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.
