Property Tax White Paper

Martin E. Karp is the chairman of the Action Committee for Reasonable Real Estate Taxes. The group was founded by the Council of New York Cooperatives & Condominiums and is supported by the Federation of New York Cooperatives & Condominiums, the Coordinating Council of Cooperatives and the Apartment Owners Association.

Since 1996, homeowners in New York City cooperatives and condominiums have been eligible for an abatement on their property taxes. The legislative authorization for these abatements - which provides an interim and partial resolution of the disparity between the taxation of New York City residents in one-, two-, and three-family homes in Property Class 1 and cooperative and condominium apartments in Property Class 2 - ends on June 30, 2004. Legislation currently before the state assembly proposes a four-year extension of the abatement program. What are the reasons for the abatements and what is the outlook for their continuation?

The $11.8 billion property tax is the largest single element in the fiscal year 2005 $45.7 billion New York City Fiscal Plan revenue. This levy can be changed by the joint action of the mayor and the city council. The 18.5 percent tax rate increase in 2002 was the first change in 13 years.

Real property taxes alone cannot provide the revenue necessary to support services in a large, modern city. As an "ad valorem" tax, real property taxes have inbuilt inequity in "ability to pay," and do not have the flexibility of income- or expenditure-based taxes. Because of their magnitude and ability to be controlled by "local government," real property taxes will be required for the foreseeable future. There are two major real property tax policy issues: the magnitude of the tax and the equity of its distribution. The tax magnitude is dependent on fiscal needs and the judgment of the city government. But how fair is the distribution of the tax burden?

A Brief History

In 1975, the New York Court of Appeals ruled that assessments using varying percentages of market value violated the state constitution. A Real Property Tax Law (RPTL) was enacted in 1981, over Governor Hugh Carey's veto. This law legitimized the practice rather than dealing with its inequities. Article 18 of the Law established the four-class system that currently governs New York City real estate tax policy. Cooperatives and condominiums were grouped with multiple dwellings in Class 2. Related legislation, Section 581, required that cooperatives and condominiums be assessed as rental property.

The number of cooperative and condominium apartments increased substantially after 1981, primarily because of conversion activity. Modest increase continues due to construction activity. See the following chart:

Property values rose in the 1980s and the tax burden on a cooperative apartment doubled in the decade. Real property taxes became the largest item in a cooperative's budget; in some cases, reaching 40 percent of total expenditures. Rental and commercial buildings were affected in a similar manner.

What's the Problem?

The Action Committee for Reasonable Real Estate Taxes was formed in February 1990 to address the problem of precipitously escalating taxes. In reviews by city and state government representatives on tax policy, it has been agreed that there should be no difference in tax treatment between owner-occupied one-, two-, or three-family homes in Class 1 and owner-occupied co-op and condo apartments in Class 2.

For Class 1 properties, "full market value" is determined by selling price, and the assessed value is nominally 8 percent of the full market value. Cooperatives and condominiums were included in Class 2 (multiple dwelling buildings). Under Section 581 of the RPTL, the full market value of cooperatives and condominiums is determined by the capitalized rent of equivalent apartments. The assessed value is nominally 45 percent of the full market value.

The current tax burden on these two types of owner-resident properties derived from the Fiscal Year 2004 New York City Property Tax Rolls is depicted in the following table below.

The Class 1 Actual Assessment Ratio of 4.77 percent as opposed to the nominal 8 percent is due, in large measure, to the limitations placed by Article 18 on change in assessed valuation. The 37.68 percent Actual Assessment Ratio compared to the nominal 45 percent for the Class 2 property is due to the five-year transitional change permitted by Article 18 along with some limitation of assessed value changes for co-ops and condos with fewer than 10 apartments.

The Effective Tax Rate (Tax Levy/Full Market Value) for Class 2 co-ops and condos is 6.85 times that of Class 1 residences and is the underlying cause of the inequity. If a one-, two-, or three-family home had a market value of $350,000, the Billable Assessed Value would be about $16,700. The Billable Assessed value of a similar co-op or condo apartment would be $131,900. Using fiscal year 2004 tax rates, the one-, two-, and three-family home would receive a tax bill of $2,430. The resident co-op or condo homeowner's tax bill would be $16,650. If co-ops and condos were valued at selling price the magnitude of the difference would be reduced.

A Solution

In April 1992, the Action Committee for Reasonable Real Estate Taxes released a revenue neutral recommendation for equitable distribution of the tax burden among the four tax classes. In the same period, Finance Commissioner Carol O'Cleareacain, instituted a major study of real estate tax policy. In early 1993, because of continuing problems in tax-fixing and State Board of Equalization & Appeals valuations, the City Council called for an independent commission to investigate real estate tax policy. Representatives of major sectors of Class 2 and Class 4 property, such as the Rent Stabilization Association and Real Estate Board of New York, joined the Action Committee in making a recommendation to the commission. The commission submitted its report at the end of 1993, without formal recommendations, for consideration by incoming Mayor Rudolph Giuliani. The report confirmed that co-ops and condos bore more than a fair share of the property tax burden.

In 1994, Council Speaker Peter Vallone proposed a $440 million tax reduction program for co-ops and condos. In 1995, Mayor Giuliani included co-op and condo property tax reduction in the FY 1996 Financial Plan. These actions led to an abatement program to start to address the disparity in taxation. In March 1996, the mayor and City Council's recommendations were embodied in state legislation introduced by Assemblyman Alexander B. Grannis. The bill was passed in June; and became Section 467- a of the RPTL. To partially adjust for differences in the tax inequity, the abatements were 25 percent for apartments with average assessed values of $15,000 or less and 17.5 percent for apartments with assessed values greater than $15,000.

Abatements were utilized because amendment of Article 18 of the RPTL would not be required. To provide time for developing a longer-term plan, the legislation provided for three years of tax abatement to resident owners of three or fewer apartments. The city was required to present a plan by December 31, 1996, to "address the disparity in real property taxation between residential real property in class one and residential real property in class two held in the cooperative or condominium form of ownership."

Some 3,900 buildings with about 350,000 units filed for FY 1997 and 1998 abatements. About 250,000 co-op and condo apartments in the city were eligible for the abatements. Tax reductions, totaling about $101 million were issued in 1997 for these first two years. The third-year abatement was budgeted at $160 million.

The database necessary to implement the legislation yielded side benefits in the ability to provide Senior Citizens Homeowner Exemptions and veterans benefits to cooperative apartment residents and later to permit extension of School Tax Relief benefits to cooperatives.

In the absence of a long-term plan, it was necessary to obtain a two-year extension of the abatements in 1999. On September 14, 2000, Finance Commissioner Andrew Eristoff wrote to State Senate Majority Leader Joseph L. Bruno and State Assembly Speaker Sheldon Silver about the requirement for New York City to submit a long-term plan to the state legislature. The efforts to deal with the acknowledged co-op and condo tax disparity were summarized. Despite abatement funding of $167 million annually, based on a Department of Finance appraisal, it was estimated that an inequity of $180 million a year remained.

The appraisal was based on equal treatment of Class 1 and Class 2 residences, i.e. selling price valuation. The letter ended by stating that, with the loss of $550 million revenue a year from the "commuter tax" and revenue loss from other state actions, the current "long-term plan" was to continue with the abatement program. In light of the city's position, it was necessary to obtain a further three-year extension of the abatement program in 2001. Some 314,459 co-op and condo apartments participated in the abatement program in FY 2003. This coverage now ends on June 30, 2004.

Where Do We Go From Here?

The tax inequity still exists despite debate on its magnitude and distribution. Prior discussions about a long-term plan show agreement on the basic principles. It is not possible to simply move co-ops and condos into Class 1. One reason is the requirement that the benefit should apply only to eligible owner-occupied co-op and condo apartments.

A viable amendment of Article 18 can be developed, which, among other things, insulates the remainder of Class 2 as well as Classes 1, 3, and 4, from the required changes. The same assessment ratio would be used for the Class 1 and Class 2 owner-occupied residences, and sales prices would determine market value. The change would require a number of years in development of the legislation and subsequent implementation. For this reason, the four-year continuation of the abatement program is required.

The process for extending the abatements involves the following steps:

Legislation must be introduced in the state assembly and senate to amend 467-a. As of early March, under the leadership of Assemblyman Grannis, A-9610 has been introduced in the assembly. The draft of the proposed bill is being circulated in the senate. The action committee believes that this will be successfully received. The bill essentially provides for a four-year abatement extension under the current terms.

The City Council must submit a "home rule recommendation" endorsing the proposed legislation. This recommendation typically is released in the city budget development process as the funding for the abatement is included in the budget.

The legislation must then be passed and signed by the governor.

The Department of Finance must update its database and include the abatement in the June or December billing. In past years, the Department of Finance has been able to update the database in anticipation of abatement approval as the data is used for other purposes.

There are now over 556,000 co-op and condo apartments in New York City. About 60 percent are owner-occupied. There is increasing pressure to convert the sponsor-owned apartments to resident ownership. Home ownership is considered an important element in the city's demographic profile. Co-ops and condos serve a wide range of owners. Twenty-three percent of the apartments in the abatement program have assessed values of less than $15,000. Almost half the co-ops and condos are outside Manhattan. There is a wide range in valuation and selling prices. Thus it is felt that continuation of the effort to remove the demonstrated inequity is justified.

The action committee will continue to press for an equitable and effective resolution of this problem. The group is well aware that the difference in the tax burden on homeowners in Classes 1 and 2 is not the only New York City real estate tax issue. Many of the inequities cited in the early 1990s still remain. The committee will do its best to provide a constructive contribution to the evolution to an equitable real property tax policy for all taxpayers.