The Politics of Property Taxes

For most watchers of the city council, there is little doubt that the current tax abatement for co-op and condo owners will continue. The abatement, which first went into effect in 1997, was extended in 1999, and will probably be extended for another four years when it expires at midnight on June 30, 2004.

For the parade of people appearing before the City Council's finance committee in the last week in February - including the head of the city's budget office, representatives of independent watchdog agencies, such as the Independent Budget Office (IBO) and the Citizen's Budget Commission, as well as nearly a dozen co-op and condo advocates - the question is not so much whether the abatement will continue but whether the city will at last go beyond the abatement and finally begin to tackle the larger issue of revamping the city's property tax structure.

There have been some slightly encouraging signs. In early February, Assemblyman Alexander (Pete) Grannis introduced legislation to extend the current real property tax abatement through 2008, and revived a requirement that the City Council submit to the state legislature, no later than July 1, 2005, a plan containing recommendations "to address the disparity in real property taxation" between Class 1 residential properties and Class 2 cooperatives and condominiums.

At the same time, the city's Department of Finance (DOF), which cannot change the structure of the four-tiered system but can change the rates within it, has raised the assessed value of Class 1 homes, the amount on which Class 1 property taxes had been based. While acknowledging that some homeowners in his district had experienced a 30 percent increase in the assessed value of their homes, including himself, Queens Councilman David Weprin, says that, although he opposes the large hike in the assessed value of one-, two-, and three-family homes, he understands what the DOF is trying to do.

Little by little, says Weprin, who is also the chairman of the finance committee, the DOF is trying to increase the assessment paid by Class 1 homeowners, so they are bringing it up to "if not complete parity with condominium and cooperative owners, then certainly closer."

For Weprin, tax parity between single-family homeowners and homeowners of similarly valued co-ops and condos would be a wonderful thing. But, lowering condo or co-op property taxes or equalizing them "generally means bringing up Class 1 properties to a higher [tax] number. And that's always a political issue...if it doesn't substantially increase single-family homeowners' taxes in the city of New York, it can be done."

One way to do it, suggests George Sweeting, deputy director of the IBO would be to amend the tax abatement program to cease giving abatements to co-op and condo owners whose tax levy was already as low as that of Class 1 homeowners. During the February finance committee hearing, Sweeting said the IBO estimates that, of the $250 million in tax relief that will be paid through the co-op/condo abatement in fiscal year 2004, $88 million, or 35 percent of the total, will go to taxpayers whose effective tax rates are below the Class 1 level before the abatement.

And no amount of tinkering with the abatement, adds Sweeting, will deliver an equal benefit to all apartment owners. "To do this requires changing assessment practices so that co-ops and condos are valued and taxed like private homes."

So, if the city and the state legislature were to take on the Herculean task of changing New York City's real property tax structure, where could they go for a model?

The recent property tax reform in Nassau County could be instructive. Nearly four years ago, the Nassau County legislature was faced with a civil rights lawsuit filed on behalf of minority homeowners by the state's attorney general and the U.S. Department of Justice, arguing that minority homeowners' taxes had risen steadily while those of their richer neighbors in mostly white towns had not.

Rather than fight the government in court, Nassau County administrators set about revamping their property tax system, starting a campaign to find and tag all tax lots and revamp property taxes based on the market value of the homes. The result was that, for the first time, taxes were assessed according to the real value of the property, as opposed to the assessed value of the homes.

"The tax structure in Nassau County was archaic," recalls Alvin Wasserman, director of Fairfield Property Services, a property management company that manages 60 condos, co-ops, and homeowner associations in Queens, Nassau, and Suffolk Counties. There were people with homes worth upwards of half-a-million dollars that were valued in only the tens of thousands in terms of tax assessment, and people with very modest homes carrying a proportionately large burden of the taxes.

"That was across the board, through the county," says Wasserman. In the end, he adds, the county was careful to make adjustments that caused few dramatic changes in what homeowners paid in taxes. "If you had a modest home, you probably paid a little less, while if you had an expensive home, you probably paid more. All they've done is update what the real values are. The assessed value of your house is closer to actually what the market will bear."

For Dick Netzer, a professor of public policy at New York University and a former dean of New York University's Wagner School of Public Affairs, it makes no sense for New York City not to assess taxes based on the market value of people's homes. In 1979, when the New York State legislature was under orders by the state supreme court to study ways to revise the state's property tax structure, Netzer, then-dean of the Wagner School of Public Affairs at New York University, was tapped by then-Mayor Edward I. Koch. His task: to study the tax system and make recommendations on how it might be reformed. For a year-and-a-half, Netzer and a team of assistants crunched numbers.

"We came up with a recommendation that all residential properties should be treated the same," he says. To protect the revenue stream, Netzer and his team recommended that owners of commercial properties pay more in taxes and that a homestead exemption be developed to ease the potential increased burden on middle-class homeowners.

His report, however, went by the wayside, in response to what Netzer calls the "hysteria" of one-, two-, and three-family homeowners, who were afraid of dramatic increases in their taxes if the system were based on market value. A four-tiered system was created instead, which has caused problems to this day. Observes Netzer: "It was done in typical New York legislative style: the bill [was] drafted late one night by lawyers for the senate majority leader and the speaker of the assembly, and the next day it was passed. The governor vetoed it, and they passed it over the governor's veto." At the time, says Netzer, the thinking among the state legislators was that the members didn't want to anger their constituents by raising taxes in any marked fashion, and there was no reason to protect co-op and condo owners.

"It was done that way because, I think, they, the legislators, were persuaded by two things: they figured they could not treat them as well as single-family homeowners, politically, and, two...these people [co-op and condo owners] are all rich and 'we shouldn't do anything for them.'" In the end, "What was done was a very clumsy arrangement, with a little bit of fixes every few years...developing [into] a fairly inept way of doing something for co-ops and condos."

Why is it inept? Because, the abatement has ended up flowing mostly into Manhattan and, in large measure, to cooperative and condominium owners who need it the least, maintains Sweeting. And, the inequities within the abatement have endured to this day, because the abatement was set up as a stopgap, says Sweeting, not as a long-term solution. The thinking was, says Sweeting, "People knew there were problems with it, but if it was going to be replaced in a few years, why move to a longer-term solution?"

The only problem is that there is no long-term solution, adds the IBO's deputy director. "I think if the city came together with a program that the [City] Council and the [Bloomberg] Administration were together on - it's no guarantee you will get it through the state, but that often gives you a good chance of getting it through the state."

So far, the Bloomberg Administration has pledged to maintain the abatement. At the finance committee's hearing in February, Mark Page, head of the city's Office of Management and Budget, told the committee members that the administration believed that "the continuity and predictability of the tax structure is important," and that "we believe the abatement is a good idea."

The administration wanted to avoid any sudden an unexpected changes in the property tax structure, added Page, in large part because of what is likely to happen to the value of people's properties if the taxes are changed. "One problem you have in valuing real property has to do with the value of the tax structure as it exists. One doesn't hold still" if the other is changed, Page warned the committee members.

But while low taxes play a large part in the high value of Class 1 properties, and that value may come down if the taxes are increased, the overall question is one of fairness, insists Marcia Van Wagner, an economist with the Citizen's Budget Commission. "Low property taxes are said to be a means to retaining the middle class in the city," Van Wagner pointed out to the finance committee during the February hearing. "However, they contribute to high housing prices, since low taxes are capitalized into the value of the house."

Consequently, says Van Wagner, that puts many homes beyond the reach of first- or even second-time homebuyers. "That seems contrary to the goal of retaining middle class homeowners in New York City. The bottom line is that Class 1 properties do not pay their fair share of the property tax," Van Wagner told the finance committee.

The reason they don't pay their fair share is because of the myth that was established two decades ago in Albany that one had to be rich to own a co-op or condo. "The myth has been established that you have to have some degree of affluency [sic] to afford them," offers Queens Councilwoman Helen Sears. In fact, the councilwoman insists, the widespread increase in co-op conversions in New York City throughout the past two decades has provided the "nucleus" of affordable housing in New York City. When the administration goes to Albany to lobby for an extension of the tax abatement this spring, "one of the things this administration might address is what co-ops and condominiums are," Sears suggested to Page during the February 26 hearing. It is 10 years, and counting, since the inequity in the tax structure was codified into state law. "I think the city can do more" to change that, Sears told Page sternly.

Something, in any event, has to be done, agrees Netzer, who originally tried to tackle the problem back in the late 1970s, because right now the system "is inequitable to everyone. I own a brownstone, which according to the DOF, has a $2.65 million estimated market value." But because he is taxed only on the building's assessed value, which is much lower, he pays $5,000 a year in taxes. "That's ludicrous," says Netzer. "That is so incredibly low. The national average property tax rate on residential property is one percent of the market value. One percent means I would be paying $26,000 [a year in property taxes]." If anything is going to get fixed, it would have to be done at the state legislature, "and I don't think anyone in the state legislature is interested in touching it."

So, is there another way? Nothing short of a united front, on the part of the City Council and the state legislature, could achieve a complete reworking of the current property tax system, notes Mary Ann Rothman, executive director of the Council of New York Cooperatives & Condominiums, which lobbied for the tax abatement in 1996 and for its extension in the following years.

"This system is convoluted and unfair and everything else," she says, "but it took a very long time to hammer together, and it will take a very long time to find a different system to gain the approval you need from all the political parties and get the political system behind it. It's a lot of work. It could, literally, take years to decades."