New York City has historically adopted policies designed to make more housing available at a relatively low price. Such steps have included rent regulation, which covers more than a million city apartments, and public housing, whose 178,000 units make it the largest such system in the United States.
Since 1971, NYC has also used special reductions in property taxes to encourage the construction of new rental housing, which is otherwise taxed at one of the city’s highest rates. This so-called 421-a tax exemption program, named for the state law authorizing the city to adopt it, is due to expire June 15, 2015, unless renewed in some form by state legislators. The 421-a law has been used as an incentive to develop some 150,000 housing units overall in NYC, including some 37,000 low-income, or “affordable,” units that 421-a has, since 1985, especially sought to encourage. Such housing development has come at significant cost in forgone property taxes to the city. Currently, NYC forgives some $1.1 billion annually for 421-a-eligible housing.
Some of the reduced taxes have, in exchange for payments directed to low income housing developments elsewhere in the city, reduced tax on luxury Manhattan and Brooklyn apartment buildings— which has, in turn, sparked controversy. In response, NYC mayor Bill de Blasio has proposed that all building developers in the city seeking a 421-a tax exemption be required to set aside units for lower-income tenants in buildings where higher income residents otherwise pay market rates.
Others have proposed a similar rule but one that includes eliminating the 421-a tax exemption entirely. This paper proposes that state legislators instead adopt a compromise approach aimed at helping finance a higher number of new low-income housing units with a lower level of city property tax exemption. Specifically, the paper proposes to restore an approach, allowed to lapse in 2008, that permits developers of low-income housing to finance construction, through the sale of the right to a 421-a exemption, to developers of higher cost, higher-income housing elsewhere in the city. In support of the restoration of this so-called 421-a off-site or certificate program, this paper finds that, to date, the cost in reduced taxes per unit built through the on-site, “inclusionary approach” is significantly higher— up to three times higher— than the cost of off-site, low-income units built through the aforementioned tax certificate program that we urge the state to restore. For example, the cost in forgone taxes for each affordable unit in an on-site “inclusionary” development will, over the duration of the exemption, cost the city three times more— at least $550,000, on average —than an equal-size unit in a freestanding, all affordable development in a less expensive portion of NYC, such as Astoria, Queens. The present value of the cost of an average, on-site inclusionary unit in central Manhattan is roughly $850,000, compared with roughly $300,000 in Astoria.
In other words, for the same level of tax expenditure, the off-site program could lead to the construction of nearly three times as many affordable housing units. This paper also recommends that the overall level of tax exemption under such a program be limited.
In weighing which approach or approaches to choose, state lawmakers, who will set policy, and NYC officials, who will implement it, will have to weigh the question of whether, at a time in which there are many demands on its budget, NYC should devote more tax revenue to a policy aimed at ensuring that rich and poor live in the same buildings, or to limit lost tax revenue while supporting construction of low-income housing units no matter where in the city they might be.
By reintroducing a reformed 421-a tax certificate program as one—but not the only—approach to encouraging affordable housing, NYC can realize the construction of more low-income housing for the same, or less, cost in forgone taxes. Doing so will advance the de Blasio administration goal of seeing some 80,000 new low-income housing units built within the next ten years.