Options for Property Tax Reform: Equitable Revenue Raising Reforms for NYCs Property Tax Andrew Hayashi 1 The Most Important Economic and Fiscal Decisions Facing the Next Mayor A Citizens Budget Commission Conference December 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 Characteristics Park Slope/C.Gardens (Class 1) E. New York/Starrett City (Class 4) Fair Market Value$483,000 Actual Assessed Value$5,820$217,350 Tax Liability$1,063$22,363 Effective Tax Rate0.22% 4.63% 3 Source: New York City Department of Finance, Property Tax Rolls, Fiscal Year 2013.

Example of Intraclass Inequities Property Characteristics Brownsville (Class 1) Kew Gardens/ Woodhaven (Class 1) Fair Market Value $490,000 Actual Assessed Value $6,592$29,400 Tax Liability $980$4,410 Effective Tax Rate 0.20% 0.90% 4 Source: New York City Department of Finance, Property Tax Rolls, Fiscal Year 2013.

Why Inequities Matter Interclass Inequities Interclass 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 Inequities Intraclass Inequities– inherently unfair, and: – Favors appreciating property over depreciating property – Caps and phase-ins sacrifice revenue rather than simply smoothing cost over time 5

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 Type2015 Baseline ETROption 1 ETR 1-3 family homes$ %0.84% Condos/co-ops$ %0.86% 4-10 unit rentals$761.89%2.06% 11+ unit rentals$ %5.03% Utilities$ % Commercial$ %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 2 Property Type 2015 ($ in millions) Baseline ETOption 2 ETR 1-3 Family Homes$1, %1.04% Condos/Co-ops$ %0.98% 4-10 Unit Rentals01.89% 11+ Unit Rentals04.60% Utilities05.42% Commercial03.86% Total$2,000

Distribution of Class 1 Tax Levy With and Without Assessment Caps by Property Value in FY 2013 Property Value Fiscal Year 2013 Levy Levy Without Caps Levy Increase Share of Levy Increase Lowest Quintile < $349,520 $324$365$414.38% Second Quintile$493$546$535.65% Third Quintile$571$663$929.80% Fourth Quintile$686$838$ % Highest Quintile > $695,956 $1,070$1,668$ % Total ($ in millions)$3,145$4,081$ %

Option 3: Eliminate Caps and Phase- Ins Addition to the Levy and Change in ETR by Property Type in FY 2015 ($ millions) Property Type2015 Baseline ETOption 3 ETR 1-3 Family Homes$ %0.90% Condos/Co-ops$ %0.79% 4-10 Unit Rentals$ %5.04% 11+ Unit Rentals$ %4.65% Utilities$05.42%4.89% Commercial$ %3.88% Total$2,000

Effective Tax Rates by Property Type, FY 2015 Property Type FY2013 Baseline Option 1 Option 2 Option Family Homes0.77%0.84%1.04%0.90% Condos/Co-ops0.78%0.86%0.98%0.79% 4-10 Unit Rentals1.89%2.06%1.89%5.04% 11+ Unit Rentals4.60%5.03%4.60%4.65% Utilities5.42%6.13%5.42%4.89% Commercial3.86%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 14 The Most Important Economic and Fiscal Decisions Facing the Next Mayor A Citizens Budget Commission Conference December 6, 2013