If New York City is successful in reforming its outdated and labyrinthine property tax system, it could bring greater fairness and better transparency. However, some measures may potentially disrupt the local economy and transform the real estate market in ways that could take more than a decade to stabilize.
Changes proposed in a 2020 advisory commission report and more recently framed in an Assembly bill that has now been shelved would shift the tax burden to thousands of middle- and upper-income residents. These residents may be in a better position to leave the city if their housing costs reach a tipping point, especially those who can work remotely and find it less expensive to live outside the five boroughs.
The proposed changes focus on the methods used by the city to value and then tax some 8.6 million residential owners and tenants, aiming to eliminate discriminatory tax impacts affecting low-income people and racial minorities. Identifying all affected stakeholders has been a significant obstacle to past tax reform initiatives. Balancing the changes to avoid a broad disruption in city real estate values may be equally challenging.
Currently, the tax levy falls more significantly on nonresidential owners and, by extension, their commercial tenants. Residential real estate benefits from significant tax preferences. According to a 2020 analysis from a city commission, Class 1 properties (generally single-family and smaller residential properties) comprised 48% of total city real estate value but only 15% of taxes paid. Co-ops and condos accounted for about 23% of value but only 15% of taxes paid.
If the city council aims to maintain these preferences and shield some residential owners and tenants from abrupt tax increases, the commercial sector would bear the brunt. This includes offices, hotels, retail, and industrial properties, which hold the position of least-favored class in any reform scheme and are likely to face unacceptable tax increases in the residential class.
The proposed reforms would remove caps on taxes that currently shield owners of high-value homes in upscale neighborhoods, leading to sharp rises in property tax bills for thousands of moderate-income homeowners. Additionally, condo and co-op owners would no longer belong to a different class from other residential properties, facing market-based sales valuations instead of the current hypothetical rent-based values, which currently result in lower taxes.
Changes would be phased in over five years for residential properties, with full implementation upon property transfer during the transition. This might reduce property sales or lower purchase prices due to the sudden rise in carrying costs, raising legal questions about constitutional muster due to differential treatment of properties based on sale status.
A critical change would be the removal of the fractional assessment approach for all property types. Commercial owners, who today see an arbitrary assessment ratio of 45%, would see their properties assessed based on full market value. This shift, while promoting transparency, leaves much room for speculation and potentially removes several bedrock variables from the valuation formula.
Mayor Eric Adams and city leaders have a significant challenge in ensuring the reforms produce a more equitable tax system without economically discouraging many residents, commercial owners, and their tenants from staying in the city.
For a more detailed analysis of NYC’s property tax reforms, please refer to the full article by David C. Wilkes on Bloomberg Tax.