The Leviathan: Property Taxes in the Big Apple

How NYC's tax mess overtaxes tenants & towers, and what to do about it.

I’m sure that many of you, like me, spend much of your time thinking about what an ideal tax system would look like. Perhaps you fantasize about abolishing the income tax, funding the entire government from tariffs, or finding a way to turn a DBCFT into an LVT. Sometimes it is useful to come back down to earth and see just how unfit-for-purpose many of our existing tax systems are. This is a particularly valuable exercise for property taxes, which in many places are a tangled mess that hides the true tax burden and punishes productive land use.

With that goal in mind, this article will walk you through the “notoriously opaque, confusing, and inequitable” property tax system in New York City, by summarize the findings of the report ‘Footing the Bill’, which I just published with coauthor Iziah Thompson at the Community Services Society. I’ll explain how property taxes currently work in NYC, detail the distortions and inequalities that it produces, and highlight our recommendations for how to fix it.

Dissecting the Leviathan

In general, NYC’s property taxes are known to be somewhat impenetrable - fractional assessments are modified by exemptions and growth caps, tax rates depend on class shares, ultimately yielding bills that are incredibly difficult to understand for the average taxpayer.

Let’s walk through how a typical tax bill is calculated, using the case study of a mansion in the Dyker Heights neighborhood of Brooklyn. This 2,800 square foot home on 82nd Street recently sold for $3.2 million, although the Department of Finance uses various assessment techniques to determine its fair market value as $2,387,000. This value was then marked-down by an assessment ratio of 6%, giving it an assessed value of $143,000. Because this amount was growing too fast from previous years, it was constrained by a growth cap, producing a taxable value of $114,000. Using class shares, which govern the proportion of tax revenue that should come from each type of property, this property received a tax rate of 20%. This was multiplied against taxable value to produce a final tax bill of $22,700.

Sound unnecessarily complicated and opaque? You’re telling me! I had to replicate this calculation for every single property in the city!

This system introduces distortions and inequalities through four key pathways:

1. Assessment Methods: Different methods are used to assess different types of properties, under-taxing more valuable condos/coops/commercial buildings, and making property taxes on apartments function more like a rental income tax.

2. Fractional Assessments: Remember how our mansion saw its assessed value calculated as 6% of its fair market value? That’s the rate applied to low-density houses (1-3 units). For higher-density housing, a rate of 45% is used instead, for some strange reason. Not only is this disparity arbitrary and nonsensical in a city desperate for more housing supply, it also obscures the truth of which building types really pay the highest taxes. This is because they combine with class shares to produce nominal tax rates which make it look like low-density homes are paying higher tax rates than apartments (20% vs 13%) when the reverse is true when we consider what is actually charged in reality. For example, while on paper it looked like our mansion was charged a 20% tax rate, in reality we paid taxes of $22,700 against a property value of $2,387,000, an effective tax rate (ETR) of just under 1%.

3. Growth Caps: constrain how quickly taxable values can rise over time. Low-density homes enjoy a lower ceiling of 6% per annum (or 20% over 5 years) compared to the 8% (or 30% over 5 years) allowable for higher-density homes. This is a tax subsidy for low-density housing in rapidly-appreciating areas, paid for by new multifamily housing & less-prosperous neighborhoods.

4. Class Shares: When calculating posted tax rates, City Council must keep the share of the tax levy relatively consistent over time, using class shares which are pegged to property values way back in 1981. As a result, despite comprising more than half of all property value, low-density homes contribute only 15% of total tax revenue.

Privileges & Penalties

Clearly, decades of trying to stitch-up loopholes has created a convoluted patchwork system that is bursting at the seams and riddled with distorted incentives. So we dug into tax bills throughout the city, to find out who gets privileged and who gets punished by this system as it currently stands. For all the details, check out our full report.

Effective tax rates paid by different property types in NYC.

Despite New York being home to the iconic apartments of Jerry Seinfeld and the F.R.I.E.N.D.S, density is overtaxed. Effective tax rates (ETR) average 0.7% of property value for low-density homes, rising to 2.6% and 3.6% for medium- and high-density buildings respectively. Despite this being a city where more than two-thirds of households rent, rentals are overtaxed, paying higher average ETRs than owner-occupied homes.

Poverty is penalized, with tax rates being highest on the cheapest properties and declining as property values rise. Likewise, majority-Black neighborhoods in Brooklyn & Queens tend to pay higher ETRs than wealthier, whiter areas like Park Slope & the East Village. As documented in prior studies, assessment methods benefit luxury condos & coops, shifting the tax burden onto middle- and low-income property owners.

And finally, productive land use is penalized & speculation is rewarded, with vacant land enjoying relatively low tax bills and are penalized with a sharp increase in taxes if they choose to develop. We highlight the example of an entire city block in Manhattan which has remained vacant for two decades, and which pays a lower tax rate than the neighboring 860-unit apartment building.

As just one example of the perverse outcomes of this system, let’s compare our Dyker Heights mansion to a nearby apartment building in Bay Ridge. Both buildings occupy a quarter-acre lot and recently-sold for similar amounts, yet our mansion houses just one family, whereas the apartment building is home to 42 households. Despite being a much more efficient use of land, the apartment building pays far more in property taxes, both in absolute terms ($150,000 vs $23,000) but also as a percentage of property value (5% vs 1%). Yet again, we observe that NYC’s tax system absurdly favors single family mansions while penalizing the construction of dense apartment buildings full of tenants.

Better Taxes, Better City

So how can we untangle this mess? Let’s start with some blue-sky thinking about what an ideal property tax should look like. It should be simple (so that regular humans can easily understand their tax bill), progressive (more valuable properties get higher tax rates), tenure-neutral (people should not be penalized for renting), and it should reward good things (like building homes, maintaining buildings, and putting land to productive use).

With those goals in mind, a good property tax system should fairly assess the market value of all taxable property and tax it all at a single rate. Tax relief should be targeted at individuals (such as people who are disabled, veterans, low-income or retired) regardless of whether they rent or own. It may be desirable to exempt some activities (such as schools, parks or churches) from taxable property. To avoid penalizing the construction of badly-needed housing, we argue that property owners should earn a tax exemption when they redevelop new buildings, or even better, the value of buildings should be wholly exempt from taxation.

To move NYC in this direction, we make several recommendations. In the short-term, fractional assessments should be abolished so that posted tax rates closely match actual ETRs. Similarly, class shares should be abolished, so that tax bills for each class of property will closely match its fair share of total value. When smoothing taxable values over time, the same mechanisms should be used for all classes of property. We detail these and other recommendations in our full report.

We endorse two approaches to improving land use in New York City, a stick and a carrot. The stick proposes to discourage vacant & underutilized land with an additional tax, using the revenues to help renovate rent-stabilized properties. More comprehensively, we propose offering a carrot to developers by reducing or removing taxes on building values, offsetting lost revenues with a land value tax. Such an approach can be expected to stimulate increased construction of apartments, encourage renovation & maintenance of existing buildings, and boost business activity.

When the time finally comes for lawmakers to fix NYC’s broken property tax system, the goal shouldn’t be to just clean up the current opaque & unfair mess, we should give the greatest city in the world the tax system it deserves - one that can truly unleash its potential.

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Stephen Hoskins is the Director of Community Research & Engagement at the Progress and Poverty Institute