Home > Uncategorized > Crank up New York real estate taxes

Crank up New York real estate taxes

January 19, 2016

There are two reasons to own a house. The first one is to live in it. The second is to sell it later at a profit.

These two reasons have led to two different housing markets in New York City. The first one what we might call the affordable housing market, and it simply refers to normal people who need to live somewhere but don’t have extra millions of dollars to spend. The second one is the luxury real estate market of New York, which is exactly for people who have large pots of investment money.

Those two housing markets compete with each other, and lately the luxury market is entirely dominating. This is partly due to the large amount of foreign money being laundered and funneled into real estate. (Update: the U.S. Treasury has said it will look into this, but some people are already claiming it won’t be enough.) It’s also partly due to general global inequality, which produces quite a few millionaires.

Finally, it’s partly due to the bizarre constellation of tax breaks we give new developments, even if only temporarily. It makes holding on to apartments relatively frictionless, even if they are empty, which many of them are. On a permanent basis owners of luxury apartments pay a tiny fraction of the real estate tax that other New Yorkers do relative to the sale price of their apartment (h/t Nathan Newman).

And that’s where we come to the problem. The people who want to live in New York are being shut out by the people who want to own apartment-shaped assets.

If you were a developer, looking for your next building project, you might succumb. Given the expense of land, it makes sense to maximize your profits and build 3- or 4-bedroom apartments that will be snatched up by Russian oligarchs rather than a large number of studios that will actually be lived in. It just makes you more money.

What should we do? Well, we could do nothing. In the long run we might have a city that consists of mostly empty apartments.

Or, we could decide that people should actually live here. In that case we should increase real estate taxes until things change.

Right now we create the exact wrong incentives. First, because non-residents don’t pay city income taxes, and second because we often delay taxes on new apartments and make taxes too low overall. If you think about that, we are actually setting up incentives for the situation we have: empty luxury apartments.

Instead we should make sure that luxury apartments pay more than their fair share of taxes, instead of less, and especially when they’re empty. Don’t worry, the billionaire owners can afford it, and if they can’t, then they can sell it to a mere millionaire who lives in Park Slope.

You see, if an apartment – especially an empty apartment – actually costs the owner a lot of money, they’d sell it, and they’d sell it to a person that would actually live there. That would bring prices down on those assets, because the rich people could simply shift their interest to the fine art market or some other place where holding assets doesn’t cost as much.

Finally, if real estate taxes went up, people might worry that their rent would go up too. But if the market as a whole became a market for normal people, instead of just for rich foreigners, the overall costs would become more reasonable, not less.

Categories: Uncategorized
  1. Peter
    January 19, 2016 at 8:00 am

    I think we have the same situation as with banking – we have savings (people who want to keep their money for future usage, in a safe place and with no risk) and investment (people who want to use their money to make more money, not for their needs). The problem is when you mix the two, either the banks doing it without informing the people who own the money, or the legislation allowing the banks to do the same.

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  2. January 19, 2016 at 9:37 am

    What about adding a tax for vacant units? It seems this would be a lot easier politically (the opposition cannot even vote in local elections!) and it would attack the problem directly.

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  3. January 19, 2016 at 11:06 am

    ” First, because non-residents don’t pay city taxes”

    I am rather astounded by the statement that non-residents don’t pay city taxes, particularly real estate taxes which would be of relevance here. Non-residents don’t pay New York income tax but I was unaware that they were exempt form city property taxes. A search by me did not find any reference to this exclusion. Indeed, the only real estate and non-resident factor I found is that a domicile gets a 50% reduction in estate tax when it is sold.

    Reference?

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    • January 19, 2016 at 11:17 am

      I think city tax is short for city income tax. I’ve worked in NYC for 10 years, and from my experience, I’ve only heard city tax used to describe the income tax.

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    • January 19, 2016 at 11:19 am

      Yes, sorry. I’ve updated.

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  4. January 19, 2016 at 2:08 pm

    There’s an even better solution.

    Adopt UK style trespassing laws and make squatting a purely civil matter with no punitive consequences. In other words, if an apartment is vacant, anyone who can break in can live there until the owner (or legal renter) goes to court to have them kicked out. Squatters can also be sued for the cost of any damages to the property, but that’s it.

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    • January 19, 2016 at 3:41 pm

      In NYC, most expensive apartments are accessed via a shared entrance guarded by full time doormen, so this wouldn’t actually work well.

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  5. January 19, 2016 at 4:51 pm

    Great idea due to my wife: increase property taxes, and offer a credit against city income taxes for the increase. This way the increase falls entirely on those who hold apartments but aren’t paying income taxes, that is those who hold the apartments for investment.

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  6. sglover
    January 20, 2016 at 12:40 am

    “What about adding a tax for vacant units?”

    But how would you determine vacancy? If a lot of those apartments are just oligarch investment hedges, surely they could easily install a “relative” for 30 days (or whatever the occupancy minimum is) each year.

    Wouldn’t some kind of highly progressive property tax be easier? Granted, there’d be an awful political fight to get it off the ground.

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  7. Gordon
    January 20, 2016 at 10:28 am

    A highly progressive tax rate might work to skew the ratio of affordable homes to luxury ones, but the outcomes are a bit uncertain. It’s not hard to see a scenario in which millionaires are priced out of the apartment market by multi-millionaires, and the merely affluent then crowd the middle classes out of the places that they would otherwise have lived in. They in turn outbid poor people and so on. Taxes are a pretty blunt instrument.

    More generally, the problem you’re describing is, “lots of people want to buy apartments in the same place.” You think some of those people should be discouraged from doing so, while others should be allowed or encouraged. Since you see price as part of the problem rather than as an effective mechanism for allocating scare resources, tinkering with prices seems like a counter-intuitive way to solve the issue that you’ve deemed problematic.

    I don’t really see the problem in the same way that you do (I don’t see that there IS a problem), but if I did, I’d be more inclined to look at planning permits and regulations than taxes. If you’re trying to increase the supply of affordable housing, and your issue is that there are too many luxury homes being built, then you might stipulate that each new building includes a certain percentage of the kind of accommodation you’re looking for. Obviously there are problems with that approach as well, but increasing the cost of a good to increase its supply would seem to be the most problematic of all.

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