Mayor Bill de Blasio’s campaign pledge to pay for universal pre-school by hiking income taxes on the wealthiest New Yorkers is likely to come up against election-year politics, with Gov. Andrew Cuomo and the entire state legislature on the 2014 ballot. But unlike income taxes controlled by Albany, de Blasio has a bigger say on other levies — particularly those imposed on real estate.
Former Mayor Michael Bloomberg twice convinced the City Council to cover budget shortfalls by raising property taxes, including a record 18.5 percent jump in 2002, when typical co-op owners saw their tax bills climb by about $500 a year. That hike brought the effective tax rate on co-ops and condos to 13 percent of assessed value, from about 11 percent, experts say.
The rate came down briefly during the boom years of the last decade, but the recession prompted another hike of 7 percent in 2008. That increase tacked on another several hundred dollars a year for those same co-op owners, effectively putting the rate back to where it stood after the 2003 jump, at around 13 percent. It remains at that level today.
Although the amount that each residential and commercial asset class pays fluctuates based on changes in property values, the ratio each pays is more or less static. That’s because it’s politically difficult to tweak the ratios and ask, say, a single-family homeowner in Queens to shell out extra so that their share is closer to that of a Fifth Avenue co-op.
At current rates, Class 1 properties, or single-family homes, pay 78 cents for every $100 in market value of the property, while Class 2 homes, which include condos and co-ops, pay as much as $3.83 for every $100, experts say.
“There is tremendous variability,” said Charles Brecher, the research director for the Citizens Budget Commission, an independent budget watchdog group.
The mayor and City Council have the power to make across-the-board increases to the nominal tax rate. They can also slice up the pie a bit differently, so that one type of property pays more or less than another, as long as no one slice rises by more than 5 percent in a year, experts say.
The imbalance — which exists because tax law treats co-ops like rental buildings, in part because some co-ops also have rental units — has long been seen as a fundamental problem with the city’s system. But significantly changing it would require legislation from Albany. And with those single-family homes typically located in middle-class or even poor areas, any effort to make the people who live there shell out more taxes would, for many, be politically unpalatable.
Property tax bills also climbed under Bloomberg because assessed values rose sharply, in step with the city’s hot real estate market, after a long period in the Giuliani years when values were relatively stagnant.
De Blasio faces a $2 billion hole in the city’s $70 billion budget, and contrary to popular belief, there’s little room to cut, because about 75 percent of that total is mandated spending, experts say. So the new mayor might be tempted to push the City Council to bump up that underlying 13 percent rate for co-ops and condos to drum up more money.
As with many tax changes, however, there could be blowback.
“Administratively, this would be an easy thing to do,” said George Sweeting, of the city’s Independent Budget Office, a non-partisan watchdog agency. “Politically, it would be very hard.”
There are other taxes that could be tweaked to boost revenue without Albany’s approval, like the hotel room tax. For much of 2013, this tax stood at 5.8 percent, which would have generated $521 million dollars, according to the city Office of Management.
But bowing to pressure from the hotel industry, which says the tax hurts tourism, the City Council let the rate drop to 5 percent at the end of November, which means the city will now collect $70 million less in revenue, Sweeting said.
For his part, de Blasio believes tourism will be fine even if the tax rate returns to 5.8 percent, and he supports reinstating the higher rate, according to news reports.
Then there’s the city’s real estate transfer tax, which sellers pay and which flows mostly back to the city. It currently tops out at about 1.4 percent for sales over $500,000.
De Blasio might consider creating a new rate for luxury homes that sell for more than $5 million, for example, in line with the state’s mansion tax, sources say. The new mayor has not raised this idea publicly, however, and it is another reordering that would require a green light from the state legislature.
Some have suggested removing exemptions to the city’s commercial rent tax, which a tenant pays for office space. The tax, which drums up about $680 million a year, according to the IBO, is around 4 percent of an annual lease. Under current rules, tenants with rents of less than $250,000 a year, along with those based north of 96th Street or in the Financial District, are exempt.
“It bothers the heck out of some tenants, especially when they come from another city and are not used to it,” said Arthur J. Mirante II, the president of the tri-state region for commercial brokerage Avison Young.
If it pays to keep the streets clean and funds other services, the rent tax, in its current form, should be retained, Mirante said, adding, “$680 million is a pretty staggering amount or money. I don’t think there’s any chance in hell you can tinker with that.”
Any move to remove the exemptions or raise the rate would also require approval from Albany.
Sources also pointed to rental building taxes — the ones that effect co-ops and condos — as ripe for reform, though de Blasio has not even hinted that he will take up the issue. Rentals are taxed in the same steep category as condos and co-ops, a cost landlords say they often shoulder themselves, rather than pass along to tenants.
“It’s basically an unfair system to rental owners,” said Gary Jacob, an executive vice president with developer and landlord Glenwood Management Corp.
And it’s gotten worse over time, between increases to the tax rate and the boost in assessments, he said. More than 30 percent of Glenwood’s rent rolls are taxed today, up from 20 percent three decades ago, Jacob said. “No other city has a burden anywhere near that,” he added.
De Blasio might simply focus on making the city’s property tax code easier to understand.
“New York’s property taxes are without a doubt some of the most complex, opaque property taxes of any major jurisdiction,” Sweeting said. “There’s room for improvement.”