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After Covid and local recessions…Unearthing the Big Apple’s revenue under its feet

Last January, CPTR piped up with its observations on the surprise bid of Andrew Yang for the mayoralty. Borrowing from his own 2016 presidential campaign, he proposed a basic income (BI) plan for those New Yorkers left behind by pandemics, economic collapse, and no housing.

At the time, a question arose: where’s the money? In the previous incarnation of the BI, a proposed sales tax would provide the Simoleans. The internal contradiction was apparent to those who follow tax policy. The sales tax is regressive and the dominant powers in society are okay with that. In such states as Georgia, Mississippi, and Alabama, dependence on the sales tax is legend (Want to buy fresh produce? There’s a tax for that!). There’s a lot of poverty in those three states, with no signs of improvement.  In those states, the sales tax covers many products and services to make up for vestigial property taxes and low-ish income taxes.

Sales taxes are high in New York State and City, and those applied to food seem like a minefield to snare the unwary corner store. The combined sales tax is 8.875% in the Big Apple, although the archaic service of shoe repair is exempt! So, we can finally put the sales tax delusion on the back burner.

Yang’s other suggestion for funding BI was a value-added tax (VAT). A few experts claim that VAT is less regressive than the sales tax, but that depends on where you’re buying toothpaste. Some rates imposed are hair-raising.

A new approach

Since VAT is a national tax, and New Yorkers can’t handle more sales taxes, Yang’s campaign looked for an alternative but reliable source of revenue for his program. Taxing not for profits is an idea anybody should entertain, primarily when tax-exempt Madison Square Garden serves as the Catherine Wheel for James Dolan with the Knicks and the Rangers as court jesters.

Some researchers contacted Andrew Yang’s staff and suggested that considering the amount and value of vacant and blighted land in New York, they should consider creating a new class of real property. That could raise serious money either for the general fund or earmarked projects of urgency to New York City.

The Researchers:

After several meetings to provide clarity and some deep data dives, the Yang campaign debuted a version of what CPTR had crafted with its studies. To their credit, the campaign shined a light on a previously murky and arcane issue: should New York City have a system of property tax and assessment that lets vacant and blighted lots off the hook?  Historically, many neighborhoods suffered the ill effects and economic drag these parcels represent. The neighbors know it, their elected leaders know it, policy shops study it and understand it, but nobody has done anything to fix this flaw in the system.

The Yang campaign settled on valuing vacant and “wasted” parcels at 100% of market value. It sounds reasonable. In contrast to the CPTR plan and how Washington DC does it, it’s not as transparent as it could be. Because Washington has different classes (including one for vacant and one for blighted parcels), identifying and sorting these parcels for public policy purposes is clear-cut.

Yet, the Yang campaign’s proposal is new and bold for a city like New York, that for such a vital place seems permanently committed to baby steps.  The revenue target is $900 million, which appears a heavy lift. The campaign is clear this is not just a revenue tool but also an economic development tool. Here is a stick in addition to the many carrots provided to the real estate interests that loom large in the Big Apple (they use big clubs for bodegas with noncompliant awnings, food carts, and so on).

Martha Stark, former New York City Finance Commissioner and coordinator of an extended grinding class-action lawsuit against the current assessment system, came out with a thumbs up for the idea. Still, she wondered how realistic the revenue stream was. Her best estimate was $500 million.

It’s not just a coincidence that many of the left-of-center candidates for Council have reacted enthusiastically to the original proposal of adding a Class V of property under the CPTR plan, along with Dianne Morales running strong for mayor. Some are on the record favoring an overall shift from buildings to land values in a graduated and organized program.

Former Manhattan Borough President, now city controller, Scott Stringer, championed a pilot program to incentivize (with prejudice!) vacant residential lots in Manhattan north of 96th St. The program has been in place successfully since 2008. Because of the way things are, his support for LVT became muted; however, he did give his latest press conference in front of a vacant lot in Brooklyn.

New York City’s assessment and taxes: a devil with many details

Yang’s plan may confuse (yes, it’s a campaign) because New York’s property valuation system, in addition to its tax rate system, is an outdated oddity, a relic of those wacky and wonderful 1980s – like parachute pants and oversized shoulder pads.

Where to begin? In the late 1970s and early 80s (against Gov. Carey’s veto), in a bid to resurrect New York City (and give its remaining property owners a break), the state legislature passed a law that split New York City properties into four classes:

  • Class I consists of residential properties.
  • Class II contains co-ops, condominiums, and large residential apartment buildings
  • Class III is public utilities (kind of like an innocent bystander in this story).
  • Class IV is everything else.

Simple right? Nope, you forgot the assessment ratios!

Class I ratio is 6% of market value. Classes II to IV ratios are 45% of market value.

But we can’t stop there. We have to apply tax rates now!  The tax rates for 2021 are:

Class I – 21.045%

Class II – 12.267%

Class III – 12.826%

Class IV – 10.694%

Why the different tax rates? Because the tax rates get set by the semi-mandated share of revenue each class provides to the city[1]If you can’t take any more of this, dear reader, there’s a video.

Is it “what’s the use?” Or “let’s fix it?”

The takeaway is that people of goodwill in New York see the priority of fixing the system. The system benefits a few though, and the obtuse nature of New York City’s assessments assist the new breed of rentiers who have – since New York’s troubles in the mid-1970s – turn New York from a community of workers, families, and creators into a monoculture of media, finance, and power.

No doubt, landlordism took off in New York just after independence, with familiar family and street names such as Delancy, Roosevelt, Livingston, and even Trinity Church (especially Trinity), reaping the spoils of confiscated Tory land.

Therefore, this is an old story that, sadly, repeats.  One need only look at formerly hollowed-out neighborhoods turned into “investment opportunities,” shuttered factories that once made things by employed, productive people into lifestyle quarters for people who are cooler than you and me.

Ignoring the problem of vacant land highlights how much money is being left on the table to improve neighborhoods and lives. Case in point: 1472 Shakespeare Avenue, a sprightly little vacant lot of not quite 2/10 of an acre in the Bronx.

Corner lot, mixed-use, fit for a building for which the immortal Swan of Avon could be proud.

Zoning? Condo Residential.

Sale Price? $1,850,000 (May, 2021)

Market Value? $467,000

Assessed Value? $13,273

Actual tax bill?  $2,835.39

Here’s a snapshot of the story: the asking price of $1.85 million may be realistic, or it may be a fantasy of the landowner (who lives in the leafy suburb of Great Neck, NY). The market value of $467,000 has been reduced quite a bit over the past three years (from 2019 to 2022). Okay, all things being equal, that may be the accurate market value for an arms-length sale.

But wait what’s this assessed value of $13K? Values for New York City properties phase in over a multi-year period. The intentionally Byzantine assessment system really can’t tell you how they arrive at any one assessed value at any given time. Maybe they use Univac.

Now we arrive at the heart of the issue: the owner expects to get over 1 ½ million dollars, but the annual tax liability is a paltry $2,835.39.

In comparison, a two-story frame house owned by a no-doubt hardworking family a few doors down the block pays $2,450.48.

The system is broken, even with a putative “homeowner-friendly” assessment system.  With much of the city on its back foot, now is the time to “keep it real,”  How?  By creating market value assessments and policies to divert publicly created value out of private pockets.

[1] 1Beginning with the 1992 assessment roll the maximum annual change in levy shares was set at 5 percent. However, in many years since then the cap has been lowered in order to hold down tax increases for Tax Class 1 and sometimes Tax Class 2 properties. For the 2019 tax year the final tax rates were determined with the cap set at 1.2 percent.

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