The Winners and Losers on the Property Tax Seesaw

Political leaders have been trying for decades to reform the city’s byzantine property tax system – with little success. Mayor Bill de Blasio promised to tackle the issue during his first mayoral campaign in 2013 and did nothing during his first term. He promised to address the issue during last year’s campaign for re-election – and so far has done nothing. Fed up with waiting, a group called Tax Equity Now New York (TENNY) has filed a lawsuit asking the courts to identify the problem areas in a system that is widely regarded as lopsided and unfair. How did the current impasse come to pass? 

The city’s method of taxing real estate has roots in a 1981 legislative action that divided city properties into four classes: Class 1 consists of one-, two-, and three-family homes, as well as condos with three or fewer units.; Class 2 is for all other residential properties, including co-ops, condos, and rental buildings; Class 3 is for utilities; and Class 4 is for commercial properties.

The effective tax rates for each class vary, for a host of complicated reasons. But two peculiarities of the system in particular account for much of the disparity. One is a state law limiting annual assessment increases on Class 1 properties to no more than 6 percent, or 20 percent over five years, regardless of how fast market values are rising. Originally designed to keep homeowners from abandoning the city in the wake of the 1970s financial collapse, the cap explains why homeowners in the city’s priciest neighborhoods, like Park Slope and Greenwich Village, pay a much lower effective tax rate than homeowners in neighborhoods that are not appreciating rapidly. The other factor is a state law that requires co-ops and condos to be valued as if they were rentals. City assessors must compare them to rental buildings comparable in age, size, and location. “That might have been OK in 1981 when there weren’t very many co-ops,” says Martha E. Stark, a TENNY leader and former commissioner of the city’s Department of Finance. “But it makes absolutely no sense to compare them to rental properties now. It significantly understates the value of high-end units.” 

James Parrott, director of economic and fiscal policies for The New School’s Center for New York City Affairs,  says the city Department of Finance has been working to narrow that gap by “casting a wider geographic net” when looking for comparables. “We’ve seen the relative assessments for co-ops and condos rise a little bit faster in recent years compared to rental units,” he says. 

The condos benefiting the most from market-value “discounting” are in Brooklyn’s Prospect Heights and in Manhattan’s Flatiron District, Chelsea, Union Square, and the Upper East Side. Those with the smallest market-value discounts are in Jamaica, Briarwood, and Jamaica Hills in Queens, and in Parkchester in the Bronx.

On top of that, the city’s co-op and condo tax abatement, adopted in the 1990s, actually “rewards” this undervaluation, says Stark. Under the formula, the lower the assessed value, the higher the abatement percentage. 

This system ends up putting “a very high burden on renters and contributes to high rents throughout the city,” says Jordan Barowitz, the vice president of public affairs for The Durst Organization, which owns almost 2,000 rental units in Manhattan and is part of the TENNY coalition. “Renters are subsidizing wealthier condo and co-op owners at a rate that can sometimes be two or three times greater.” 

Mary Ann Rothman, executive director of the Council of New York Cooperatives and Condominiums, says the organization agrees that the current system is unsatisfactory and in need of a total overhaul. “We can’t nibble at the edges and do piecemeal repairs,” she says. However, the group is a fierce advocate for the abatement program, and Rothman says that will continue as long as the current property tax system is in place because, without it, “the cost of living within the confines of this city would skyrocket even further.” 

Pressure for reform appears to be growing, as state lawmakers and city council members have publicly pushed the mayor to follow through on his promises for action in recent months. But TENNY isn’t waiting any longer. Stark notes that the lawsuit doesn’t call for any specific methods of resolution. Rather, the group is looking to the court to identify the structural problems in need of correction, thereby providing “helpful guidance and opportunity to politicians, so they can do something.”