The end of 421a means it’s time for NYC property tax reform

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For those who want to see New York City revitalize and thrive, the impending demise of the 421a housing reduction, known by its section of the state statute, may seem like a blow. The city’s most lucrative $1.8 billion annual property tax break, the city’s most lucrative, has enabled the construction of thousands of income-restricted “affordable” units. The majority of the city’s new housing developments since 2013 (and 28% of affordable units) have taken advantage of this.

But after 50 years, Albany’s subsidy seems to be at the end of the road. It’s probably obsolete as a result of progressive arguments that 421a is just another tax break for the rich — and that its affordable units aren’t reaching the income levels of the poorest.

But this is a case where everyone from across the political spectrum should unite — and move forward to solve the underlying problem that 421a has patched up at best: the city’s insane property tax system.

City Comptroller Brad V., who would politicize the city’s retirement investments and sees rent regulation as inviolable, is right this time: He says the “city’s property tax system is notoriously opaque, unfair and backwards. Over the past four decades, instead of addressing its structural deficiencies, New York State has created a patchwork of exemptions and rebates to lower tax rates for various property owners.”

At the heart of the system’s complexity and fickleness lies in the fact that city property tax invoices are often detached from a property’s actual market value. That’s what motivated 421a — but it also made it another example of how to do business in New York, according to Lander, when you’re a well-connected firm with access to top lawyers. That’s the same reason Walgreens had to buy Duane Reade to get a foothold in the city: real estate development here is more of a specialist’s skill than the “out of rights” option available to a willing entrepreneur in, say, Houston Available.

Albany lawmakers will phase out 421a in June.
Hans Penink

The underlying issue is so well known that it’s old-fashioned — but still worth a look. As NYU’s Furman Center found, rental apartments have a higher “effective tax rate” than single- and triple-family homes, so it’s no surprise that unregulated rents continue to rise. And since condos and co-ops are taxed like single-family homes, a Park Avenue condo can pay far less tax than its value suggests.

Commercial real estate has long been a cash cow – a situation that post-COVID work patterns may no longer allow. And the disproportionate burden on rental properties means developers have a financial incentive to only build for the luxury market. Those wanting to build “affordable” units will need a range of subsidies – including 421a.

The whims of the system have not escaped elected officials, including former Mayor Bill de Blasio, who convened a commission to find an alternative. The good news is that the Advisory Commission on Property Tax Reform did just that in a December report. Key proposals include: putting all small residential properties — single- to three-family homes, four- to ten-unit rentals, condos, co-ops — in the same tax bracket and “ensuring that the rules are applied consistently regardless of the type of property.”

Progressives like City Comptroller Brad Lander have argued that 421a is a tax break for the wealthy.
Progressives like City Comptroller Brad Lander have argued that 421a is a tax break for the wealthy.
Photo by Noam Galai/Getty Images for a fair wage

The way to get there would include a “sale-based market value”. In other words, don’t tax co-ops in the Upper East Side as if they were rent-controlled housing.

Certainly reform would produce winners and losers when viewed in the narrow sense of tax liability. The city’s independent Treasury Office found that if all residential properties in the city paid property taxes based on market value, nearly 500,000 would receive an average tax cut of $1,100. Staten Island homes would almost all get a tax break — but 98% of Park Slope homes would get a whopping average $11,000 in tax increases. That’s the result of gentrification, of course — and the neighborhood’s liberals should be willing to pay their “fair share.”

The demise of 421a represents a give-or-break moment for Albany progressives who must approve a new property tax rule for the city. We’ll find out if they were just interested in punishing real estate developers who got the tax break — or if they’re serious about general property tax reform, as Lander is demanding.

For a full-fledged comeback in New York City, many factors need to be in place, from driving the homeless off the city’s streets to reducing crime across the board. But making homebuilding a lot easier — and not requiring complex tax subsidies to do it — is key. Albany must act.

Howard Husock is a Senior Fellow at the American Enterprise Institute.

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