New York City’s major property tax law was enacted decades ago. On this episode of Policy Outsider, we take a deep dive into the law’s limitations and challenges to reforming it. Our guests are Rockefeller Institute President Bob Megna, Carol O’Cleireacain, a Richard P. Nathan Public Policy Fellow at the Institute, and Preston Niblack, commissioner of the New York City Department of Finance.
Guests
Transcript was generated using AI software and may contain errors.
Joel Tirado 00:00
Welcome to Policy Outsider presented by the Rockefeller Institute of Government. I’m Joel Tirado. New York City’s major property tax law was enacted decades ago. On today’s episode of Policy Outsider, we take a deep dive into the law’s limitations and challenges to reforming it. Our guests are Rockefeller Institute President Bob Megna, Carol O’Cleireacain, a Richard P. Nathan Public Policy Fellow at the Institute, and Preston Niblack, commissioner of the New York City Department of Finance. That conversation is up next.
Bob Megna 01:00
so Hi, I’m Bob Magna, president of the Rockefeller Institute of Government. It’s a pleasure for me today to bring a important topic to our listeners. And the question at hand is the New York City property tax and New York City property tax reform. And the question is, can it be accomplished in our lifetime? I have a real I don’t know how long the rest of my lifetime is, but I’m hoping for our guests today. It goes on for for quite a while. Our two guests today are Doctor Preston nib. He is New York City’s commissioner of finance, which means he gets to administer the tax system as it’s imposed in New York City, and believe me, that is a difficult and complicated job. And to talk to him about this important issue, we have Doctor Carol ocon, who is currently a Richard Nathan Fellow at the Rockefeller Institute of Government, which is how she came to us and came to this important topic, and more importantly, Carol has had A fast career in city finance, including being city finance Commissioner. And she’s the person who recommended to Mayor Dinkins that they establish the 1993 revision commission. She then served on the latest Reform Commission 25 years later, which tells us, by itself, how difficult it is to do property tax reform anywhere in the state of New York, but especially in New York City, where it is just a intricate web of Different kinds of properties and different rules governing how those properties are valued. So we don’t really want to hear from me very much. Let me just do one or two things to get to Carol and to the commissioner. First, over 1.3 million properties who values have to be assessed every year should give everyone who has any indication of how city and state government works a shiver down their spine about how difficult it is to do that on an annual basis, and that includes different kinds of properties. We’re not just talking about residential properties. We’re also talking about factories, warehouses, garages, hotels, theaters, nursing homes, etc, etc, etc. So anyone who knows the complexity of the kinds of property and real value real property in New York City would know how complicated this is. It’s also important to realize, and I don’t think a lot of people do, outside of the folks working on city finance, that this is the largest source of revenue for New York City. We always think of the city income tax, and we think of the city sales tax. But I think a lot of folks don’t think about how important and how prominent the property tax is to and vital to the city government. So that’s simple, but as you’re going to find out, everything about how this tax is applied is pretty complicated, and so I am going to turn this over to Don. Dr o’ Clara con to start us off in this conversation, and I want to thank both of you for doing this. And I especially want to thank Dr niblack for taking the time out of what I know is an incredibly difficult schedule to do this with us.
Carol O’Cleireacain 05:19
Thank you. Actually, Bob. In addition to saying it’s complicated, you also could have said the tax is really old. The current law, which people still talk about. His name s, the s7 1000 a was passed by the state legislature in 1981 over I should add the veto of Governor Carey, and it set in place four distinct classes of property, one to three. Family homes are in class one, apartment buildings in class two, utilities in class three, and everything else, mostly commercial property in class four. It also allows each class to be assessed at different percentages of estimated market value. It also caps annual assessment increases, and it fixed the shares of the tax levy that is all the revenue collected among these three, these four classes measured by all standards of good taxation. And I will say that both the commissioner and I are well educated in public finance. So economists would tell us that by all the standards, fairness, simplicity, uniform treatment, ease of administration, this tax is failing. In the interest of time, I’m going to give you a simple 5000 foot view of the problems. I’ll start with the fact that the city doesn’t really know the actual value of its own property tax base, and that’s largely because the law, the law mandates an artificial, I call it fictional valuation of co ops and condos. They’re assessed as if they were rentals, which results in significant undervaluation, especially of luxury units. And that’s been well documented by our commission and by other art siders. Second similar The second problem is that similar problems, even on the same street, carry very different tax burdens. Our commission provided the evidence of large variations in the effective tax rate, which is the tax burden per dollar of market value within class one, that is within family homes, and within class two, the co ops and condos, and also variations between those two classes. And we know why, because the law does not allow for accurate assessments. It does not allow assessments at market value, and it imposes caps on the speed at which assessments can increase. So when housing prices change at different rates in different neighborhoods, assessments and tax burdens end up way out of line with market. Reality and time is really an enemy here, not a helper. This inequality is going to continue to get worse. Third, and this is an important problem with it, many low income residents actually struggle with the size of their property tax bill. This tax is not based on one’s ability to pay. Those on fixed incomes and in gentrifying neighborhoods are often property rich but income poor. There are circuit breaker programs and homeowner exemptions with which offer them some relief, but with them, people still have to pay the tax upfront and then get reimbursed later, which is not completely effective or enough, frankly. And finally, taxpayers and public officials too are baffled by this system. It’s really complicated because of assessment caps, which result in transitional assessments. The tax bills are confusing. Setting the tax rate is a multiple step process, assuring the balancing of shares of the total tax levy among the four classes. And I can tell you, trust me, only a handful of people understand this, or who could even explain it. I won’t even try, and I doubt the commissioner will try to take you through it even. And as the Commission saw it, the class share system, which has never been adjusted as it was attended intended, is now a hindrance. So that’s my quick tour of the tax biggest problems. I’m sure the commissioner can give you even more to close, I want to say something directly. Worry about reform. It’s really hard. Although assessment caps are very unfair, they do generate predictability. So the system we have is predictable more or less, for both taxpayers and for budget makers, and those tax caps help to mitigate to some degree, the problem of being property rich and cash poor. So there may be many people who learn to live with this system. They’ve been with it for a number of years, and they might prefer the devil they know to some theoretical promise of reform, my opinion, and not that you’ve asked for it, but I’m going to give it to you. My opinion is that true reform needs to be combined with a property tax cut. Unfortunately, our Reform Commission was constrained to revenue neutrality, which means we couldn’t spend $1 of the output of the revenue. And that meant that our proposals would generate large numbers of losers in addition to the winners. We were trying to help how many and how much and in which neighborhoods, that is what governs the politics of getting it done. So it’s not easy and it’s not particularly pretty, is it? Dr New Black,
Preston Niblack 11:32
it’s let me. Let me start by saying, first of all, thank you for hosting this here at the at the Rockefeller Institute. This is a very important topic, Bob, as you laid out, and it’s a huge important revenue source, and it’s a very big tax on a lot of people, and it’s affects, really the economy of the whole city. So getting it right is very important. And I think Carol did a great job at summarizing some of the problems and challenges of the current system. I take exception with a couple of points as we go along, but
Carol O’Cleireacain 12:06
I expected that.
Preston Niblack 12:09
But I want to talk for a moment about sort of the starting point for us when we when we the Adams administration came in to office and we had the advisory commission report had just kind of landed on everybody’s desk, you know, a few days before the end of the de Blasio administration. So we came in and said, you know, are we going to pick this up? And the mayor said, yes, when the system is broken, it’s very unfair. We have to figure out how to fix it. So the Advisory Commission Report laid out what seemed to be a very elegant and systematic, systemic reform that actually addressed many of the inequities that people have complained about over the years in the property tax system, and one of the things that didn’t do, and it was by design, and created a lot of people whose tax bills would go down about 70% roughly in our estimate, but that left 30% whose tax bills would go up. And those were the people that I was interested in, and the mayor was interested in, who are they, where are they, and by how much were their taxes going to go up and it, you know, as I think we all knew, it, was in neighborhood. The problem about the tax caps on assessed growth is that they tend to fall in certain neighborhoods and in neighborhoods that have seen rapid growth. So you could be a homeowner who bought your home 50 years ago in a neighborhood for a price that you could afford then and now, 4050 years later, you own a home that has increased tremendously in value. Your taxes haven’t gone up as fast, but they may have gone up faster than your income. So now you have this challenge of a piece of property that is tax advantaged, in effect, because of the caps and but that if it were valued at its, you know, actual, something akin to its actual sales on the market value, you wouldn’t be able to afford. So how do you address this? And I think the challenge with the advisory Commission’s framework was while it created really a permanent fix to all of these problems, it did so with a lot of disruption to taxpayers, especially, of course, the taxpayers who’d been benefiting from the system for a Long time. Carol alluded to our shared backgrounds in public finance and as public finance economists, an elegant solution like this is great. We love it. It’s very pretty as taxpayers who might be affected one way or the other, our definition of fairness may look a little bit different from our definition of fairness as. Economists, and that’s really where the rubber kind of hit the road and where we ended up taking a step back. So the administration has drafted legislation, and we tried to get it introduced in Albany this year, the budget took longer than was expected, and we had other issues getting the bill actually introduced, which kind of speak to some of the complexity and the daunting nature of the legislature tackling a reform that affects so many people in ways that they’re not going to easily
Carol O’Cleireacain 15:32
understand. Is it hard? Was it hard to find sponsors? We had a
Preston Niblack 15:36
sponsor in the Senate who was very eager, and a little bit harder problem in the finding one in the assembly. But then we had some people who were also, you know, not so eager. They wanted to know more before they before they signed up. So understandably, and there wasn’t enough time in the session to really begin to to look at it. I We wanted to take the mayor wanted to take a patient approach that mitigated some of those negative impacts on taxpayers. At the same time, one piece that was a very important feature of the advisory Commission’s report that we really did want to keep was targeted tax relief for lower income homeowners, the
Carol O’Cleireacain 16:24
advisory which is always going to cost yourself, which
Preston Niblack 16:27
is always going to cost, right? The Advisory Commission had actually two mechanisms for achieving that. One was the homestead exemption, which exempts a portion of your home’s value from taxation. The other was a circuit breaker which caps the amount you pay as a percentage of your income. We kept the homesteadings a version of the homestead exemption in our bill, and this was for the mayor, extremely important, and really one of the key features of the bill that we would like to see introduced in that it provides some systematic relief to low and moderate income homeowners. There is existing relief if you’re a senior or if you’re disabled. But the mayor was also concerned about people maintaining affordability for everybody, essentially in the city, even for low and moderate income homeowners, you raise the amount we we it was, if I recall correctly, in the Advisory Commission, was a 20% we raised it to 25% with a with a phase out, you know, based on income. So, you know, creating affordability at the lower end of the income spectrum was a very important feature. The question, of course, is the other question, of course, is, how do we fix the inequities that Carol talked about within class one, the one to three family homes within class two, co ops and condos in between those two classes that you know that that it was too much to bite off and chew the whole reform at one time so
Carol O’Cleireacain 18:05
and to be fair, I think it, that’s what I was alluding to. I think it’s impossible to do without spending money. You just, you can’t. I can’t do this
Preston Niblack 18:19
a little Yeah, I started out as a housing analyst in at the city’s independent budget office about three or 400 years ago, and I remember saying even then, property tax reform is easy, as long as you have a couple billion dollars to throw around. Most of the time, we don’t have a couple million dollars to throw around
Carol O’Cleireacain 18:41
and the budget. And I used to be a budget director, a budget director would tell you, you never have it.
Preston Niblack 18:48
So in the absence of being able to spend, you know, two, 3, $4 billion we had to find an approach that would allow us to go in the direction of reducing the range of the inequities in tax treatment of similar properties more incrementally. And what we have proposed is raising the rate at which assessed value can grow, which will allow you to sort of move more rapidly in the direction of the target ratio, which is currently 6% right, and allow you to capture more of the market value. And it’s incrementally more. It’s not, you know, it’s, it’s a, it’s a, it’s an incremental approach. It’s not intended to be a big shock. It’s intended by design to be, you know, to get you there slowly and to kind of move you down the path, co ops and condos much harder to address. By law, they have to be valued as if they were rental properties. Rental properties, an apartment building that’s a rental building is valued by, you know, taking what the expenses? Are taking what the rent income is, getting a net operating income, and then capitalizing that into a value, capitalizing that flow into a stock. That’s the value. It doesn’t make any sense for co ops and condos, but that’s what the law constrains us to do with co ops and condos, even more than with changes to how class one is valued, changing co ops and condos to a system whereby they’re valued, you know, as if they were sale by their sales value on the market would have created immense disruption. Yes, it would have captured a lot of the value of very high end co ops and condos that we can’t capture. Now, on the other hand, there was a ton of properties in the middle that it was very hard to foresee the impact on, but many of which would have been impacted in ways that you know, because we don’t have a good sense of their sales value, it would have sometimes been very significant changes in the tax treatment of those properties as well, in ways that were harder to predict with class one. We kind of know what the sales based market value is, because that’s how we value them. Costs and condos, we don’t value them that way. And so we’re guessing a little bit, you know. And by guessing, I mean, you know, we have very sophisticated models from our very talented modeling and data analysis group at the Department of Finance, but still, we just don’t know as much. So that made that problem much more difficult. It’s a bigger issue,
Carol O’Cleireacain 21:34
just a much bigger issue, co ops and condos. Yes, tough.
Bob Megna 21:41
Can I ask some dumb questions?
Preston Niblack 21:44
Yes, what,
Bob Megna 21:46
what percentage are co ops and condos of your of your base?
Preston Niblack 21:53
Good question
Carol O’Cleireacain 21:55
in the fictional valuation, or what we think might be a more realistic. It could be a third. Could, yeah, a third.
Preston Niblack 22:08
And I think it’s quite that much. I think it’s, you know, it’s about, it could be, it’s about 45% I guess the whole of class two, and I think the minority of that is probably co ops and condos compared to rental buildings.
Carol O’Cleireacain 22:26
And then the number I had been carrying from the Commission report was a market value of about 23% of the market value and and from everything Preston has just said that’s got to be a low ball, right? Because nowhere near what the top end of the market is like, and it’s colossally high. The problem is that distribution of co ops is a very skewed distribution. Yeah, yep.
Preston Niblack 23:02
And I think if you, well, go on, I think if you went to a sales based valuation of co ops and condos to more accurately capture their value, you can’t leave them in the same class anymore, right? So the Advisory Commission said, Let’s combine it all into one class, which made a lot of sense, but you know, again, has all this sort of unpredictable impacts on co ops and condo valuations that we were concerned about. If you create them, if you create a separate class for them, so that you can try and mitigate some of that, you’re still left with the problem of rental buildings. And I think, you know, one of the issues about reform that was not addressed was, what do you do about renters? You can’t really give renters. You can’t guarantee that any tax relief you give to rental buildings goes to the renters themselves. Right? So the best way to approach it, really, and what most many states do, at least, is to have an income tax based credit for your rent. So if your rent exceeds some percentage of your income, for example, you get there’s a formula that gives you some credit, but you have to wait for that pay your taxes.
Carol O’Cleireacain 24:19
Think it’s handy and great, because the revenue comes out of the income tax, right, and not out of the property tax,
Preston Niblack 24:26
but at least you know, and at least you know that the taxpayer is actually getting the benefit, and not just the building.
Carol O’Cleireacain 24:31
Because if you did it in some kind of system that made it really clear what a renter was getting, you can bet that a landlord is going to try in some way to capture
Preston Niblack 24:44
providing that any kind of relief that is meaningful at all. And most of the systems that I know don’t really have what I would consider to be very generous benefits, it really is very costly also.
Carol O’Cleireacain 24:58
But what’s interesting. Also about the renter problem is the politics of it, because I sat on this commission. We had two years worth and we were disrupted by covid, but we had two separate years worth of hearings in the boroughs and renters never show up. Renters have not got an inkling, or most of them certainly, have they not been organized to act on the property tax, or believe that the property tax is of any concern to them when you know they’re paying it, unlike the owners of the building, exactly, unlike the owners of the building, and unlike every all the small all the homeowners, all the homeowners understand it, even the ones that don’t actually see a property tax bill that that goes through the bank or somewhere they know they’re Paying
Preston Niblack 25:59
Carol O’Cleireacain 26:35
No, no, I think it’s, it’s for paying your income tax. Yeah, we get a statement, yeah. And they tell you what proportion of your co op maintenance is going to the mortgage in the building so that you can get that bit of mortgage.
Preston Niblack 26:49
The condo owners are billed directly at the unit level, so they do see the bill, the property tax bill, and they also, you know, may pay it through their mortgage as well. Like, like a single family homeowner does,
Carol O’Cleireacain 27:02
let’s just say that we have you, we have parked, metaphorically, the co op and condo problem for some point in the future. I don’t see how it can never be addressed, because it’s this really is going to get worse and worse, and because the obvious luxury at the top end of that market is, well, what I just said obvious,
Preston Niblack 27:30
I will say, We, at the Department of Finance, we have made a lot of effort over The years to try and capture as much as more accuracy in the value of COP and condo buildings. But we are extremely constrained by the fact that the law is quite clear. We cannot look at sales
Carol O’Cleireacain 27:52
so that law has to be changed. Yes,
Preston Niblack 27:56
the political and how you do that, yeah, and how you do that is
Carol O’Cleireacain 28:01
tricky. Do you think though that technology is going to I’m not an AI person, but it seems to me that there’s a future where technology could be really, really useful. Here. I know that, and I wish you could speak to it, because I know that the Department of Finance does a hugely, a much better job than they used to do, mapping the properties and understanding what each of these buildings look like. They’ve taken technology has really helped assessors. Who you know, your old fashioned view of an assessor is he has to walk into the into the building and go up and down. Doesn’t have to do that. Now, there’s all of this technology that can see from the air. You’ve got Google Global, whatever could you talk to that? Because it seems to me that this should be solvable. I’m going to make up a number 10 years from now.
Preston Niblack 29:00
It’s funny, as it happens. I just came from a presentation by our property valuation team on some advanced techniques that they’re using to evaluate their modeling efforts. Because we have a what’s called a computer aided mass appraisal, which is basically means that we we start by modeling properties. Now we actually have to physically visit every property once every three years. But in the, you know, in the intervening years, we sort of rely on economic data, data we collect about neighborhood values, et cetera, all the characteristics of buildings to model what the value should be. And we’re doing, we’re always, we have an extremely good modeling group, very sophisticated. Our our head of valuation, Assistant Commissioner, Carmelo Quintos is, you know, well known nationally for her knowledge in this area and expertise. And so we’re always looking at techniques to. To improve our valuations, and I think we do a good job. Technology will never Trump politics and so, or maybe it will one day. But, you know, maybe it has, maybe it has, but it, you know, we can work at the margins, if you will, of fixing our valuations to be or, you know, making our valuations and assessments as accurate as possible. But when it comes to reform and actually changing how you the basic approach you use, you know, and if that means that there are going to be taxpayers who are going to get gains and taxpayers who are going to get losses, then that’s political problem, that technology can’t fix
Carol O’Cleireacain 30:48
that problem. Yes, I know, but it but I mean, the technology could make it so that it’s a much more manageable
Preston Niblack 30:56
problem. I think it’s
Carol O’Cleireacain 30:58
both in an analytical sense, but also in a practical sense of you having to administer a tax because it’s not easy to administer to a co op, because a co op is a is a corporation, and how they choose to spread their the burden among the shareholders is different from building to building. So I think that that there’s there could be some hope, right, that administratively, things could get easier for you.
Preston Niblack 31:28
Yes, I think in terms of reform, sort of going in the direction of its changes to the law that really eliminate the sources of the inequities that people are concerned about, and, in fact, even sued us about, there’s no, there’s no magic bullet, right? Just as technology is not a magic bullet, right? It’s a tool. It’s a tool. We’re gonna we’re getting better. The the approach to reform, I have come to believe really takes, it’s going to take time. Also, you said 10 years for technology. I mean, I think it’s probably 10 years to get to reform, or more, because you can’t do it fat. You can’t do it fast. You create too much disruption in the market, too much disruption to taxpayers and homeowners. So, you know, it’s, it’s having, I think, a plan and a vision for how you move forward, but over a period of time that exceeds any particular elected officials term in office.
Carol O’Cleireacain 32:32
I guess that gets back to my point about predictability. Predictability is not one of those fairness issues that you learn, yes, economics graduate school, but predictability is very important to taxpayers.
Preston Niblack 32:48
Perfect, perfectly true. You know, you, you, I have always said there’s not necessarily, not everybody is necessarily looking for reform, as long as they open their bill and they’re not shocked, yeah,
Bob Megna 33:02
so can I? Can I venture a dumb question to if someone sells even they’re in Carol’s situation that I think is very important, where you have a person of modest income in an area where real estate values have increased tremendously. When they sell that property, you’re going to get them a little bit, I guess, on the income tax side, the question is, Is that another approach to look at, to see, kind of at the back end, how you both collect the data on what these values are and how you think about taxing in the future.
Preston Niblack 33:47
I mean, it’s interesting that you raise that up so it wasn’t a stomach question, as you thought. It was very current. It’s a good it’s a very good question, a current question. And it’s actually part of what you know we it’s an element of the reform that we are proposing, which is, if you sell a property right now, the tax the effective tax rate goes with the property. So if I sell my home to Carol and I’m now my because I’ve enjoyed the benefit of caps, the ratio of my assessed value to market value is 2% say Carol, who did nothing to earn that, nor did I, for that matter, but Carol, you know, gets it right, right? Carol gets that 2% and continues. So there’s not really any reason why you shouldn’t reset the ratio to what it you know, the target is, which is currently 6% upon sale. The one exception to that we would we would propose, is for inheritances, for people who, you know, there are many properties for whom most, most of their many owners, for whom a property, piece of property in a home, is their primary Finance. Financial asset, and you don’t really want to impair the value of that when they are passing that along to their heir. So there’s one that’s the one exception we would have. But otherwise, I think resetting the the the assessed value to its target ratio of market value is one element of how we would approach again, trying to sort of bring more more convergence of values around the to the target ratio,
Carol O’Cleireacain 35:26
and you have the database Commissioner. So let me ask you, How common is that? What what portion of the properties that are changing hands fall into? What’s your estimate of falling into either of those classes you just described?
Preston Niblack 35:42
The current median AV ratio is around 4% so that’s against a target of 6% so there’s most properties, of course, are below that. The properties that turn over are more commonly closer to the 6% honestly. So it’s really the properties have been held for a long time where the taxes are low, which may actually be an impediment to mobility, right? Because if you move your taxes are going to go up. But most of the properties that are are sold are actually closer to the the target 6% ratio than than are way far from
Carol O’Cleireacain 36:19
Preston Niblack 36:23
not going to get you huge amounts of money. No, no, but it’s a way. It’s a way of, sort of, you know, over time. And I forget, you know, it’s something like 6% of class one properties turnover in a in a busy year. So it’s, you know, again, it’s, it’s a slow process by which people get, you know, by which we can sort of get that convergence, but it’s one that minimizes excessive disruptions.
Carol O’Cleireacain 36:49
Can I ask an even dumber question, or real dumb question, you’re giving low income taxpayers relief with the homestead and the circuit breaker. How are you paying for that?
Preston Niblack 37:07
The allowing the caps, allowing the growth in the assessed value of properties to rise, actually pays for that within a couple of years. And I think, you know, the question of, sort of, how much that should be, and how much you’re willing to forego in the first year or two or three or four, you know, will dictate how deep the exemption is, or how high the income is that we that you give some exemption to, you know, Everything we propose, we had to put numbers against, right? It doesn’t mean that we’re, you know, going to fall on our swords over any particular set of numbers. This is all obviously a political negotiation, and we, you know, we want to land at a spot that is going to be acceptable to enough people to get a
Carol O’Cleireacain 37:59
vote. Yeah, right. But it started with your negotiation, you should, pardon me, between you as finance commissioner and the budget director as as to what they were willing to forego from there,
Preston Niblack 38:15
and they were receipts and they were willing to forego something. Yeah, so
Bob Megna 38:21
that’s an interesting point, though, and I’ll let you guys continue this. But how do you see that? I know we don’t want to extrapolate, and I know this is all politics, but how is the pressures that are on the budget folks, affecting how you think about this.
Preston Niblack 38:47
Again. I you know my my feeling has evolved over time about this, but I think I have been fairly consistent in thinking that it’s going to take some time, and I still think it’s going to take time. There’s no rushing into this. And you have to sort of lay out an endpoint, but you have to lay out a path that gets you there without harming a whole bunch of taxpayers along the way. So, you know, I think that we have, we have a little bit of because we have the luxury of time, right? We have the ability to adjust the speed at which we are moving forward. You know, nobody knows what the budget is going to look like next year, but nobody expects it to be good. And
Carol O’Cleireacain 39:36
just because of the certainties.
Preston Niblack 39:38
I mean, I think there’s, there’s two types of uncertainties, right? There’s what’s what’s the federal budget going to look like? How bad are the cuts going to be to programs that the state relies heavily on federal and the city rely heavily on on federal money for, and what’s the risk of recession with with tariffs in place now, with. You know, war and uncertainty in the price of oil in the Middle East, you know, there are a lot of uncertainties, and that tends to stall business investment and activity and could lead to a recession, or at least a, you know, something of a slowdown in growth. So I think that there are, you know, plenty of reasons for concern about the budgetary outlook because of both of those things, either one, either one of which, by itself, would be enough to cause concern.
Carol O’Cleireacain 40:31
But you do have a city which is growing in population and with housing programs, right? We know we have an affordable housing problem, and we know we have that kind of growth. So that must be built somewhere into the expectations of where, even in not very good times, the property tax base will be. Yes, I mean one thing that’s something that goes away, the property tax
Preston Niblack 41:03
base, right? It can go up and down. And I think one of the, one of the, you know people, one of the topics that people have been concerned about recently has been office space. Obviously, since covid and remote work, office space has been subject to much higher vacancy rate than we’ve seen in many years. But it turns out that that is much affects much more the sort of lower, less premium space, where the premium space still seems to be in high demand, right? So it’s the sort of Class B office space that’s struggling more. So the kind of most valuable properties are generally holding their value. And we’re also now starting to see people snack, snapping up portfolios of property that had been that had suffered, you know, because of vacancies, people handed the keys back to the bank or, you know, decided to sell it at a loss. And so we’re now, you know, we’re seeing some new investment in the property market,
Carol O’Cleireacain 42:04
and you’re seeing conversions.
Preston Niblack 42:06
Conversions are slow, very Yeah, conversions are very difficult, and they’re slow. I know that there are, there are a couple of conversions that are underway right now, one of which I think is actually going to be break ground, or going to open pretty soon, like and then I think there are a lot of people who’ve come to the housing department and expressed interest, so it’s there’s definitely an interest in that not every, not every office building can be converted to residential property, of course.
Bob Megna 42:36
Well, again, I would ask, if there are any follow up questions.
Carol O’Cleireacain 42:42
I’d like to ask him one last question, and it’s basically a political question, because, because you have a piece of legislation, and you’ve clearly been talking to people, and that’s not what we did at the commission, right? We talked to taxpayers, but not and elected officials came and spoke to us. But this is a real bill, and it’s a real possibility for people to vote for or feel that they can’t. What’s your sense of what matters to the folks in Albany who write the law.
Preston Niblack 43:23
Good question. I think, I think there’s a lot of concern and hesitancy, because people don’t fully understand what it means for their constituents, right? So the first question that elected officials are going to ask about is, what does this mean for my constituents? And I think that,
Carol O’Cleireacain 43:46
and when they ask that, what kind of things do you have to show them,
Preston Niblack 43:51
right? So we’ve drilled down to the sort of neighborhood level here with modeling, and we have a lot of data to do this with so that we can give people a sense of you know, okay, 70% of the homeowners in your district would see their taxes reduce, and the median reduction would be $700 20% would see it increase. 10% would see it no change. You know, we can describe in pretty good detail what would happen
Carol O’Cleireacain 44:19
with the homestead and the
Preston Niblack 44:22
Yes, including yes, that includes the homestead exemption, yeah, living who could do that? Yep. Okay. I mean, we are able to match, you know, income, personal income filings, right with people’s property addresses, so we have a sense of, you know, how many people are eligible in a neighborhood for for property benefits like that,
Carol O’Cleireacain 44:42
and a way to demonstrate that they will actually use it, or know how to use it, or even making it simpler or easier.
Preston Niblack 44:50
You know, I think that with the homestead exemption a few years ago, the first, I think the first year the of the Adams administration, there was a property tax rate. Rebate of $150 70% of those we just sent out because we had the information at hand. Others, the rest of them, people had to apply. But there were sort of presumptions, you know, that if you were eligible for a senior citizen, homeowner, in exemption, etc, that you qualified. We just needed you to confirm, you know. So just check a box. So, you know, the vast majority of people, I think, yes, it will be, there will be some application necessary process for some people, but most people, I think, will be able to get a database. Yeah, we can get, we can just automatically extend it, pretty much. So,
Carol O’Cleireacain 45:37
what about the what about the lawmakers who have mostly renters?
Preston Niblack 45:48
I you know, I think that there’s concern about the burden of property taxes on renters and the building owners to your Yes, yeah. But you know, building owners are very vocal about the burden of property taxes, and they’re not hesitant. They’re not at all hesitant to blame rent increases on property tax increases. You know, we’re very, I will have to say I am. I am very mindful of renters as a class and the end of taxation of rental buildings, we we differentiate between buildings that are under some form of rent regulation or stabilization versus those that are market rate. Market rate buildings saw, not surprisingly, in this last assessment, role, a pretty substantial growth because there’s a lot of rent pressure, rent regulated buildings where there has not been the ability to raise rents as rapidly as the market would. We saw assessments rose half a percentage point. So you know, we can distinguish, of course, between buildings because they have to file income and expense statements with us. We can distinguish between buildings that have more ability to raise rents than those that don’t. But I do think that it’s, you know, it’s all kind of one big piece of the affordable housing problem that can’t be solved by the property tax system alone. It has to be solved by also on the supply side as well,
Carol O’Cleireacain 47:31
in sort of going after some of the inequalities or unfairness or inequities that I talked about, or problems, let’s just call them problems of the property tax that I talked about. There’s a major lawsuit in front of you. I think it’s been there. I don’t know. I’m making up numbers five years, six years, something like that. Maybe. Okay, you want to make news here and tell us what’s happening. You’re not the judge. So, I don’t,
Preston Niblack 48:01
yeah, I don’t. I don’t have any news to report. But last May, yeah, the issue is, yeah, the lawsuit alleges that the city’s property tax system is essentially unconstitutional or in violation of the law for a few different reasons. One of the major assertions is, is that the the caps on growth and assessed value have resulted in effective tax rates that are higher in certain neighborhoods and in other neighborhoods, which we all know to be true. But part of the part of the allegation here is that that is so in a manner that is puts heavier tax burdens on majority and minority neighborhoods, which is a finding that I think may have been more true at a certain point in history than it is now. Honestly, we have not been able to replicate those findings, but I think more importantly, there are two. There are two main clauses in the real property tax law that are at issue here. One is the section that requires us to impose caps in the growth of the safe assessed value, and the other one says that all property in a class must be taxed at a uniform percentage. So those things seem to be intention. My feeling is the legislature knew what it was doing, and the uniform percentage apply. It means it should be taxed the ratio that is set right has to be uniform across the whole class. Right now, that ratio of assessed value to market value is 6% in effect, it is not always 6% because of the growth caps. So I you know the solution that the plaintiffs put forward to the core. Report is that we should lower the race the AV ratio, so that we can kind of compress that range of values of AV ratios
Carol O’Cleireacain 50:10
in the belief that that will give relief to minorities. Yes,
Bob Megna 50:15
okay. The
Preston Niblack 50:19
the problem with that is, if you if you lower the AV ratio, you’re lopping off a bunch of taxable assessed value. So the result is, if your tax rate doesn’t change, you’re going to lose a lot of money. If the tax rate does change, then you’re in order to make up some of that revenue, then you’re going to have tax increases, tax rate increase. And in either scenario, maybe, you know, surprisingly, there are people who are going to lose, you know that people whose taxes will go down, certainly, but there’s also a large number of people whose taxes will will go up.
Carol O’Cleireacain 51:03
And this is, why, why? Why do some people
Preston Niblack 51:07
so this is the magic of the class share system that is built into the current tax system, which would be, you know, great thing to do away with. So the
Carol O’Cleireacain 51:18
thing that I said, no one in the world understand, yeah, I mean, put tax rate,
Preston Niblack 51:23
put as simply as possible. The class share system requires that the total tax levy, which is just the total value, total taxable value, times the overall tax rate, right? So total also think of as the revenue. Yes, it’s the revenue. So the allocation, of the total tax levy across the four classes of property is essentially fixed by a formula, a statutory formula, that is really subject to only the most minor adjustments each year by the city council and the state legislature. So that means that if you lop off value from one class, you still have to raise the same amount of revenue from that class, from that class, so their tax rate goes up, which means that everybody who is sort of at the at the borderline there is going to see an increase. Everybody who is below what the new target ratio is will benefit. But everybody who is closer to the to the edge there is going to see an increase, even though their value has gone down, their tax rate will go up enough to offset the decline in their value.
Carol O’Cleireacain 52:31
Some of those people who will lose will also be minority,
Preston Niblack 52:35
yes. I mean, already neighborhoods, yes. I mean, you know the this? They not know that when they brought this suit? I don’t know, but, I mean, this is just we looked at this very closely. It’s we looked at this very closely because we wanted to understand what the impact was. And you know, our, I the mayor’s very strong feeling was, this is very rough justice with no with no way to mitigate the impacts. And that’s why, in our view, going forward with a reform that allows us to provide some relief, to target, targeted relief to low and moderate income homeowners, that allows us to structure the the march toward greater equity in a way that is more incremental, avoids disruptions and gets us on the path, even if it doesn’t get us there. Right way makes a lot more sense than a kind of roughshod change in the AV ratio with the kinds of distortions that are kinds of impacts that might not have been anticipated.
Carol O’Cleireacain 53:45
So presumably, you’ve made that case to the court and
Preston Niblack 53:50
well, we’re still, you know, it’s still early. The court, the court of appeals, allowed the case to go forward last May, and right now we’re in discovery, so meaning, you know, both, both sides are sort of asking the other side for information, and so that’s that process will take a while. So we’re not really at the point of sort of making argument, oral arguments, or presentations yet to the court, but certainly we will, you know, we look forward to having our day in court and able to make you know our arguments for our position
Carol O’Cleireacain 54:29
well as we know the wheel, the wheel of justice. I think slowly
Preston Niblack 54:35
Yes, and I think all, all, all this shows that you know, property tax reform is, as we started out by saying, hard and I think you know, this administration deserves credit for at least stepping forward and starting to tackle the issue in a serious way. Going to be a long time, whether it’s through the courts or through the legislature or whoever it’s going to take time. Time right to arrive at a solution that fixes the underlying problems in a way that is sensitive to the impact on taxpayers.
Carol O’Cleireacain 55:11
Well, then to answer Bob’s question, at the beginning, in our lifetime, I’m going to have to eat my vitamins and I can stick around.
Preston Niblack 55:21
Yes, as Bob said, not not knowing what my lifetime is, I require some optimism on our part to assume that we will get there. But I’m optimistic. You
Joel Tirado 55:40
Thanks again to Bob Megna, Carol O’Cleireacain, and Preston Niblack for this in-depth exploration of New York City’s property tax code. If you liked this episode, please rate, subscribe, and share. It will help others find the podcast and help us deliver the latest in public policy research. All of our episodes are available for free wherever you stream your podcasts and transcripts are available on our website. I’m Joel Tirado; until next time.
Joel Tirado 56:15
Policy Outsider is presented by the Rockefeller Institute of Government, the public policy research arm of the State University of New York. The Institute conducts cutting edge nonpartisan public policy research and analysis to inform lasting solutions to the challenges facing New York state and the nation. Learn more at rockinst.org or by following RockefellerInst. That’s i n s t on social media. Have a question, comment, or idea? Email us at [email protected].
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