Published in the Staten Island Advance
By Council Member Joe Borelli
STATEN ISLAND, N.Y. — The chances are that if you’ve spent enough time sipping coffee on Staten Island, or in any other outer-borough diner, you certainly overheard this conversation from a neighboring table, perhaps in the most emphatic of Queens baritone voices: “Can you buh-lieve … that Bill de Blasio has a $2 million house in Park Slope and pays less tax than I do in my Kew Gardens semi?”
Maybe it wasn’t in a diner. It could have been around the table of an Annadale firehouse, or a teachers’ lounge in Brooklyn. The point is: Middle-class New Yorkers are dumbfounded to learn that some of the city’s wealthiest residents in its posh neighborhoods are paying much less effective tax rates then average homeowners.
What should surprise and scare them most is that despite any assumptions of the mayor pulling strings, his property tax bill is both legal and accurate according to our antiquated property tax system. They can call the mayor any name they want, it feels good; but the truth is that our state laws deserve the brunt of public anger.
Section 1805 of New York State Real Property Tax Law bars city property assessors from raising the taxable assessment on one-to-three family residential homes (Class 1) more than 6 percent in any year or more than 20 percent in any five-year period.
Overall, this provision is a good. It prevents new homeowners from being quickly burdened by higher and unpredictable taxes in “hot” real estate markets and prevents older long-term owners from being taxed out of their homes from steady growth.
However, the law provides sensible instances where the effective cap gets reset. If you subdivide a property, the new tax lot will be assessed at the actual market rate. If you put a new extension on the house, or knock it down and rebuild, you’ll also be assessed at the new value.
This makes sense under the basic idea of fairness. Property taxes are meant to be an ad valorum tax, so in theory all owners are charged the same rate on the value of their property. If you knock down a small house and build a $2 million mansion, you should be taxed on the new $2 million value; and going forward, that mansion owner would still be protected under the cap.
Unfortunately, there is a quirk in the law. If a purchaser buys an old home whose owner has been the beneficiary of the tax cap, the new purchaser is still protected under the same assessment increase laws as the last owner. The cap is attached to the property, not the owner, and the result creates vast disparities between the city’s wealthy and middle-class homeowners, and among wealthy homeowners themselves depending on when their homes were built and the characteristics of the market.
For example, let’s compare two fictionally funny families, the Huxtables and the Heffernans.
The Cosby Show family lived in Brooklyn Heights in the 1980s. They were gentrifiers, and bought their brownstone at a time when the market was significantly lower. Although “10 Stigwood Ave.” doesn’t exist, there are plenty of comparable properties. Assume Dr. Huxtable was the buyer of 28 Garden Place when it was sold for $315,000 in 1982.
He lived there happily for 33 years, but decided to pack it in for the Del Boca Vista retirement community in 2015.
In the time he owned the property, he was protected by the state’s cap and paid his final year of taxes on the effective market rate of $1.4 million. That year, the property was sold to a new owner, who paid $5.2 million for the brownstone in what had become one of the most desirable blocks in the city. Instead of paying taxes on the new value, the new owner is assessed only on the existing effective value of just $1.5 million, despite the actual sale price and despite the city actually assessed the 2016 value at $6.1 million.
On the other hand, The King of Queens bought 6215 Boelsen Crescent in Rego Park, Queens, in 1994, where they lived until early last year. The Heffernans were protected by the same tax cap, and in their last year of ownership paid taxes on an effective market value of $722,000. The home sold for $1.2 million and this new owner also paid property taxes on the effective market rate, which climbed only 6 percent under the law to $764,350.
Both properties are undervalued, and both new owners are protected by a tax cap that unintentionally covers them. The main difference is this, however, excluding for deductions (Veterans, STAR etc.) the Queens owner is paying an effective tax rate of roughly 0.8 percent of the total value of their house, while the new Brooklyn Heights owner is paying an effective tax rate of just 0.35 percent of the total value.
In raw numbers, the Rego Park owner will pay about $9,300 on a house valued at about $1.2 million, while the owner of a house worth nearly five times as much will only pay double that, just $18,000.
What’s worse? If a person is buys a relatively new house in the same year worth the same $1.2 million, the new owner is not protected by the tax cap as a new building is reset under Section 1805, and will pay $14,000.
These aren’t the exceptions; this is the norm. An in-house 2015 quality assurance review by the Department of Finance demonstrated that the problem is systemic. Certain neighborhoods are on average being assessed and taxed significantly less than those in other boroughs, and in some cases, just blocks away.
The study specifically confirmed: “Most of this undervaluation seems to be driven by Brooklyn, where market value change caps on increases prevent valuations from keeping up with increasingly high sale prices.”
According to the department’s own sampling data, the weighted mean time-adjusted sales ratio for Brooklyn was .885. Loosely translated, that means that on average, Brooklyn’s homes were assessed and taxed at 88.5 percent of their actual sale price, and well under established assessing guidelines.
Compare that to Staten Island and the Bronx, where homeowners were taxed on 98.5 prrcent and 98.1 percent of their homes’ value. When it’s broken down further, we can see that this is actually not driven by a boroughwide market value increase, but rather just certain highly desirable Class 1 residential neighborhoods.
For example: Parts of South Williamsburg and Prospect Heights are assessed at less than 80 percent; Park Slope, Bed-Stuy and Clinton Hill are between 80-90 percent; while Canarsie, Flatbush and Dyker Heights are assessed within industry guidelines of 95-105 percent of their actual values. In Brownsville, homeowners on average pay over 105 percent.
The inherent unfairness is just part of the problem, as the undervalued assessments also lead to a potential loss of significant revenue. The total tax levy from Class 1 properties was $3.62 billion in FY 2016, the same year the quality assurance study determined that the citywide sales ratio, driven down by the undervaluation in Brooklyn, was 93 percent.
Bringing that number up just 5 percent through a reform of Section 1805 to industry standards would raise $180 million, which could be used to offset the need to raise tax rates on all Class 1 homeowners to meet the levy.
In the mayor’s latest budget proposal, he is planning for property taxes to balloon $4.6 billion, or 15 percent, over the remainder of his term. While much of this can be achieved through new developments and an increase in market values, the ability to generate new revenue from an equitable and more fair system would help avoid the type of rate increases Class 1 properties have continuously seen since the Bloomberg era.
Reforming Section 1805 should be relatively easy, so long as there is the will in Albany and the support of the mayor and City Council. A simple amendment to add the market value sale of a property to the list of conditions that causes a reset of the cap would do the trick. The undervalued neighborhoods are all “hot” real estate markets where properties often change hands, and the quick turnover and resets will raise the ratio in a matter of years.
The political will should be there; after all, this is something that actually increases revenues without raising rates. Additionally, this will not impact existing homeowners, as only prospective sales after the law is signed would be affected. Politicians need not worry about a wrathful constituent, as ideally the goal would be to prevent the type of tax hikes they fear.
And, finally, this could serve as a natural disincentive to gentrification of neighborhoods, which has become a serious concern for many legislators. This would keep the tax cap for those folks that are already in place, but force new buyers to pay full taxes on the high-priced homes they purchase, essentially eliminating old brownstones as tax havens for wealthy investors.
This is a scenario where everyone can win, even de Blasio. Perhaps if we let him call it an effective millionaires’ tax he’d be on board. As long as existing homeowners aren’t seeing a rate hike, I doubt they would care.
(Joe Borelli is the City Council member for Staten Island’s South Shore and Minority Whip of the Council. He and fellow Republican Council member Steve Matteo will announce a property tax rebate proposal soon.)