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Update on Property Tax Issues in the U.S.: IPTI (June 2017)

This month’s installment focuses on a landmark lawsuit brought against the property tax authorities of none other than New York. Several weeks ago, a group known as Tax Equity Now NY (TENNY) – which describes its mission as the pursuit of legal and political reform of New York City’s property tax system – sued the State of New York, the City of New York, the NYC Department of Finance, and ORPTS (the State-level administrator of the property tax system) what TENNY contends are a confusing and contradictory array of illegal rules, policies and practices permeating the City’s property tax system.

TENNY seeks nothing less than a judicial declaration that the defendants and the New York City tax system violate the:
New York State Constitution
New York State property tax statutes
Equal Protection Clause of the United States Constitution
Due Process under the United States Constitution
The United States Fair Housing Act

Additionally, TENNY is seeking a permanent injunction against what is described as “the unlawful assessment and collection of property taxes within New York City:”

It is no secret that the City’s tax system is a patchwork with its genesis in a 1981 tax overhaul law – one which followed earlier ground-breaking litigation highlighting inequities in the prior system – which has since been overlaid with a plethora of quick fixes, stop gap measures, and “band-aids”, surely intended to equalize the burden, but which at the same time (intentionally or not) simply shifted the burden from one faction of taxpayers onto another.

The task of completely and equitably re-distributing the tax burden, in a way that generates the necessary revenue and offends no one (taxpayers, investors, politicians, advocates or watchdogs) has gotten much study and discussion in New York, but has proven perpetually evasive. Hence, the system has been at various times – and depending who one asks – excoriated by those it burdens and defended by those whom it benefits. The point is that discussion has proven easier than actual reform.
The matter of Tax Equity Now NY LLC V. City of New York, et al takes aim at a great number of the system’s shortcomings, casting some as technical issues of implementation, others as misguided interpretation of law, and still others as racially discriminatory. Among these are:
1-3 family home and residential buildings of 11 or fewer residential units by law have limitations – known as “CAPS” – on their assessment increases.

Thus, says the lawsuit, owners of these properties receive assessments far below their true market value. This lowers their effective tax rate and shifts the burden to other non-capped properties.

In fact, it is asserted, 1-3 family homes represent 45% of the City’s market value but contribute only 15% of the tax levy. True enough, but equally true is that these properties house a substantial number of voters in New York City.

These “vertical” homeowners have seen tremendous appreciation in real-world value over the years, especially in Manhattan and in other parts of the City that have seen increasing interest or re-purposing (for example, industrial to residential) in the past decade.

That said, as a matter of law these properties are not taxed on the basis of their sales prices but instead on what they would rent for were the building not a coop/condo. This is yet another instance of artificially and unfairly depressing the effective tax rate for these properties, which consequently shifts the burden.

Adding to this problem, says the lawsuit, is a tax abatement which it is claimed unfairly applies only to coops/condos but to other property types. The abatement was only intended as a stop gap in the 1990’s, developed in response to coops/condo pushing for yet lower taxes.

In fact, the Governor of New York, in signing the original legislation, then directed the City and State to come up with a more permanent tax “repair” for coops/condos prior to the original expiration date of the stop gap. Instead, the stop gap has been extended multiple times, and as result, the lawsuit contends, the effective tax burden of coops/condos has gotten lower and lower.

The lawsuit alleges that these and many other infirmities, shortcomings, mistaken implementations and misguided policies of the NYC tax system have consistently favored predominantly white and predominantly wealthy neighborhoods, and favoured owners as opposed to renters.

It is not common to hear criticism of the tax system expressed in terms casting apartment renters as the victims. The lawsuit argues this by stating that disparate tax burdens fall on rental landlords, who by extension pass them along to their tenants. However, we must note that many rental landlords in New York City are governed by rent regulation and thus cannot freely raise rent to cover a rise in taxes, and that their tenants are correspondingly protected from fully absorbing that burden for them.

Seemingly absent from mention anywhere in the TENNY lawsuit are commercial property owners. The owners and operators of office buildings, hotels, retail stores and industrial sites in New York City do not enjoy capped assessments. Further, they essentially have market forces limiting the rent they can charge, and thus do not have an unlimited ability to pass along increasing tax burdens.

Nevertheless, their plight is never mentioned. One wonders if tax reformers might be aiming to disfavor them even more, a perhaps short-sighted notion given the economic driver that commercial real estate can be for a municipality.

No one would argue that the NYC tax system is without serious shortcomings, but it is only with all stakeholders present that true, proper and long-lasting reform and equity can be achieved. It may be some time before this lawsuit works its way through the court system – the complaint has not yet been answered, and motions to dismiss being contemplated by the defendants are not due until the Fall of 2017. We will keep you posted.