The Property Tax Cannot Stand

Most policy conversations about producing more housing focus on creating financial incentives for more development, streamlining the zoning code and rationalizing the elaborate web of rules that drive up the cost of construction. All of that matters, but the way we tax property in New York City is as big an impediment to housing production as any other factor. It’s time we focus on that broken piece of the status quo.

Let’s start with a quick primer: The property tax people pay varies depending on the tax class to which the property is assigned and then four key numbers about the property itself.

New York City has four tax classes. One-, two- and three-family homes are assigned to Class 1. All other residential property, including apartment buildings, co-ops and condos, is assigned to Class 2. (Other classes of property, 3 and 4, are nonresidential.)

Which numbers determine the size of the bill? 

First is the market value, which the City estimates using three appraisal methods. For small homes in Class 1, it mostly assesses market value by looking at sales of comparable buildings. For apartment buildings, co-ops and condos in Class 2, and for office buildings, factories and stores in Class 4, it generally looks at the building’s income or the income of comparable buildings (this is called the “income approach”). For unique properties like utility equipment, churches and museums, it uses the cost to replace the property.

Second, there’s the assessed value of a property, which is a percentage of the market value, that the City chooses to ensure that all properties within a tax class are, putatively, taxed equivalently (uniformly) across that tax class.

Third, the City Council determines the share of taxes that will be paid by each tax class based on a not-easy-to-explain formula. Once the amount of money to be raised — the levy — is determined, the City Council sets a tax rate for each tax class so that it can raise the target levy.

In simple terms, the math works like this: Tax Class Rate = Class Levy / Total Tax Class Assessed Value.

But it’s anything but simple. New York City’s property tax system is known for its complexity. That complexity adds significant inequities, unfairness and confusion.

A few examples:

• Assessment caps for small homeowners (Class 1) limit assessment increases to 6% per year and 20% over five years. This, along with the City’s failure to adopt a uniform assessment ratio (assessment divided by market value) within Class 1, means that in neighborhoods with fast-rising property values, assessments are kept low, resulting in lower tax bills than would have otherwise been the case.
• In multifamily buildings, rentals pay a disproportionate share of the property tax levy compared to very expensive cooperatives and condominiums. This is a huge problem in a city where the vast majority of residents rent rather than own. Decades of research by the Furman Center and the New York City Independent Budget Office shows that the effective tax rates paid by rentals are higher than co-ops and condos. For the rent-stabilized stock, the Rent Guidelines Board reports that taxes constitute a whopping 29% of operating costs — the largest single line item.
• Co-ops and condos, regardless of how fancy they are, are valued by comparing them to rental income from regulated, rather than from market-rate, rental buildings. As a result, some of the most expensive co-op and condo buildings are undervalued, which shifts a greater responsibility for the classwide tax levy to modest co-ops, condos and rental buildings.

These are just a few examples; there are more. Add them up and they place a greater financial burden on rental apartments, drive up rents and discourage the production of high-density housing New York desperately needs. In addition, homeowners in modestly priced homes are paying substantially more taxes.

After decades of hearing elected officials talk about the problems with the property tax but not seeing sufficient solutions, Tax Equity Now New York (TENNY) sued New York State and City in April 2017. (Disclosure: I am the policy director for TENNY.) The suit sought a declaration from the court that the City’s property tax system violated the New York State Constitution and several provisions of State law. In its review, the Court of Appeals, the State’s highest court, clarified the law in two important respects.

First, the Court debunked the City’s excuse for not adopting a uniform assessment ratio for small homeowners: In response to the City’s argument that the 6% and 20% caps were the reason why assessments were not uniform, the court held that the City could both adopt a uniform assessment ratio and comply with the required caps. In other words, contrary to the City’s belief, the assessment caps did not trump the requirement for uniformity.

Second, the Court clarified that the City was not required to use regulated rental income when valuing co-ops and condos that would not have been subject to rent regulation. In 1997, the New York State legislature allowed apartments with rents of more than $2,000 and household incomes of more than $175,000 to be deregulated. The laws were amended in 2011 and again in 2015 to allow apartments to be deregulated if rents were more than $2,700 and the household income was greater than $200,000. For expensive co-ops and condos that the City had been valuing using regulated rents, the deregulation that was allowed between 1997 and 2019 almost certainly would have led to the deregulation of almost all of those co-ops and condo units. Therefore, the City could start to use market-rate rents to value those co-ops and condos. The use of market-rate rents from comparable buildings could increase the unfairly low assessments on these higher-end buildings.

The Court also held that the City is on the hook to make these changes: It doesn’t need to surrender its power to Albany to get a more equitable tax policy done. The next mayor can take a series of steps now to begin to make the property tax more fair and legal and to loosen the cinder block tied to the legs of New York’s housing market.

Advance fairness for small homeowners in middle-income and predominantly minority neighborhoods

For the more than 700,000 small homeowners in the five boroughs, equity principles are clear: Homes that have the same value should have the same tax assessment. Yet this is not the case under current City tax policy; homeowners in the Bronx, Queens and Staten Island bear the brunt of the inequities. If you look at the median assessment ratio for all small homes by borough, Staten Island has the highest at 4.41%. That means, for example, that a home that the New York City Department of Finance — the agency responsible for determining property taxes — values at $100,000 would have an assessment of just $2,800 in Manhattan but would be 57% higher ($4,410) in Staten Island. 

Even within boroughs, there are wide disparities. For example, in the Bronx this year, the Department of Finance estimated the value for 200 properties at $802,000 each. Yet the assessment for these properties — which, based on their valuations, should be the same — range from a low of $6,300 to more than $42,000.

The City once had a much more equitable policy, and it could again. Between 1982 and 2006, it continuously lowered the uniform assessment ratio for small homeowners of Class 1 properties to comply with the law. But the City has not complied with the law requiring uniformity for almost two decades. It is important to note that Nassau County and the City have the same assessment rules for Class 1 properties. To comply with the law, Nassau County has lowered its assessment ratio almost every year.

For the City, that means homeowners in every borough — and especially Staten Island, the Bronx and Queens — are overassessed. Under an equitable tax policy where the burden is shared more evenly between homeowners, the overall assessment for homeowners on Staten Island, in the Bronx and in Queens could be reduced by 33%, 28% and 26% respectively.

Doing right by tenants

Today, the market value and resulting assessed value for rental units, cooperatives and condominiums is determined using a system that significantly understates the value of the most expensive cooperatives and condominiums in the city. Under New York City law, the Department of Finance cannot value Class 2 apartments based on sales prices, but instead must estimate the value of multifamily units based on the building’s rental income (or likely rental income, if a co-op or condo).

The question for the City is how to estimate co-op and condo rental income. The City believes the law requires benchmarking against regulated rental income. However, regulated rents are significantly lower than market-rate rents, which means that co-ops and condos valued with those rents would be low. For example, imagine a co-op or condo that, based on sales price, is worth $1 million. If the City used the median rent for a regulated apartment in 2023 of approximately $1,300, the Department of Finance would estimate the property value at around $156,000. However, if the City used the median rent for a Manhattan unregulated apartment (almost $4,500), the resulting value would increase to $540,000.

The use of regulated rents to measure property value means some of the most expensive co-ops and condos in the city are compared to buildings that include rent-regulated units, regardless of whether the cooperatives and condominiums were regulated in the past.

It doesn’t have to be this way. The Court of Appeals agrees that the City could use market-rate rents when estimating the market value for high-value cooperatives and condos. Such an approach would result in property taxes for the most expensive cooperatives and condominiums that are as much as 40% to 50% higher than they currently are, taking the burden off of tenants in low- and medium-cost rental buildings who are shouldering more than their fair share.

Implementing this change for high-valued cooperatives and condominiums could help reduce the tax burden for rental buildings and lower-valued cooperatives in Manhattan and the boroughs.

For example, the current 12.5% Class 2 tax rate could be reduced. Currently, Class 2 property owners pay $15 billion in property taxes. Proper assessments of higher-valued co-ops and condos would allow Finance to lower the rate across the board. A fairer system could lower the rate to approximately 10.5%, under which the average taxes per rental apartment could go from $5,600 to $4,700. It is one very concrete way to mitigate the skyrocketing rents.

Stop penalizing owners who renovate and improve their properties

For renovated properties, the City uses a hybrid method to estimate market value. The City values apartment buildings based on the income from the property. Typically, when valuing a property by the income approach, the value would not increase unless rents go up or expenses go down. However, rather than base the new value for renovated properties on those factors, the City typically adds the cost of the renovation to its preexisting value. This approach overassesses owners who invest in renovating and upgrading their properties and can discourage needed renovation and improvements.

Move toward truth in taxation

While we fix the most egregious flaws in the tax system, we must also hold elected officials accountable when they decide to raise taxes. Right now, elected officials and policymakers play hot potato when it comes to accepting responsibility for increases in New York City property taxes. While the authority for deciding the amount of taxes each year is vested in the City Council, they blame the Department of Finance for the tax increases.

A principle called “truth in taxation” seeks to elucidate the relationship between City revenue growth and assessment changes, requiring elected officials to explain to the public their decision-making by showing the public what the tax levy would be if frozen (and tax rates are reduced) and what the levy would be if it were increased based on assessment (and tax rates remained the same). While it is a simple requirement, it forces elected officials to remember that they are accountable for decisions about the levy.

Adopt the statewide 2% property tax levy cap

Another policy related to “truth in taxation” is a levy cap. In 2011, New York State adopted a property tax levy cap, under which the amount of revenue raised from property taxes cannot increase by more than the lesser of 2% or inflation each year, unless the legislative body overrides the cap with a 60% supermajority vote (with some variation for different jurisdictions). Unfortunately, the law does not apply to New York City.

Since adopted, the property tax levy for New York State local governments and school districts, not including New York City, has grown by just 25.5%. New York City’s property tax levy, by contrast, grew by 71.3% — from $24.1 billion to almost $38 billion per year. If the City adopted the State property tax cap in 2011, the property tax levy would be just $23.6 billion this year, $15 billion less than it is currently.

Would that mean a smaller City budget? Yes. But it would also mean lower rents — and not only for stabilized units.

Stop violating the constitutional operating expense limit

New York City and other local governments rely heavily on the property tax because it is the one tax primarily within local government control. However, there is a constitutional limit on the amount that can be raised for operating expenses. The City can raise the levy as much as it needs to pay for the debt it has borrowed.

The City should seek clarification and a ruling from the State attorney general to make sure they are not violating the constitutional provision.

In short, there are several steps the City can take to increase fairness and clarity and genuinely incentivize production and maintenance of the types of housing New Yorkers most need. Now is the time. As the Court of Appeals has said, the City has the power.