Options for Property Tax Reform:Equitable Revenue Raising Reforms for NYC’s Property Tax

Andrew Hayashi

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The Most Important Economic and Fiscal Decisions Facing the Next MayorA Citizens Budget Commission ConferenceDecember 6, 2013

Raising Property Tax Revenue by Fixing Inequities

• The new administration will seek to raise revenue

• That revenue can be raised from the property tax in ways that reduce inequities due to: – Class share system– Assessment caps and phase-ins– Valuation of condos and co-ops

Example of Interclass Inequities

Property CharacteristicsPark Slope/C.Gardens

(Class 1)E. New York/Starrett City

(Class 4)Fair Market Value $483,000 $483,000

Actual Assessed Value $5,820 $217,350

Tax Liability $1,063 $22,363

Effective Tax Rate 0.22% 4.63%

3Source: New York City Department of Finance, Property Tax Rolls, Fiscal Year 2013.

Example of Intraclass Inequities

Property CharacteristicsBrownsville

(Class 1)Kew Gardens/ Woodhaven

(Class 1)Fair Market Value $490,000 $490,000 Actual Assessed Value $6,592 $29,400 Tax Liability $980 $4,410 Effective Tax Rate 0.20% 0.90%

4Source: New York City Department of Finance, Property Tax Rolls, Fiscal Year 2013.

Why Inequities Matter

• Interclass InequitiesInterclass Inequities– intended to encourage homeownership, but:– NYC differences are excessive relative to social benefits of

homeownership– Low homeowner taxes shift burden to rental properties– Economically inefficient— discourages most productive

uses of land

• Intraclass InequitiesIntraclass Inequities– inherently unfair, and:– Favors appreciating property over depreciating property– Caps and phase-ins sacrifice revenue rather than simply

smoothing cost over time

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Three Revenue Raising Options–$2 Billion

• Option 1: Option 1: Conventional approach – Proportional rate increases

• Option 2: Option 2: Tax all homeowners at the same higher rate– Narrows gap between homeowner and other property

types– Evens tax rates among homeowners

• Option 3: Option 3: Eliminate caps and phase-ins– Narrows tax rate difference among properties of the same

type– Modest closing of gap between homeowner and

commercial property tax rates

Option 1: Proportional Tax Increases

Raises revenue but maintains inequities

Additions to the Levy and Change in ETR by Property Type in FY 2015 ($ millions)

Property Type 2015 Baseline ETR Option 1 ETR

1-3 family homes $298 0.77% 0.84% Condos/co-ops $308 0.78% 0.86% 4-10 unit rentals $76 1.89% 2.06% 11+ unit rentals $333 4.60% 5.03% Utilities $149 5.42% 5.42% Commercial $837 3.86% 4.22%

Total $2,000

Option 2: Treat Homeowners Equally

Raises revenue and eliminates inequity among homeowners

• Raises $2 billion entirely from homeowners and co-op and condo owners

• Treats homeowners and co-op and condo owners in the same manner

• Eliminates caps for homeowners

Addition to the Levy and Change in ETR by Property Type in FY 2015 Under Option

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Property Type 2015($ in millions) Baseline ET Option 2 ETR

1-3 Family Homes $1,045 0.77% 1.04%

Condos/Co-ops $955 0.78% 0.98%

4-10 Unit Rentals 0 1.89% 1.89%

11+ Unit Rentals 0 4.60% 4.60%

Utilities 0 5.42% 5.42%

Commercial 0 3.86% 3.86%

Total $2,000

Distribution of Class 1 Tax Levy With and Without Assessment Caps by Property Value

in FY 2013

Property ValueFiscal Year 2013 Levy

Levy Without

CapsLevy

Increase

Share of Levy

Increase Lowest Quintile < $349,520 $324 $365 $41 4.38%

Second Quintile $493 $546 $53 5.65%

Third Quintile $571 $663 $92 9.80%

Fourth Quintile $686 $838 $152 16.25% Highest Quintile > $695,956 $1,070 $1,668 $598 63.91%

Total ($ in millions) $3,145 $4,081 $936 100.00%

Option 3: Eliminate Caps and Phase-Ins

Addition to the Levy and Change in ETR by Property Type in FY 2015 ($ millions)

Property Type 2015 Baseline ET Option 3 ETR 1-3 Family Homes $415 0.77% 0.90% Condos/Co-ops $244 0.78% 0.79% 4-10 Unit Rentals $700 1.89% 5.04% 11+ Unit Rentals $189 4.60% 4.65% Utilities $0 5.42% 4.89% Commercial $452 3.86% 3.88%

Total $2,000

Effective Tax Rates by Property Type,

FY 2015

Property Type

FY2013 Baseline

Option 1

Option 2

Option 3

1-3 Family Homes 0.77% 0.84% 1.04% 0.90%

Condos/Co-ops 0.78% 0.86% 0.98% 0.79%

4-10 Unit Rentals 1.89% 2.06% 1.89% 5.04%

11+ Unit Rentals 4.60% 5.03% 4.60% 4.65%

Utilities 5.42% 6.13% 5.42% 4.89%

Commercial 3.86% 4.22% 3.86% 3.88%

Summary

• Can raise significant revenue by eliminating inequities among properties of the same type

• Efficiency and equity benefits to reducing gap between owner-occupied and rental properties

• Strong case for changing or eliminating assessment caps– Owners can be protected with less costly methods

(loans or circuit breakers) – Caps largely benefit the most valuable properties

Tax Revenues

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The Most Important Economic and Fiscal Decisions Facing the Next MayorA Citizens Budget Commission ConferenceDecember 6, 2013