New York City’s government will raise about $13 billion this year from the city’s property tax. That represents about 40 percent of all city tax revenues. It’s a tax that almost all New York residents and businesses pay, either directly as property owners, or indirectly as renters whose landlords pass through to them a substantial share of their property tax. But it is a tax that is extremely complex in its details – many would say incomprehensible – and a tax considered unfair by many taxpayers and critics.

So the new study of the city’s property tax system by the Independent Budget Office is a welcome event because it unravels the tax’s complexity and identifies which properties carry the lightest and heaviest financial burdens. The study, Twenty-Five Years After S7000A: How Property Tax Burdens Have Shifted in New York City, is, however, ultimately pessimistic about chances to simplify the tax and equalize its burdens. It suggests that no one -- neither the state legislature, Mayor Bloomberg, nor the city council -- is willing to take on the “minefield” that reform of the city’s property tax system would need to cross.

Perhaps the biggest contribution of the IBO study is its description of how the technical complexity of property tax law and administration is central to understanding the fundamental inequities of the system. In order to ensure that the big winners in the system – one-, two- and three-family house owners – maintain their low tax burden, state legislators, city mayors, and city councils have for 25 years repeatedly contorted the system to shift burdens to other properties – not only to commercial properties but also to the large apartment buildings where most of the city’s renters live.

Most of those renters not only live in buildings with high property tax burdens, but their household median income is only $35,000(half make more, half less), compared to median household income of house owners of $65,000. Worse yet, a major finding of the IBO study is that since 1981 the tax-burden disparity between house owners and owners of both large rental buildings and commercial properties has widened considerably.

Among several other findings, the most positive is that heavy property tax burdens carried by many low-income, low-market-value communities in the 1970s and early 1980s have been eliminated by the 1981 law (called S7000A). Less positive is the finding that many inequities exist within property types, so that a house or co-op in one borough has a higher or lower property tax than a house or co-op with equal market value in another borough. The study also notes that commercial property taxes are higher in New York City than any other U.S. city with a population over one million.

The Political History of the Property Tax

The 1981 state law was a response to a State Court of Appeals decision in a case filed in the late 1960s (the Hellerstein case) that determined that New York City and other jurisdictions in the state were in violation of a state law that required properties to be assessed at their full market value. In practice, communities were assessing residential and commercial properties at quite different fractions of full market value.

In New York City, for example, at the time of the Hellerstein case, city house owners’ assessments were only 25 to 30 percent of full market value, whereas commercial assessments were about 80 percent of full market value. Thus, house owners in effect paid taxes much lower than the commercial owners.

The extraordinary complexity that was built into S7000A in 1981 and expanded in subsequent changes made by New York City mayors and the city council stems from a simple political imperative: minimize house owner taxes and shift property tax burdens as much as possible to commercial and large rental buildings.

The first political step in the 1981 law was to legitimize the status quo that the state appeals court had found illegal. A new classification system was set up, with four classes of property: Class 1 houses; Class 2 rentals, co-ops and condos; Class 3 utilities; and Class 4 commercial properties. The share of taxes paid by each class at that time became the legal base, preserving the low house-owner share of taxes. Any future changes in market value in each class were to be added proportionally.

But the system had complex rules that protected house owners from increases in their class share, and over the next 25 years that original system was repeatedly juggled to further protect them from the full impact of rising market values. Thus, when house values rose faster than commercial property values and threatened to make the house owner share of taxes larger, the old and new political rules minimized those increases.

The Major Inequities in the Property Tax

The IBO study has extensive data on tax burdens, and a few examples will show the scale of differences (or inequities) among classes of property. Tax burden is measured by determining an “effective tax rate,” or ETR. It’s determined by simply dividing actual taxes paid by the full market value of a property. In an example of a house with a market value of $300,000, with a $2,400 tax bill, the ETR is 0.80 ($2,400/$300,000). In terms of real money this is generally described as paying 80 cents per $100 of market value.

Using full market value for each class of property makes it possible to compare ETRs across classes. If a different type of property, say a condo, also worth $300,000, had a tax bill of $4,800, twice that of the house noted above, its ETR would be 1.60 ($4,800/$300,000), or $1.60 per $100 of market value. In other words, the tax burden for the condo owner would be twice that of the house owner.

Here are some of the major shifts that have occurred since 1984:

• The effective tax rate for Class 4 commercial properties used to be more than three times higher than Class 1 houses. Now they are almost eight times higher. (The rate for the commercial properties is 3.56. The rate for the houses is .46)
• Co-ops used to be lower than houses. Now they are 1.5 times higher.
• Elevator apartment buildings (Class 2) used to be almost three times houses (Class 1). Now they are more than eight times. (The elevator apartments buildings have a rate of 3.72. The rate for houses, again, is .46)

Will Anything Be Done?

The IBO study makes no recommendations for changes in the city’s bizarre, opaque, and inequitable property tax system, but it does list alternatives to the four-class system now used. They all assume “revenue neutrality,” that is, each alternative would raise the same level of taxes as the current system.

The first alternative laid out is a single tax rate for all property types. This would mean a massive shift of burden from commercial properties to private houses. For instance, such a shift would see house owners paying over 190 percent more, or over $5,300 more per owner, on average. Office buildings would get the biggest break, $2 billion overall, with an average saving of $324,000 per building.

Condos and coops in large buildings would have tax increases, respectively, of 94.5 percent (more than $4,500 per apartment) and 95.7 percent ($2,482 per apartment). Interestingly enough, for those interested in reducing renters’ burdens, taxes on the large elevator rental buildings would fall by over $1,500 per unit, nearly a two-thirds cut. If substantially passed on to tenants, there would obviously be a big easing of renter tax burden.

A second alternative uses what is most common in other jurisdictions: a two- class system -- residential and commercial. Keeping revenue neutrality and using full residential and commercial market values for assessment purposes, there would be big shifts within the residential class.

House owners would see a 72.9 percent increase (about $2,000 on average) and condos and co-ops in large buildings much smaller increases: 15.8 percent and 16.5 percent, respectively ($751 and $428, respectively). But the savings for large rental buildings would be substantial: a 78.7 percent reduction, or over $1,850 per apartment. (Changes in commercial Class 4 would, for the most part, be minimal.)

But of course any shifts of tax burden to house owners and condo/coop owners in both of these scenarios would have to reverse the politics at the heart of the 25-year old state law. Thus the IBO report sees little likelihood of fundamental reform. It points out that Governor Eliot Spitzer’s focus on property tax in his electoral campaign (reiterated in his January 3 State of the State address was to reduce burdens, not the systematic reform that is needed to fix the city’s system. Thus the report concludes, “Without another court ruling or some other external prod, it is not a minefield many legislators in Albany, or City Hall, appear ready to brave.”

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.