart.
Just want to remind you of Finance's role. I see Mark Russell here, who is the Yonkers assessor, got his training in New York City and then went up to Yonkers, it's great to see him. He will agree. All of us—the head of ORPS is here, the [New York State] Office of Real Property Services, Lee Kyriacou, who is fantastic. If you haven't met him, he's a great guy.

We use three methods. It's not any different than what you would do if you were valuing a home, or you were thinking about buying a business, or you were getting your property appraised. We use sales, so, you know, what did a property sell for? Is it comparable to this? We use income—how much income would be generated from this building and what would I be willing to pay for that cash flow? Then we use cost, which is for utility and specialty property like stadiums, something we've become pretty expert in in the last couple of years actually. And Maurice Kellman the head of Property [for Finance] is here and knows a lot about that. So, we do it the same way, and while we think it would be much easier for the public to understand our values—especially homeowners if we use sales prices and co-op and condo owners if we use sales prices—for co-ops and condos, by law we cannot use sales prices. And you're going to see some data about that in a moment.

Next slide just again by way of background, assessment rules, I just laid out a couple here. I could do three pages, five pages, 120 pages on it, but I thought the sort of main things I wanted you to know, the rules are pretty complicated. Highlight four things, I mean five things-four tax classes, could tell you what they all are, but Rosemary did a little brief thing in her paper about it. Properties in each tax class have to be assessed at a uniform assessment ratio. We don't assess people at full market value. Other places do. Not quite sure why, but we have an assessment ratio. The assessments for some properties are capped. So, for example, a small home, you're assessment cannot increase more than 6% a year, 20% in five years. The assessments for some other properties are not capped but must be phased in over five years, and I just would note if you renovate a property there are no caps and the entire increase is added immediately, which might serve as a little bit of a disincentive for people to renovate their places.
Now, I'm going to turn to the data. So, how are we doing? This is data for small homes. Against that backdrop what I thought we would do here is I'm just going to use a $750,000 property. And I'm going to use that throughout. I could have chosen $500,000. I could have chosen a million. I don't know. I woke up. I thought $750,000. What we did here was we took the median effective tax rate by borough—effective tax rate, remember, is taxes over the market value of a property, the taxes paid divided by market value. We took that median effective tax rate, and I multiplied by $750,000 to show the taxes that an owner in each borough would pay. Now, Rosemary said that the disparity within class had been reduced, and I think I should just say, okay, if she says so that's great because that makes us look good. It's not been eliminated. It has been reduced, but it's not been eliminated. So, the taxes for a Manhattan owner of a $750,000 small home would be a little more than $3,300 as you see on the chart. A Staten Island owner with the same value house would pay 46% higher taxes or more than $4,800. That's as a result of the assessment caps, as a result of the fact that Staten Island actually has newer properties and we're able to put them in higher. That's what the data shows. That's on small homes.

While I'm showing these differences to you at the borough level, it's important to note that these same kinds of differences can exist within a neighborhood and even on the same block in a neighborhood. Next slide.

Just to get at this co-op issue, I thought this would be useful data. My team—I think Mike Hyman is here—my tax policy team did a computer model to try to figure out what would happen if we were able to value property based on sales prices. We cannot, but to better understand the impact I thought we would show you a little bit. Here what you'll see is in every borough our market value that we have to estimate by law bears no relationship to sales price. None. If you take a look at a Manhattan co-op—this is co-op data—our market value is $135,000 dollars [and] sales-price based market value is about $761,000. That's based on data and analysis that we did. Next chart.

Same story for condominiums. Again, I'll just take a Brooklyn condominium in this case. Brooklyn would be about $94,000 in market value on our system and $505,000 if you use sales price. [So there's] no relationship to sales price. Let me just do for the co-ops then exactly what I did for small homes, which is if you had a $750,000 co-op unit, wide variation in what those co-op units would pay for taxes. Again, starting in Manhattan, they'd pay $4,400 to as much as $6,300 in Queens rounding up a little bit. So, again if you do buy that property that would sell for the same price should pay the same taxes, we don't have that for co-ops, and then if you go to condos, we don't have it for condos although they look a little bit better than the other charts did.

Okay, just to pull it all together for you because maybe—again, I don't know what people think about it but if you think co-ops, condos and small homes that sell for the same price should pay the same taxes—you now have them all stacked here. What you'll see is you can pay as little as $3,300 in taxes in Manhattan, as high as $6,800 for a Bronx condominium. That's what the data shows based on our analysis, and I'll say this now [for] my second time since I said I would only say it five more times: I am not making any recommendations.

Owners of rental buildings also pay high taxes, and I just would sort of note that this understates taxes a little bit. I see Chairman [Marvin] Markus from the Rent Guidelines Board is here. This is based again on fiscal 2008 data, so it doesn't have the recent property increase. Also, some changes have been made to the assessment. One other sort of caveat here is that this isn't our full value. This is actually the value that they're paying based on a phase-in.

In fiscal 2008 the owners of rental buildings paid between 13% and 18% of their gross income in property taxes. That represents between 30% and almost 40% of net income. We did another more recent this year study of what it looks like. Rental properties can pay as high as 28 to 29% of their gross income in taxes and 45% of their net income in taxes. It's interesting if you're a city that's interested in rental property. What I wanted to say—as I think Rosemary pointed out—I'd like to translate this for tenants, because I think the tenants need to know that part of their rent is taxes. So, what we did here was we took average taxes and rent per month throughout the city to show this from the tenant's perspective. So, a Queens tenant with a rent say of $965 pays about $166 each month in property taxes.

One table just to sort of send this message home. What I did here was we took was the average monthly rent by borough. Then I took the yearly taxes for a renter Then I said, well, if this renter had a small home, what would the home be worth if you actually—what home is paying equivalent taxes? So, in Manhattan the yearly taxes for a renter would be a little under $4,000, and that's the equivalent of a $655,000 home in our system. In Brooklyn, they'd be paying $1,600 in taxes, the equivalent of a $243,000 home, again just took a stab at this just so renters get a sense of how much they're paying in taxes. Just quickly just to go to the commercial and utility property share of market value, Rosemary made this point in her presentation, the share of tax paid by commercial and utility property owners is higher than their share of market value. The way we calculate it, [they have] 24.3% of market value, pay almost 49% of the tax. That's based on our current market values, right, so if co-ops and condos are valued as they are required by law, those are the numbers that you get. If you actually were to value co-ops and condos based on sales, the commercial and utility share of the market value drops to 17%. They would be paying 49%. So, there are some issues there.
I do think that one of the major issues that we struggle with on the property taxes is disconnect between the property tax or the market value of a person's property and a person's income. People don't like that, oh, your market value went up, but your income did not go up. So, I thought that it would be useful for you to see some data that we did on the property tax for owners as a percent of income. I think the concern that people have is a legitimate one.

This fundamental disconnect actually I think is why it makes it very difficult to change the property tax, and it gets so politically charged. Low-income owners, so owners with income under $50,000 (federal adjusted gross income under $50,000)—they pay property taxes of between 11.8% and 12.2% of income. That's the property tax. I also have some numbers that are not here of the combined property and income tax burden—so, you know, happy to share those at another time. I think that the burden for senior owners is even a little bit greater, and I know a lot of people have concerns about seniors on fixed incomes. For those owners with again federal adjusted gross income of under $50,000, the property tax burden as a percent of their income ranges from 13.4% to as high as 18.1% in the case of condo owners. We thought that was useful to say. Next chart.

What have we done? Rosemary highlighted some of them. I think one of the things that we've been very proud of is explaining to owners exactly how we arrive at your market value because we want to have a dialog about market value. That is really what we do. We publish all of our guidelines that the assessors use to value commercial property. We tell owners on a Notice of Value exactly how we arrived at your property value.
This year for the first time we actually gave individual condominium owners a notice that said this is how we got to your value and actually indicated to them what rent we were using. We published on our web site (and Rosemary makes note of this in her paper) the comparables that we're using. We're supposed to come up with a comparable rental property. We've published that for the first time, and I think it does raise a bunch of issues and actually makes the assessors accountable for identifying appropriate comparables. Your tax bills are certainly easier to understand, and we allowed more owners to pay quarterly.

I will say one more time or maybe twice, I'm making no recommendations. I'm just presenting data, but I think there are some important things that we need to think about if we really want the best property tax system there is. For me the ultimate question is: Given all the data, do we think there's a problem with our current property tax structure, and if so do we want to do something about it? And if we think it's broken or it could be better (it doesn't have to be broken, it could be better), I think these are the kinds of questions we have to ask ourselves. Do we want a property tax at all? I mean there are some people who would prefer that we just have an income tax. If we do want a property tax, should it be based on market value or something else? We could come up with other things that it could be based on. Do we think houses, whether vertical or horizontal that sell for the same price should pay the same tax? Do we think affordable residential rental property or all residential rental property is important to the city? What do we think is the appropriate commercial property tax burden to maintain New York City's competitive edge? And then I would ask these questions: Do you think people who renovate their houses should pay higher taxes than those who don't? And should property tax revenue increase when market value increases and decline when market values decline? Or should there be some different mechanism for deciding how much property taxes are paid? Should we lower property taxes for homeowners with lower incomes? Should we lower property taxes for homeowners if New York City is their primary residence?

Questions that we should consider, and I think depending on how we together through this kind of dialog answer those questions, we have an opportunity to make New York City's property tax structure the best in the country and in the world. Thanks.

HOPE COHEN: I told you she was a scholar of the property tax as well as its collector. Thank you, Commissioner Stark. Our next speaker is Steve Spinola, president of the Real Estate Board of New York, the real estate industry's leading trade association. It has over 12,000 members including the city's top building owners, developers, brokers, managers, as well as banks, attorneys, architects, and insurance companies. It's the vigorous advocate of policies to promote local economic growth and represents industry positions before state and city bodies.

Before becoming the president of REBNY in 1986, Steve was the president of the city's Public Development Corporation, which we know now as the Economic Development Corporation. And during his tenure, PDC at the time had more than $10 billion of development project in its inventory including the South Street Seaport, the 42nd Street Redevelopment Program, the College Point Corporate Park in Queens and Fordham Plaza in the Bronx, another native New Yorker, a City College boy, Steve Spinola.

STEVE SPINOLA: Thank you. Well, unlike Martha this is probably the topic I like the least. I probably understand it the least, but I'm going to try to make some points. But I want to thank Martha for that wonderful proposal she laid out for us for the future. [laughter] But I really actually want to thank Martha for—we've been working with her since 2002 I guess, and no one has been more open and honest with the problems and the issues. And there is no question about the transparency in understanding what our taxes are. We may not like what they are, but we clearly understand why they got to that number. And so I am grateful for her and her wonderful staff in terms of what they've provided in terms of leadership.

I'm not going to give you more numbers. We've had enough numbers, and I'm going to try to lay out what I do believe is a plan. By the way, I should say my membership of the 12,000, I also have a lot of cert [a certiori] attorneys who happen to be sitting in the room as members as well. I thank them.

We've got a serious problem in the city of New York because the city of New York is basically hooked on real estate taxes. The simple numbers are—and I'm rounding off numbers—but real estate taxes, if you throw in the transfer tax and the others, it's about $18 billion out of a $60 billion budget. The city's income taxes don't come close. The city's sales taxes don't come close to that number, and the corporate taxes don't come close to that number. I don't know if one day I have to add up those three to see if they're about equal to the property taxes. The other thing that the city depends upon is the fact that—there was one chart that kind of showed where market value was going, but it showed where the revenue was going to be. It didn't show much of a fluctuation, and that's in part because of the five-year phase-in and [phase-]out of what your assessments are. So, for the city of New York the real estate taxes are the most certain and consistent taxes that the city can depend upon. Unemployment is not going to make a dramatic change, and the truth is that the taxes generated from real estate over the next couple of years, despite the crisis that we are facing in our economy and the rest of the world, will continue to go up in all likelihood because of previous… So, what do we do? And why are we in the situation?

The other thing to remember is that New York City is a city of renters. Two-thirds of the people who live in the city of New York rent, and one-third own, and that's just the opposite of the rest of the country basically. So, that is a factor that we have to look at. Why do we have what we have right now? It's purely an issue of the city likes it because of the economics it brings the C\city of New York, and second because of politics. So, we have people who own; when the Grayson Commission was created, the purpose was to try to deal with bringing more evenness to the issue of co-ops and single-family homes. When the commission started, all the discussion was how do we bring single-family homes up a bit? And the result was legislation that basically granted co-op and condo owners a rebate so that we can bring their taxes down.

As a result of that, we created a greater disparity between what people should be paying and what they should not be paying. The first thing we need to find is courage among our elected leaders in taking on this issue. The simple numbers are if you own a rental apartment building in Manhattan, you're paying 30% of your gross income in taxes to the City of New York, and the net number is somewhere around 42% is what I'm told.
These are astronomical numbers. If you own an office building—if you build a new one today, you'd be out of your mind—but if you build a new one today, you basically would be paying somewhere between $18 and $25 a [square] foot in real estate taxes that would be added on to whatever is needed to pay for the debt service and the cost.

We are stuck with a system that doesn't work. Now, I don't believe you can change that overnight, you know. I'm not going to talk about rent regulations, but the real estate board has never said let's end it tomorrow. But we believe we should begin to phase it out and do what the rest of the country does. That is to let the market decide. That will result in more residential units. What should we do about the tax situation? We need to correct this over a reasonable period of time. We need to say to people who live on Park Avenue that they can no longer pay $8 a [square] foot in taxes, which they tend to be paying—$8 to $9 a [square] foot in taxes—while people who own a home in Staten Island or a rental apartment building are paying somewhere closer to $19 a [square] foot in taxes. It doesn't make sense, and we're not doing it because the elected officials that represent that particular constituency are afraid to do it. One of the things that I will mention just to show you some of the buildings and how they are assessed, and you will recognize them, 740 Park Avenue, is assessed at $17 million for the entire building. This is a 274,000 square foot building, 31 units, 19 floors, and sales have recently gone for $26 million for a single unit, $32 million for another unit and home of a number of people, which I won't mention. The Dakota, which everybody knows, assessed at almost $21 million. The typical sales obviously are in the $15 to $20 million for an individual unit. So, basically we've got co-ops in the city of New York that are assessed at prices that do not exceed the sale of a single unit within it.

The single-family home is even a bigger problem because there are more single-family homeowners and voters than there are co-op owners. But it is the same issue.
The other thing that we have to point to is condos. The new condos are being killed as a result of the accurate—I'll use that term—accurate assessment practices of the department [of Finance] when they are brand new and the lack of restrictions or limitations that they have in determining what the assessed value of those buildings should be. As a result, TimeWarner, look at that—the average tax for a condo in TimeWarner is somewhere around $20 to $30 a [square] foot. So, you cannot continue to get people to build new products when they are confronted with this cost that has to be added on to the ability for profit in order to make that decision.

When people complain to me that we are—the [Real Estate] Board is—always supporting tax abatements, my answer is if we could correct what the rate of taxes are in the city of New York, then I might agree that we don't need 421A or ICIP or any of those programs. But if you want to have investment take place in the city of New York, you cannot say to an office owner: You're going to start off at $25 a [square] foot in taxes if you build tomorrow. Or if you build a new condo, you have to start off—(TimeWarner is probably a little high) somewhere between $16 and $25 [per square foot] for a new condo in Manhattan. So, we have got to do a program that basically says we're going to look at sale prices. We're going to take away this ridiculous requirement that in order to assess co-ops you have to find "comparable rent-regulated apartments nearby" although if you can't find them nearby you may find that you're using comparables, substantially further away and so as a result of that, you are keeping those assessments down. You also have the problem, obviously, the single-family homes of not being able to raise them by more than 6% in a year or 20% over five years. The other thing that the city of New York continues to do when the S7000 legislation passed or the Hellerstein decision was agreed upon—number one, the then mayor and City Council fought to delay its implementation. It waited until basically I guess it was six, seven, eight years before they actually implemented it. The result is that single-family home values increased dramatically, and it became a higher base in order to protect the single-family homes. And then every year you cannot increase a single class by more than 5%, which—understood—again you don't want to hurt people overnight. But every year but two years since the law has been in effect the City Council with the support of whoever the mayor may be has voted to reduce the 5% cap to as little as zero in order to protect single-family homeowners primarily. That was the main purpose, usually at the expense of rental apartment buildings and Class 4 property. Class 4 property has been hit badly over the past few years and again on the rental side is just amazing. So, the political courage that is necessary to change this hasn't come close to being demonstrated when you look at the fact that we've seen again this cap changed year, after year, after year to 2%, to 3%. We used to consider a victory when we convinced the council that they shouldn't go lower than 3%, and two years ago I think it was zero. So, what do we do? I mean I think it's time for us to stop pretending. One of the things we've begun to talk to some of the owners about is that maybe we ought to insist that our owners when they send their rent bill to their tenants state like ConEd does—only in much bolder print—that 20% of your rent is going to the City of New York in terms of taxes. Maybe it's time that we talk about a piece of legislation that basically lowers rental taxes and assures that most, if not all, of that reduction gets passed through to the tenants in some way. Maybe we can build up a campaign that would actually get tenants interested. The problem is you have a philosophy in the city of New York that is very much rental mentality that they don't think that ownership has anything to do with New York City or them. Taxes have nothing to do with them—that some big landlord somewhere is actually paying the taxes. And so we need to bring the renters into this and for them to recognize not only 1) that they're being punished but, 2) that whatever our solution is that they are going to get a reward or a benefit from the change in that solution. We are going to have to try to come up with something along those lines, and in terms of the single-family home ownership, it is just going to be a very tough political battle. Because not only will we have to deal with it in the city, we have the state legislature to deal with as well. So, I believe there is a solution. The solution is actually pretty simple. It's a long-term reform. What's not simple or what is not easy is to find the courage or the leadership to make the decision to follow Martha's plan. Thank you.

HOPE COHEN: Thanks, Steve. And Steve actually already pointed to our next speaker, E.J. McMahon, by mentioning Albany. E.J. is senior fellow with the Manhattan Institute, and he's the senior fellow for tax and budgetary studies as well as being the director the Empire Center for State Fiscal Policy. He's been at the Manhattan Institute since 2002 and clearly wants to get right up here and not have me introduce him. But he studies all kinds of issues, making recommendations on all kinds of things about reforming tax and other policies and to increase economic growth. Recent work includes studies on the state budget reform, on public pensions, public sector collective bargaining, and more currently the impact of federal tax changes proposed by the presidential candidates of the last cycle, and the state and local fiscal impact of the financial market meltdown. Before he came to the Manhattan Institute, he spent over 25 years as a senior policy maker and analyst of New York government. He was the deputy commissioner for tax policy analysis and counselor to the commissioner in the State Department of Taxation and Finance. He's also worked with the State Assembly, and he was director of research for the Business Council. And before all that he was a reporter, which perhaps explains why he's always so quotable. E.J.

E.J. MCMAHON: Thank you, Hope, and perhaps it's the former reporter in me that wants to join Steve Spinola in recognizing those very compelling and provocative recommendations that Commissioner Stark made. I made careful note of all of them, and it was really food for thought. Hope used a phrase at the beginning in her opening remarks about New York City property tax system that probably could have served as a pithier title for the overall event. Her phrase was sheer wackiness. I think that pretty much aptly sums it up. I don't need to say much more about—I don't need to invent too many further adjectives about what—describing the New York City tax system. You've got a good sentence in the beginning of Rosemary and Hope's report: "the mixture of tradition, politics and legal sophistry." I like that phrase. "The result is an ad hoc patchwork of bizarre assessment guidelines, exemptions, abatements and rebates."

Now, I come to you from the rest of the world. I'm bringing an outside-in kind of perspective, and I'd like to begin by just pointing out that inequities and complexities are not unique to New York City's tax system. It is simply unique in the extremity of those things. Let me read to you again from a description of New York State's overall property tax system. There are in New York nearly 200 classes of property that have been granted special exemptions by the state including those for volunteer firefighters, railroads, historic barns, condominiums, fallout shelters, business facilities in the job incentive programs, veterans, new construction, and older homeowners. There are also local government property tax amendments or options that can be adopted by cities, towns, and villages—about one million parcels. Something a little less than 20% of all the parcels in the state are either wholly or partially exempt and like many states we have different assessment standards in different regions. Lee Kyriacou, the director of our Office of Real Property Services, the property tax czar in New York State if you will, who is here today, can attest to the confusion that can create, particularly in downstate New York.

Lee is involved in a yeoman's effort to try to help promote reform in that area. So, again, complexity and an indefensible level of complexity and inequity is not completely unique to New York, but it is uniquely extreme in New York City, I would agree. What's the problem? If the problems with New York City's property tax are so obvious to anybody who looks at them, why has it persisted? Well, the problem is that S7000A as a political matter succeeded beyond the wildest dreams of those who promoted it and put it together. It's extraordinarily successful politically. What is an extraordinary success politically? An extraordinarily success politically is something that delivers enormous benefits to a large number of people at the expense of a smaller number of people, and that's what you have here.

Let me use an example. New York State has long had very high property taxes. The rest of the state, as you may have heard and may know if you live in it, has the highest property taxes in the country, rivaled only by New Jersey. It's funny there are some national indexes that show us not ranking as high as New Jersey. That's only because the statewide numbers include New York City. If you looked at residential property taxes in New York State excluding New York City, we're easily the most heavily taxed state in the country. But that's been the case for a long time, for at least the whole post-war era.
Here's the difference. Go back to the late 1970s. What was Archie Bunker paying in property taxes on that house in Queens? He was paying about 2.25% of its market value. It wasn't exactly uniform back then, but if you had to judge, it was probably about that. What is the Jamaican bus driver who now owns, you know, Archie's former house, what's he paying in that still middle-class neighborhood in Queens? He may be paying half of 1% of market value. That's the success of Senate 7000A. In the rest of the state, the property tax percent of market value in upstate New York approaches 3%, which is the highest level relative to market value in the country, bar none.

In the suburbs of New York City it averages 1.5 to approaching 2%. That home in Staten Island, which is the part of New York City that is most like the suburbs of New York State, that $750,000 home that pays $4,800 in property taxes in a suburb of, any other suburb of New York City including the New Jersey suburbs it would be more like $15,000 to $20,000 in property taxes if the home was actually valued at $750,000. Senate 7000A in other words was tremendously successful in giving New York City single-family homeowners, owner-occupied, single-family, two-family homes in New York City in that class, that group of people who were directly taxed by the New York City property tax—it gave the largest number of direct property tax payers a tremendous tax break to the point where they now pay taxes that rival the very lowest in the country. The only people in the United States who pay—in similarly urbanized areas—who pay property taxes this low are in California due to Proposition 13. That's the problem.
And again you're listening to somebody who is a fiscal conservative describe the fact that you've got very low property taxes as a problem. Because the problem is the tax burden is not evenly distributed, and it's sort of hidden in that way. The challenge is that every politician knows that if you go anywhere near trying to reform the New York City property tax system, you're going to threaten that benefit that has flowed to those people. When at Mayor Bloomberg's behest the city enacted one of the largest property taxes in its history (in percentage basis, it may have been the largest in the city's history), all at once, there was just howls of protests from people, from single-family homeowners primarily drowning out the protest from commercial property owners, who were at that time paying average property taxes that actually would induce laughter out loud by people in the suburbs in terms of how low they were. So, they were paying up—and that's not to say that it was not a shocking tax increase. But it was to illustrate the difference between New York City and the rest of the state.

What should be done about this? I do think there is a way out of this, and I'd like to address it by going through with some of the questions Commissioner Stark listed at the end of her presentation, the ones that kind of have some obvious answers I think. But I'd like to use those answers to promote a further discussion.

First, should New York City have a property tax? Yes, absolutely. Now, most politicians would not find it that easy to deliver that question depending on what audience they were in, because politically the property tax in the tax world is like Churchill on democracy. It's the worst tax except for all of the other alternatives. The problem we have is that the best opportunity for reforming the property tax is during a boom, and one of the great -ne of the several really enormous lost opportunities of the 2003-2008 period was the lost opportunity to straighten out the property tax system without having a really heavy, enormous shift to those single-family home owners. Those single-family home owners who were getting a—who were being sort of insulated with the $400 property tax rebate. For the price of that rebate and at a somewhat larger price during that period. I think we could have had a wholesale tax reform. It would have been a time to pull it off, and that opportunity is lost. So, the time when you can afford to finance the transition to a better tax system is when you're in a boom. The time when people begin to pay more attention to the inequities of their property tax system is when you're in a slump. We're obviously in a particularly severe historic slump at the moment. So, at least there will be more attention paid. I love the idea Steve Spinola has for showing the tax portion of the rental. I totally agree with you that that would begin to educate renters in New York. I'd like to point something—I'll point something out about that in a minute. I'm going to pass over your second question, Martha, on should property tax be based on market value or something else as being sort of my wrap up to this. Should houses, whether vertical or horizontal that sell for the same price pay the same taxes? Well, to reword that slightly, should owner-occupied dwellings that sell for the same price pay the same taxes? Yes. Is affordable residential property important to the city? Well, yes. This all leads up to the conclusion. What's the appropriate commercial property tax burden to maintain New York City's competitive edge? Without being specific, the appropriate commercial property tax burden is less than what it is now. In Midtown Manhattan, the property taxes on commercial space in New York City are the highest in the country pretty much, even the highest in the region, according to some comparative studies, rivaled only by Nassau County. They're extraordinarily high, and we have to remember, we have to look at that tax burden in context. New York City has a broad array of taxes that no other city can replicate. New York City's tax structure looks like a state tax system. We have a corporate income tax, which takes our marginal corporate tax rate in New York City to double the national average. We have a whole wide array of taxes, and so it's not just that the commercial property tax is high. It's that it's combined with all of those others, and the problem is you have a tax system that's designed to stripmine the hyper valuable center of commerce in Manhattan, which also applies to the whole rest of the city. And it has great disadvantages. You also have a system now that, particularly in the wake of Senate 7000A and the property tax changes of the early 1980s, is a real political challenge to reform.

If you look at comparisons of the overall, all-in, visible direct tax burden on families, on households in large cities in the United States, for families and households earning under 75,000 to 90,000 dollars, New York City does not rank high. It actually ranks in the middle on the all-in direct tax burden. That is the part, and that gets to the problem that Steve mentioned about showing the tax on the bill. What people actually see themselves paying in New York in taxes if they are in those income ranges is not especially high by national standards. When you go above those income ranges, it shoots right up to nearly the top. Again, that's the difficulty of reform. You have a large number of people to whom the true burden of taxes is invisible, or only very little of which is visible.

Should people who renovate their houses pay higher taxes? No, that's a problem. Property tax revenue, should it increase when market value increases and decline when market value declines? No. Should we lower property tax for homeowners with lower incomes? Yes and no. Don't lower their property taxes. If you're going to have a public policy that involves any form of income redistribution, directly redistribute the income. Don't change the tax on the asset. And that argues for some for a circuit-breaker approach that is actually related to someone's income, not related to their property. Should we lower property taxes for homeowners of New York City as their primary residence? Well, I don't know about that, but let me get back to the second question, which is the key to what I'd like to address. And then I'll wrap up.

Should the property tax be based on market value or something else? I would like to throw out an idea here that has gotten attention in the distant past, in the more recent past in Albany. That is that New York City should begin looking, as part of any overall reform program, should begin looking at some version of a land-value tax. Now, the land value tax, for those who are not familiar with it, was a concept promoted by the political economist Henry George, back in the 19th century. It has aficionados. You'll find strange bedfellows left and right united around the potential of this issue.

Land-value taxes in the purest form, the George [idea] was that only land would be taxed, not improvements on land. However, as implemented in the United State, including in New York almost a century ago, it can vary, there are variations on a land value tax that can go to a split rate tax that would tax land more highly than improvements and taxes that would not tax certain improvements at all. This gets to the issue of people who renovate and how much value it creates.

In the 1920s, there was something known as the Al Smith law historically now. New York City exempted new residential construction between 1920 and the end of the decade from property tax. Only the land vale was taxed. That led to a building boom, which some studies have found was a direct response or played a major role in promoting much faster people growth and residential unit growth in New York City than in other large cities in the United State.

It effect was almost immediately forgotten during the Depression, which was a tremendous distraction for everyone, to say the least. But it's historical experience that bears re-examination. There are localities around the country that use variations on land -alue tax. In Pennsylvania there's a couple of dozen cities that have split-rate taxes. Pittsburgh had one that was actually quite successful in promoting development in Pittsburgh until the point came when it was time for a reval approaching an election year. There was mass confusion over what the impact of that reval would be on homeowner who incorrectly assume that and were led politically to believe that getting rid of the land-value tax would reduce their taxes and insulate them from the reval. What happened was just the opposite, but there's been studies also finding that the cities in Pennsylvania that have split-rate taxes have been able to promote more development than cities that don't. And again, there's also another variation on this, which was promoted by Freddie Ferrer in his campaign for mayor four years ago—which was the idea that you have some sort of aspect of the tax code that penalizes land owners who basically leave land undeveloped or fallow or underdeveloped. Again, the whole concept of a land-value tax is two things. The Georgist concept was first of all that the finite resource is land—number one. Number two, that you want to promote development of land, particularly development of residential property in accordance with zoning restrictions. Now, how would this work in New York City? The issue of the people on Park Avenue, the apartments on Park Avenue paying—if you actually had a tax based more on land value, you absolutely would be taxing the people in those Park Avenue buildings ultimately more, depending on how it was structured than the people in outer borough, single-family homeowner or rental-property because land is more scarce and more valuable in that part of Manhattan than it is in the outer boroughs. Again, I'm grossly over simplifying something that would be very challenging to implement, but I think it's the approach and the way to go in the future—that the way out of this morass is to begin looking at a concept for valuing property and for taxing it. Finally, you'll see in the back one of the handouts that's related to my work had to do with the property tax cap that was being promoted on a statewide level by Governor Paterson last year and perhaps again this year, the cap on school taxes. Now, again that may not seem to have much relevance offhand in New York City, but I'd like to point out a couple of ways in which it does have relevance or in which the lessons are applicable. The problem with—one of the major problems with New York City's tax system that has been noted—is the cap on assessments. Caps on assessments are not a good thing. The cap, and in fact many jurisdictions and states around the country have attempted to get at the issue of restricting growth and taxes by capping assessments. A much better approach is to cap the tax levy in the broadest possible way with exceptions only for new development, new property improvements, and improvements to existing property. If you establish a rate of growth in the levy that is going to be considered politically tolerable and apply it to the entire levy, that is a way to limit the damage from periods of spurts in values and also to limit the extent to which assessment becomes a revenue-raising tool and is influenced directly or indirectly by revenue priorities and not by true tax assessment considerations. I think there's many arguments on both sides of that that I was involved in in the state last year. Massachusetts under Prop 2.5 has had a 2.5% limit on property tax levy increases in effect now for almost 30 years, and I would submit to you, and this could be a debate for another day, it's been a dramatic success and could be part of any new system here in New York that was aimed at simplifying the property tax and creating a more equitable structure. So, with that I'll close and look forward to a good discussion. Thank you.

HOPE COHEN: Okay, so I expect after all that we will have a good discussion. We have about 20 minutes for questions. We have a couple of hand mics. Wait for a microphone. Wait for me to recognize you, and please, we're making a transcription of this event, so I need you to state clearly your name and affiliation when you are recognized.
And I see right there, Debbie.

JOHN WILSON: This is John Wilson with the New York Post. I'm wondering if one of you could address the impact that New York City's rent control and rent stabilization laws have on the overall inefficiencies and complexities in the property tax assessment problem, whether fiscally or politically?

HOPE COHEN: Steve?

STEVE SPINOLA: Well, it does two things. One, it obviously drives down real estate taxes for the city because if you're putting limits on what the market can charge for those apartments, the city—because of looking at income and expense argument—basically, if there's a limit as to what you can charge, and in Manhattan you can't get the market rate, then the building should be assessed lower. Second, because you are doing that, the city is then obligated as I said earlier to look at rent-regulated apartments and use that as a basis for co-ops so it drives down the assessment of the co-ops as well.

So, rent regulations, which is clearly a topic for another day or numerous days for different topics as it relate to it. But it clearly does nothing for the economic wellbeing for the city's revenue. I'm not going to get into the social issue, and it forces the city to use that under the law. The law requires them, and as a result you've got lower taxes and you've got lower assessments basically throughout but primarily in Manhattan.

HOPE COHEN: Okay, I saw the gentleman right in front. Is this the famous Mr. Kyriacou? But please state your name again.

LEE KYRIACOU: I'm Lee Kyriacou. I am Commissioner Stark's fraternal twin in Albany, so I oversee the property tax up there. I'm also her fraternal twin because I go running around the state putting up data that is per se highly provocative and then have to say I'm not proposing any changes. I just want to point out one additional data point, which will make the process even more provocative, which is you saw the property values coming down. You can guess if property values are coming down dramatically in New York City and Wall Street bonuses are doing the same, what is that going to do to the property tax as a percentage of either property value or people's incomes. So, the expectation is we're expecting that to rise dramatically, which means the pressure will be on the system even further. I was waiting for E.J. to say one more thing about looking at the property tax cap, which is the fundamental issue is, if you aren't controlling expenses, you will either see the property tax rise or you will see some other tax rise. So, I would just ask the panel, is part of the problem, I know it seems a little odd, but isn't part of the problem trying to get a hold of expenses. And I quite frankly have no expertise on New York City expense growth. Thank you.

STEVE SPINOLA: I'm happy to start. You're absolutely right, between the state's budget and the city's budget we're—it's just difficult to understand how budgets like these could be proposed at this point in time. But the other problem for the city is that the only tax that the City of New York controls is the real estate tax, and so every other tax, whether it's income and so forth, they have to go visit Albany, and then you've got state legislators who are going to play a role in this. So, when it comes down to it, basically because they have this out to basically raise the rate or do some other kind of change to the taxes, it takes away some of the self -control that should be there especially in these difficult times. So, I think part of the problem is the city is totally dependent upon it because it's the only tax that they can depend on. And the issue of holding the line on expenditures is absolutely right. But that's also another topic for another day.

HOPE COHEN: E.J., did you want to chime in on that?

E.J. McMAHON: I strongly agree that one of the main virtues of the property tax cap is to effectively ultimately limit expenditure. I'd also—I think it also is the missing link in the problem of how to deal with the concerns, the understandable concerns of taxpayers about taxes that increase faster than their ability to pay and the concerns of public officials about how or whether they ought to subsidize that. The problem we had in New York State, which again was an outside-New-York-City issue, but it was a great illustration of this, was the STAR [rebate] program, the main STAR program, which is a state-subsidized homestead exemption, a program that did not exist in 1997 and that cost (including the New York City income tax portion) over $4 billion, you know, zero to $4 billion in a decade. That's pretty good.

What that did was it heavily subsidized high property taxes. Pataki's original people, Governor Pataki's in the 1990s was to have that linked to a cap on the growth in tax levies. What happened? Quickly, precipitously, far too readily in the opinion of many of us across partisan lines, the governor dropped that provision from the final STAR bill as soon as there was predictable resistance from the legislature. The STAR homestead exemption was passed without a cap, and there have been several studies that have documented the predictable, which is that the growth in overall tax levies actually accelerated during the period where the very large STAR tax exemption was being phased in. We're going to have a similar debate in Albany now, and this is a subject that I've discussed with Lee and many other people. Taxpayers need to have skin in the game, and that is the game of controlling local government, or in the case of outside New York City school district expenditure. If they don't, they won't care, and the political pressure will be lacking. So, for instance, right now in Albany you're going to see a resurgence of the debate over a circuit breaker, which is an income tax device through the income tax that limits the amount of property tax a homeowner will pay as a percentage of income. You can design a circuit breaker in such a way that it limits somebody's property tax impact without completely eliminating any interest they have in restraining the growth in their property taxes. But that's going to be a key aspect of the debate in Albany. It also needs to be linked, like the STAR exemption should have been and still should be to, a cap on the levy, not a cap on the assessment—because again, without a cap on the levy, every form of special exemption or tax subsidy enacted by the legislature will ultimately promote faster growth in taxes, which basically will hit everybody who is not subject to the exemption. I think that the cap needs to be an important part of the solution and ultimately in the city as well as in the rest of the state to that issue.

COMMISSIONER STARK: I just wanted to say a word or two about expenses as well, just—I think it's really important to remember what the city's taxes pay for. So, you know, the property tax is paying for debt so the city can do its repairs and maintenance. And a significant portion for local government typically is property tax going to schools. Our property tax goes into the general fund, so it's not as clearly delineated for schools, but if you were to add school funding and debt service together, it's probably—you know, there's a little bit more left over that you would say, okay, helps fund police and fire, and the like. I just think that it's important to remember that's what it pays for. The other thing that I just want to point out about expenses is that the city's costs are a lot higher than other cities because there's a breakdown in our fiscal federalism system. You know, we send more money to DC than we get back, but more importantly we send more money to the state than we get back, in terms of our fair share. And if you were to—we've done an analysis at Finance—where if you were to say that we were allowed to be a city with an expense structure similar to other cities around the country, we would be able to reduce our taxes significantly and have it sort of more broadly spread out. So, just, on expense, is the answer just cutting expenses? Certainly that's a portion of it, but I think that without us really having an honest dialogue about the kinds of expenses the city is asked to bear that few other cities, except in New York State are asked to bear those costs, that we be making that conversation a little too simplistic.

HOPE COHEN: Martha, that's not a recommendation either, right?

COMMISSIONER STARK: No, it is not. Well, actually let me think about that…

HOPE COHEN: Okay, I see a question back there. While you come over there, I just wanted to pick up on E.J.'s comment about skin in the game and come back to that question of renters in New York City, this question that renters really don't see themselves as paying property tax although they do through rent, and we are a city as was pointed out earlier today two-thirds renters who basically don't think they have skin in the game. Sir?

RICK LANDMAN: Rick Landman, NYU Wagner School. When I started working for the city in the '70s when—I know Steve, I also know Arthur—my job was to be basically involved with the tens of thousands of in rem properties that were coming in because the tax burden was higher than the value of the properties. Is there any sort of—I mean I watched that graph that we just saw. Is there any sort of fear or problem looking towards the future? I mean that's when we created PDC and HPD. Are people just walking away again?

HOPE COHEN: Are you willing to take that without making a recommendation, Martha?

COMMISSIONER STARK: I just wanted to acknowledge someone else who is in the audience, Vicki Been from NYU, who has actually been doing a lot of work with us in the city trying to monitor properties at risk. I think that work has been incredibly important. Actually, Vicki, you know, you might be better able to say kind of what the trends are. What I would say is based on the data that we've seen thus far our delinquency rate hasn't increased precipitously. It's actually slightly up, not very much, but I think because we have as much data out there, NYU is doing a fantastic job of helping HPD sort of monitor what's going on, I think we'll be on top of it a little bit sooner and able to step in should the trend shift to where it was, Rick, when you started in government when you were four.

STEVE SPINOLA: I think it's premature to suggest that we're running into a foreclosure or abandonment although the ingredients are there for it to happen, through a combination of—I mean obviously if rents don't go up, or if rent regulations continue to, you know, if they make some modifications and put limits on what rents could be—the MCI court decision. If you throw all of that in there, over the next few years I would be worried about it, but right now because of the wonderful times we've just had and the changes in the rent stream and more efficient capability of operating buildings, I don't see that happening. But I do believe the fundamental question for today is at what cost can we continue to live and invest in the city of New York. That cost looks at everything.
The one item that E.J. talked about, real estate taxes being lower, and I know he knows this, but you've got to throw in the 4% income tax, and all of the sudden that Staten Island resident is now paying something close to what the New Jersey resident is paying. Obviously, it depends on their income, so all of those costs are playing.

COMMISSIONER STARK: I just want to respond. We actually did do an analysis (and I had meant to include it in my charts but it got a little bit too complicated) just showing data where you showed New York City combined income and property tax burden compared to nearby jurisdictions. We actually kind of did a circle right around sort of Nassau and then the eastern most point in Queens, you know, Riverdale and then Westchester counties. We still with that combined burden are a little bit actually lower than those other jurisdictions. And we also took a look at New Jersey and the like. We're hoping to put together a lot of the data and work that we're doing, but it's an interesting point and something we should certainly be mindful of.

HOPE COHEN: Okay, we have time for just one more, George Sweeting.

GEORGE SWEETING: Good morning, I'm George Sweeting from the Independent Budget Office, and I'd like to just invite any of the panelists who want to, to predict or speculate a little on the prospects for making at least some improvements in the property tax. We've heard a very compelling case this morning about some of the problems with the tax. It's hardly the first time we've heard this case, and although I agree with E.J. that there was a great opportunity missed in the boom to address this, you know, it's also been pointed out with the increasing demand for tax revenue during the downturn it's going to put the pressure on the tax and some of the problems become more apparent. So, it may be that there will be some attempt at addressing some of these problems. The Grayson Commission got started at the tail end of a severe bust, so it wouldn't be unheard of to try to tackle it. Any takers?

E.J. McMAHON: I would just quickly agree with you that there's no time like the present to actually begin doing the groundwork that would be necessary for a reform that perhaps would not be so easy to implement until there's an economic turnaround. Because I think what—since there was really no serious concerted effort at property tax reform going on in city government before the last downturn and then renewed boom, there wasn't any steam behind that kind of idea then. I think perhaps if there could be a coming together of people like the people in this room and in the industry and in academia—where the void left by Dick Netzer remains enormous on this issue for those who know who Dick Netzer was. I think that it would be a good time to begin. It's never too soon to start thinking about this. Right now as a political matter it would be easy to describe it as simply hopeless. However, I do think that the arguments are obviously very strong and again to promote one of my favorite sort of issues on this if one took more of a land value approach, which was Dick Netzer's you know, hobby horse for years, a land-value approach also would tend to favor owner-occupied dwellings over other types especially in the outer boroughs. That political imperative that everybody in the political structure wants to protect, you know, would be served by such an approach. That's why I think another reason why it would need to be part of the approach.

COMMISSIONER STARK: I just would say I'm exceedingly optimistic. I have been since I started doing this work when I graduated law school in '86 and joined city government for three years in 1990. But I do think that even if we're not able to get major legislative changes done, I think that there are things that we can do that improve the transparency of the property tax, highlight what the issues are so that when the next time comes, people are poised to do something. So, I believe there are small things that we can do. So, for example, maybe we need clarification in the law about what rents we use to value co-ops and condos—not hugely controversial, but do we really need to use rent-regulated buildings or might we be able to use buildings that aren't rent regulated to at least get, you know, the co-ops and condos valued a little bit better than they are now? We published all comparables because we want people to challenge us on those comparables. We want to do a better job of it, and we think shedding light on that will help us do a better job. I think that there are steps that we can take as a city that don't require legislation, and think it's been our commitment with the support of the mayor to try to do everything we can to make the tax as fair as possible. Lowering the assessment ratio in Class 1, for example, so that you have more homeowners that have same value properties paying the same amount. So, I still remain, even after as many years of doing this as I've had and lots of fits and starts and participating in almost every panel, that we can make change when reasonable minds get together and act in their enlightened self-interest.

STEVE SPINOLA: I used to be optimistic in '86, when I first came to the [Real Estate} Board. I think there's potential. You know, part of the discussions we've had over the years is some of the reforms at one point there was proposed, I'm not sure if it was from coming out of the Grayson commission that we separate income-producing properties from non-income-producing properties. The concern there for us was a political one. If we take all rental apartment buildings and all office buildings and industrial buildings and put them in to one class, then the—all of the people who vote are in the other class and we are going to end up having a worse political pressure on protecting that particular class. So, I'm not overly optimistic. I am hopeful that over the next few years we'll look at this, and I do believe part of it is the industry's own fault for not making this a more important issue. We need to try to figure out how we convince tenants, both office and residential rental tenants, that they have something at stake here because remember in office buildings the tax is basically passed through to the tenants. And so we need to figure out, and I need some great minds, how do we get the office tenants and the rental apartment building tenants to care about this and to put some pressure on?

E.J. McMAHON: I'd like to make one added suggestion that kind of provides maybe some grounds for optimism and points to a feasible approach to reform. Let's not forget to take advantage of the city's scale, diversity and its political organization. That is, there are opportunities to pilot tax reform in given locations. If one was to say—take the Bronx and do things differently, the Bronx being the place where you have the least property tax revenue at stake, or a portion of Queens. I mean or Staten Island. In other words, it's possible, given New York's own federalism, if you will, or its political organization, to think about a reform that would begin to unfold beginning on a pilot basis, for instance, or be tested in specific discrete areas. I think that's something to think of.

HOPE COHEN: Funny that you should say that, because a couple of years ago the Manhattan Borough President started talking about land-value taxes. So stay tuned for the Manhattan Institute's Henry George series and thank you very much for joining us this morning.

 


Center for Rethinking Development.

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Moderator:

Hope Cohen, Deputy Director, Center for Rethinking Development

Panelists:

Edmund J. McMahon, Senior Fellow, Manhattan Institute, Director, Empire Center for New York State Policy

Rosemary Scanlon, Associate Professor of Economics, Schack Institute of Real Estate, New York University

Steven Spinola, President, Real Estate Board of New York

Martha E. Stark, Commissioner, New York City Department of Finance


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