The end of 421a means it’s time for property tax reform in New York

For those who want to see New York City reborn and prosper, the impending demise of the 421a housing reduction, known by its section of state law, may seem like a blow. The city’s most lucrative $1.8 billion annual property tax relief has enabled the construction of thousands of “affordable” limited-income units. The majority of new residential developments in the city since 2013 (and 28% of affordable units) have made use of it.

But after 50 years, the grant appears to be at its wits end in Albany. It is likely to lapse due to progressive arguments that 421a is just one more tax break for the wealthy – and that its affordable units don’t reach the income levels of the poorest.

But it’s a case where those from all political walks of life should agree — and move forward to address the underlying problem that 421a has best placed a band aid on: the insane property tax system of the city.

City Comptroller Brad V, who reportedly politicizes the city’s retirement investments and views rent regulation as inviolable, is right this time: He says “the city’s property tax system is notoriously opaque, unfair, and regressive.” Over the past four decades, rather than addressing its structural flaws, New York State has layered a patchwork of exemptions and allowances to reduce tax rates for various homeowners.

At the heart of the complexity and vagaries of the system is the fact that municipal property tax bills are often divorced from the actual market value of a property. That’s what motivated 421a — but also made it, according to Lander, just one more example of how doing business in New York requires being a well-connected company with access to top legal talent. It’s the same reason Walgreens had to buy Duane Reade to get into town: real estate development is a specialist skill here rather than the “as of right” option available to the willing entrepreneur at, say, , Houston.

Albany lawmakers are expected to let 421a expire in June.
Hans Pennink

The underlying problem is so well known that it is old news, but still worth looking into. As NYU’s Furman Center discovered, rental apartment buildings have a higher “effective tax rate” than one- to three-family homes, so it’s no surprise that unregulated rents continue to increase. And because condominiums and co-ops are taxed as if they were 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 build solely for the luxury market. Those who would build “affordable” units need a range of subsidies – including 421a.

The vagaries of the system have not escaped elected officials, including former mayor Bill de Blasio, who convened a commission to propose an alternative. The good news is that the Advisory Commission on Property Tax Reform did just that in a December report. Among his key proposals: put all small residential properties—single-family to three-family homes, rental properties of four to ten units, condos, co-ops—in the same tax class and “ensure that the rules are applied uniformly regardless of the type of property.

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

The way to achieve this would involve a “market value based on sales”. In other words, don’t tax Upper East Side co-ops as if they were rent-controlled apartments.

Certainly, the reform would create winners and losers, if viewed narrowly in terms of tax liability. The city’s independent budget office found that if all residential properties in the city paid property taxes based on market value, nearly 500,000 would receive a median tax reduction of $1,100. Homes in Staten Island would almost all get a tax break, but 98% of those in Park Slope would get a median increase of $11,000. Of course, this is the result of gentrification – and neighborhood liberals should be prepared to pay their “fair share”.

The disappearance of 421a sets up a “shut up or shut up” moment for Albany progressives, who must approve a new property tax scheme for the city. We’ll find out if they were only interested in punishing the property developers who got the tax break — or if they’re serious about broad property tax reform, as Lander demands.

A strong comeback in New York will take a whole host of factors to kick in, from getting the homeless off the city streets to reducing crime at all levels. But making it easier to build housing is essential – and not needing a complex tax subsidy to do so. Albany must act.

Howard Husock is a senior fellow at the American Enterprise Institute.