Posted by George Sweeting, April 2, 2014

The state may have blocked the Mayor’s proposal to raise the personal income tax on high earners, but now Albany has presented City Hall with a new tax question: whether to go along with business tax changes that could cost the city hundreds of millions of dollars in tax revenue and are likely to result in big tax cuts for some banks. The state budget includes important but little-discussed changes in state business taxes that City Hall will likely come under great pressure to follow.

Until now, the city and the state have each had an income tax for banks, separate from the city and state income taxes on corporate businesses. The bank and corporate taxes have different rules and tax rates, although in recent decades the structural differences between banks and other corporations has been blurring. Last year, the Governor’s Commission on Tax Reform and Fairness recommended ending the state’s bank tax and extending the state corporate tax to cover banking corporations to ease tax compliance costs and reduce opportunities for gaming the system by firms seeking the most advantageous tax treatment. There will be winners and losers under the changes. Some banks and corporations will reap savings, while others may see higher tax bills. Which category the banks and other firms fall into will depend on the nature of their business operations.

The new state budget eliminates the bank tax while also making other changes to the state’s corporate tax. Eliminating the bank tax costs the state tax revenue because of differences in how income is allocated; the other changes include some provisions that will increase the state’s tax revenue and others that will reduce it. For now, the state has only provided an estimate that the net impact of all of the business tax changes is a loss of $205 million in tax revenue in state fiscal year 2015-2016, which grows to losses of over $500 million after three years.

There is usually strong pressure for the city to conform to state business tax changes to maintain broad alignment in the tax structure and ease the compliance burden for the many businesses subject to both city and state income tax. Beginning in January 2008, the state fully phased in changes in the way it taxes firms with operations here and outside New York to what is called the single sales factor, providing many businesses with tax savings at considerable cost to state tax revenue. The city followed suit, phasing in the singles sales factor over 10 years. Conversely, when the state dropped its unincorporated business tax, the city did not conform.

While no estimate has been publicly released, following the state’s lead by shifting banks to the general corporate tax would almost certainly cost the city a significant share of the over $4 billion of revenue IBO expects the combined bank and corporate taxes to generate in city fiscal year 2015. How much will depend on whether that change is accompanied by others that could raise revenue, but based on what we know about the effect on the state level, the revenue loss could be in the hundreds of millions.

The challenge for City Hall will be navigating between the arguments for the economic benefits of moving to a simpler and easier tax system for financial firms and the likely loss of tax revenue needed to fund the de Blasio Administration’s agenda. Much of this will be fought out in Albany, which must approve any changes to the city’s businesses taxes, perhaps as early as June when the current session ends.

Posted by Doug Turetsky, December 9, 2013

New York City homeowners may be letting millions of dollars in state property tax breaks slip away. For the first time since the state enacted the STAR tax abatement 15 years ago, homeowners, including coop and condo apartment owners, are required to register with the state in order to receive the tax break in the upcoming fiscal year. With the registration deadline of December 31 fast-approaching, only about half of New York City homeowners receiving the tax break this year have registered—well below the statewide average of 66 percent.

The tax break, known formally as Basic STAR, will be worth about $300 to each eligible city household in 2015. Using state Department of Taxation and Finance figures for the number of households that have not registered as of November 26 and the city’s property tax assessment roll, IBO’s Ana Champeny estimates that about 250,000 city households have not yet registered. That would leave about $75 million in potential property tax savings unclaimed by city residents next year. This tax break is a state expense and comes at no cost to the city budget.

Senior citizen homeowners who receive what is known as Enhanced STAR don’t need to register. There are nearly 100,000 New York City households receiving the Enhanced STAR property tax break.

More than 3 million properties currently receive the Basic or Enhanced STAR exemption statewide. In recent years the tax break has cost the state more than $3 billion annually.

The county with the highest registration rate in the state is Saratoga, where 83 percent of current STAR recipients have registered. The rates in the city’s five boroughs pale in comparison. The highest is Staten Island at 64 percent, the lowest is the Bronx at 47 percent. Brooklyn is at 50 percent, Queens 52 percent, and Manhattan 53 percent. Citywide the rate is 53 percent.

Homeowners are only supposed to receive the STAR benefit for one property. Until now, the program operated on the honor system, with the state tax department assuming owners of two or more properties were only claiming STAR once. But an audit released earlier this year by state Comptroller Thomas DiNapoli found that about a fifth of the claims for STAR were in fact ineligible for the tax break. Most of the ineligible exemptions identified by the state Comptroller were for “double-dipping”—homeowners receiving the exemption for properties that were not their primary residence. Other improper exemptions included homes that received the tax break even though they were in foreclosure.

The state implemented the registration system this year so tax department assessors could start tracking whether a homeowner was claiming a STAR tax break for more than one property and to help identify other improper claims. The prevention of duplicate claims by one homeowner may explain in part why registration numbers are lagging in New York City. The STAR property tax break is worth more outside the city, so homeowners with multiple properties may be choosing to register for their homes outside the five boroughs.

The state first alerted New York homeowners to the new registration requirement in August and sent another mailing in September. In late November the state sent postcards to homeowners urging them to “Register Now,” with a particular focus on New York City. Registration can be done online at www.tax.ny.gov/pit/property/star13/default.htm or by calling 518-457-2036.

Posted by Doug Turetsky, June 4, 2013

In April, Cooper Union ended its 150-year tradition of providing students a tuition-free education. Although starting in 2014 the school will no longer be giving all of its students a free education, Cooper Union will still be getting an unusual set of tax breaks from the city—breaks that help fund the school’s annual expenses. These tax breaks cost the city about $20 million in forgone revenue this year, in effect providing a more than $21,000 a year subsidy to each of the highly selective school’s roughly 930 undergraduate engineering, architecture, and art majors.

The largest and most well known of the unusual tax breaks dates back to 1902 and centers on land at Lexington Avenue and 42^nd Street given to the school to boost its endowment by heirs of Cooper Union’s founder Peter Cooper. The endowment paid off for Cooper Union when the school leased the site to Walter Chrysler in 1928 to construct the eponymously named Chrysler Building. The land has remained exempt from property taxes because it is owned by the school. Cooper Union gets rent from the land of about $9 million a year along with payments equal to what the city would collect in property taxes if the site were still on the tax rolls. The payment amounted to $18 million this year.

Schools typically get a property tax break only for locations where classes are held, students housed, or administrative operations conducted. But the unusual property tax exemptions afforded Cooper Union, which include land the school sits on as well as any land it may receive as part of its endowment, date back to the charter granted to the school in 1859 by the state Legislature, provisions upheld in subsequent court cases.

Albany has continued to do its part to keep the break in place. In 1969, Mayor John Lindsay sought legislative help in restoring the site to the tax rolls for a cash-hungry city that several years later would begin to charge tuition to City University of New York students. Albany did indeed pass legislation stipulating that only property directly used for educational purposes could receive a tax exemption. But the legislation only applied to property acquired after the bill went into effect.

More recently, Cooper Union engineered two more commercial deals on land it owns. In order to generate funds, Cooper Union proposed a large-scale development plan that included two locations it would lease much as it did with the land under the Chrysler Building: 51 Astor Place, where its engineering school stood, and 22-36 Astor Place, which was a parking lot. In 1959, ownership of 51 Astor Place–then a city property—was transferred to Cooper Union with the condition that it be used for educational purposes.

To make the sites more attractive to prospective developers, Cooper Union won zoning changes from the City Planning Commission. In addition, in 2007 the Bloomberg Administration released Cooper Union from the requirement that 51 Astor Place be used for educational purposes in exchange for a $980,000 payment to the city and a promise that a portion of the building would be used for school purposes.

Cooper Union leased the parking lot to Related Companies, which built a 21-story luxury residential building on the site. At 51 Astor Place, Edward J. Minskoff Equities leased the site and is seeking tenants for a 13-story “starchitect”-designed office building with a Jeff Koons sculpture in the lobby.

The tax breaks for these two locations, hammered out with the Bloomberg Administration, are more complex than the tax exemption for the Chrysler Building. While both Astor Place buildings will remain fully exempt as is the Chrysler Building, the city will get payments—technically called payments in lieu of taxes—equal to half of what the tax bills would be.

The city can’t collect payments at either site until the office building is ready for occupancy. The residential building opened in 2005 and was exempt from any payments until fiscal year 2011. But the city still has to wait to collect any payments on that property until a certificate of occupancy has been issued for the office building. IBO’s Ana Champeny estimates this cost the city $2.1 million this year in foregone taxes from the residential building. We won’t know the amount of taxes foregone on the office tower until the building is completed and assessed.

When seeking the Astor Place zoning changes, Cooper Union told the City Planning Commission it needed them in part to generate funds to continue to provide a tuition-free education for its students (the school also wanted a new building for its engineering program, which it built at 41 Astor Place). With the public purpose of the unusual tax breaks now mostly a thing of the past (about 25 percent of students won’t pay tuition), some New Yorkers may question why the city should forego tax dollars on Cooper Union’s commercial development deals at a time when the city’s own university system has seen repeated tuition hikes.

Posted by Doug Turetsky, April 19, 2013

Tucked into the state budget adopted last month is a special three-year tax break for New York families with children. The first of three annual rounds of checks for $350 per qualifying family will be sent out in October 2014 (just weeks before the next year’s gubernatorial and legislative elections) at a cost of about $400 million statewide. While New York City families stand to garner a large share of the checks, many will find their mailboxes empty.

An analysis by IBO’s Michael Jacobs, which uses data from a sample of 2010 income tax returns, finds that about 575,000 of the city’s tax-filing families with children will qualify for the check next year. Each of these families will receive a check for $350, bringing just over $200 million into the city.

But that same analysis also reveals that nearly 725,000 New York City families with children—families with an estimated 1.2 million kids—will receive nothing. That’s because in most instances they earn too little to qualify.

Here’s how the tax break, called Family Tax Relief, works: To qualify, a tax-filing family or household with at least one child needs an income after tax-deductions (adjusted gross income in tax-speak) of between $40,000 and $300,000, and they must have owed New York at least a $1 on their 2013 state income taxes. If the family qualifies, they’ll get a check for $350, regardless of whether they have one child or a dozen under the age of 17, and even if the amount they owed is far less than the $350 check they’ll receive.

Family Tax Relief is described as help for “middle class families that are struggling to make ends meet” Yet in a city where the median adjusted gross income for families with children is $38,400, Family Tax Relief’s definition of middle-class is high and wide of the mark. As a result, tens of thousands of relatively well-off New York families will get a check while many low, moderate, and middle-income families with children will not.

To put that observation into numbers: more than 190,000 New York City families with children and adjusted gross incomes from $100,000 to $300,000 will be receiving checks worth more than $66 million combined. But roughly 660,000 families with adjusted gross incomes under $40,000 will find their mailbox empty. Among those left out are about 126,000 families—most of them single mothers with children—with incomes below $40,000 but who still owe income tax to New York State.

IBO’s Julie Anna Golebiewski estimates that about 60 percent of all the households with children in the Bronx will not qualify for the credit, based on data from the American Community Survey. In nearly all cases, the households won’t qualify because their incomes are too low. In Staten Island, about 28 percent of households with children won’t qualify and in Queens about 36 percent. In Brooklyn and Manhattan, roughly half of all households with children are expected to get a check. About 16 percent of Manhattan households with children won’t get a check because their incomes are too high, giving Manhattan the largest share of over-the-limit earners among the five boroughs.

New York’s Family Tax Relief bears some similarity to a 1991 proposal by former New Jersey Senator Bill Bradley to provide a $350 tax credit to families in the U.S. for each of their children. But Bradley’s plan called for the program to be universal, with everyone regardless of income getting help. If a family was too poor to owe taxes they would get the benefit in the form of a direct payment rather than a tax credit.

IBO’s Jacobs calculates that making the New York State program universal so that it covers all families with children—regardless of their income level or state tax liability—would more than double the cost of the program in New York City to about $453 million in 2014, even if the checks are capped at $350 a family no matter the number of children. Alternatively, if Albany were to let those single mothers and other families with incomes below $40,000 qualify for relief while maintaining the requirement that families have some tax liability, it would raise the total cost to the state of the Family Tax Relief program in New York City to roughly $245 million—about $45 million more than under the current legislation.

Posted by Doug Turetsky, February 12, 2013

Last month the Mayor presented his Preliminary Budget for 2014, which included the projection that revenue from the property tax would increase by more than $900 million in the fiscal year that begins July 1 and total $19.4 billion. But don’t start spending all of that additional revenue quite yet.

The property tax revenue projection is derived from the most recent estimate by the city’s Department of Finance of changes in assessed value of properties across the city. A quick look at the latest assessment roll by IBO’s Ana Champeny finds that the city seems to be adding some unlikely sites to its roll of taxable properties.

Photo Credit: Flikr/Simon English

Take the Chrysler Building as a prime example. It has been tax exempt for decades in order to help subsidize tuition-free education at Cooper Union. Yet the Chrysler Building shows up on the city’s initial tax assessment roll for fiscal year 2014 with a taxable assessed value of $184.4 million. This is the amount used to compute tax liability and should not be confused with the city’s estimate of the building’s market value, which the finance department lists at $448.7 million. (The city’s property tax system can be mind-numbingly complex. To learn more about the system and how it got this way, see IBO’s 2006 report.)

You’ve probably heard of the Barclays Center in Brooklyn, that big new arena that was the source of much controversy right up until Jay-Z took the stage the night it opened. A lot of the controversy centered on the city’s subsidy and the use of the funds the developer would otherwise owe for property tax to instead go towards paying the annual interest and principal on the money borrowed to build the arena. Under this deal the property should be recorded as fully tax exempt. But the arena shows up on the 2014 tax roll with a taxable assessed value of $329.1 million.

How about the Museum of Modern Art’s Museum Tower? The tower was developed through an arrangement with the Trust for Cultural Resources that enables cultural organizations like MOMA to generate revenue by spinning off part of their property for private development, which remains exempt from the property tax. Although the trust’s board of directors includes the city’s Deputy Mayor for Economic Development and the head of the city’s Economic Development Corporation, Museum Tower shows up on the tax roll for the first time since it was built in 1985 with a taxable assessed value of $79.6 million for 2014.

There are many other examples as well such as Interchurch Center, which is part of Riverside Church; 3040 Broadway, owned by Columbia University; and the Church of the Heavenly Rest, which has been at 90th Street and Fifth Avenue and fully tax exempt for more than 80 years.

When the Mayor’s budget office forecasts property tax revenue, it assumes that some of the initial increase on assessments will be rolled back due to challenges by property owners and administrative changes by the finance department. But some of the jump in assessed values for 2014 is driven by these unusual shifts in exemption status, and may augur a larger number of properties than usual with assessment changes before tax bills are sent in June. Right now, these six buildings alone account for about $70 million in potential property tax revenue, which is about 8 percent of the anticipated growth in property tax collections next year.

Perhaps the appearance of some buildings on the roll of taxable properties could be explained by an effort initiated by the finance department last year to ensure that only eligible properties are getting tax exemptions. This effort requires owners to file annual applications for the exemption. But the failure to submit the necessary paperwork doesn’t explain why schools and parks department sites are also showing up on the assessment roll as taxable properties. Don’t think, though, that the glitches are limited to those showing higher assessments. The sale of buildings owned by the Jehovah’s Witnesses in Brooklyn Heights received a fair amount of press attention over the past couple of years. For the city, the sales should mean the return of tax-exempt church property to the tax rolls.

Somehow, 161 Columbia Street and 50 Orange Street are still listed in the property records as receiving tax exemptions as houses of worship. Together, the mistaken exemptions for the two buildings are worth more than $420,000 in tax savings for the property owners in the coming fiscal year.

Posted by Doug Turetsky, May 17, 2012

With about five weeks to go in the New York State legislative session, there are still some controversial issues to resolve such as the push to increase the minimum wage, the DREAM Act, and pay hikes for legislators. One issue that has received little if any public notice is the impending expiration in June of New York City’s tax break for coop and condo owners.

If Albany doesn’t act to reauthorize the tax abatement, roughly 365,000 New York City coop and condo owners could see their property tax bills jump. But if legislators simply renew the existing bill, they’ll be giving far steeper tax breaks to many coop and condo owners than originally intended and costing the city hundreds of millions of dollars in foregone revenue.

In the early 1990s, many coop and condo owners complained that the city’s property tax system was unfair, burdening apartment owners with higher tax rates than those paid by owners of one- to three-family homes. A special commission to look at problems with the city’s property tax system was appointed by Mayor David Dinkins and Council Speaker Peter Vallone. The commission concurred with the complaints of coop and condo owners and recommended that taxes on homeowner apartments be brought into line with those one- to three-family homeowners. (For more details on the commission and inequities in the property tax system, see IBO’s Twenty-Five Years After S7000: How Property Tax Burdens Have Shifted in New York City.)

Fixing the inequity between apartment owner and homeowner taxes proved difficult under the constraints of the broader property tax system crafted by the state. In 1997, at the behest of the City Council and then-Mayor Rudolph Giuliani, the state Legislature enacted what was supposed to be a temporary fix for coop and condo owners.

But the temporary fix has in effect become permanent, renewed four times—at no small cost to the city treasury. The total cost of the abatement in 2012 is about $445 million in forgone revenue. An estimated $260 million of that is a tax break for coop and condo owners whose tax burdens are actually lower than what they would face if they were simply moved into the homeowner tax class, according to calculations by IBO’s Ana Champeny. And many of these coop and condo owners live in some of the wealthiest neighborhoods in the city, particularly east and west of Central Park and brownstone Brooklyn.

Why do many apartment owners have lower tax burdens than homeowners? Under state law coops and condos are assessed as if they are rental buildings, meaning that in many instances the properties are greatly undervalued—especially in neighborhoods where values have risen dramatically over the years.

The effect of the state’s assessment rule becomes clear when IBO estimates coop and condo building values using actual sales data rather than the assessments the city is required to use. Take the example of 101 Central Park West. The Department of Finance market value is about $630,000 per unit while the average sales price for apartments sold since January 2011 has been $8.4 million. Using our sales-based market value ($5.8 million per unit) for the building, 101 CPW has an effective tax rate for of 63 cents per $100 of market value in 2012. That’s 19 percent less than the city-wide average effective tax rate of 78 cents per $100 of market value for the one- to three-family homes—before applying the coop and condo abatement. With the coop and condo abatement, apartment owners at 101 Central Park West have an effective tax rate of 52 cents per $100 of market value.

As the clock winds down on this year’s legislative session with no bill as yet introduced to make the promised adjustments to what was supposed to be a stopgap measure, it is likely the coop and condo abatement will simply be renewed as it has been before—an outcome with repercussions for the city’s budget. The $260 million in revenue foregone by providing a benefit for some apartment owners that goes beyond the intended level of tax relief is enough to restore some of the most contentious cuts in the Mayor’s budget for 2013 such as reductions in after-school programs, the subsidy to the city’s libraries, and the closing of 20 fire companies.

Posted by Andrew Liebowitz, September 30, 2010

Thanks to the New York State budget adopted in July, clothing and footwear will get pricier for retail shoppers in New York starting tomorrow October 1. That’s when the 4.0 percent New York State sales tax and 0.375 percent Metropolitan Transportation Authority-dedicated sales tax on clothing under $110 return. From then on, anyone buying a coat that costs $109 will have to shell out $113.77. Or at least they will for a number of months. With the exemption on sales tax for clothing and shoes under $110 scheduled to return in phases over the next 16 months, a calendar may prove to be a helpful shopping tool.

In the first phase, the state sales tax and the portion of the sales tax dedicated to the MTA will be temporarily reinstated for clothing under $110 from October 1, 2010 through March 31, 2011. In the second phase, which runs from April 1, 2011 through March 31, 2012, clothing under $55 will be exempt from state and transit sales tax. And in the third phase, beginning April 1, 2012, clothing under $110 will once again be free of sales tax. MTA funding will not be affected during any phase of the legislation; when the sales tax earmarked for transit is suspended, the state and city each put up half the money to compensate the MTA for any revenue foregone.

The city has the option of following the state’s lead and temporarily repealing its own sales tax exemption for clothing under $110. If it did, clothing shoppers would pay sales tax totaling 8.875 percent: 4.5 percent for the city, 4.0 percent for the state, and 0.375 percent for the MTA. Repeal of the city’s exemption would require action by the Mayor and City Council.

The Mayor’s Office of Management and Budget estimates that the current sales tax exemption on clothing under $110 costs the city over $300 million annually. While repeal of the city’s exemption would provide a significant amount of revenue at a time when the Mayor is again proposing cuts to the city budget, opponents of restoring the tax argue that it would hurt local clothing merchants competing with jurisdictions that don’t tax clothing sales. They also point out that sales taxes on clothing are generally regressive, falling more heavily on those who can least afford it.

After taking into account clothing sales lost to other states with lower taxes, the New York State Division of the Budget estimates that taxing all clothing sales will increase the state’s sales tax receipts by $330 million for state fiscal year 2010-2011. With the sales tax exemption for clothing under $55 scheduled to be restored on April 1, 2011, the Division of the Budget expects a somewhat smaller revenue increase of $210 million for 2011-2012.

Implementation of the sales tax changes take on added complications with mail order and online sales, rain checks, layaway sales, and exchanges. The New York State Department of Taxation and Finance offers a guide that explains when the clothing tax should be applied to these types of sales.

Posted by Doug Turetsky, September 1, 2010

In July Deputy Mayor Stephen Goldsmith unveiled his initiative to eliminate inefficiencies in several areas of city government, from getting rid of unused office space to consolidating information technology operations. The Deputy Mayor aims to save money and improve services. That’s a laudable set of goals. Similar efforts to root through city operations are taking place inside and outside City Hall as policymakers and pundits champion ideas to balance the city’s budget. Interestingly, few seem to be poking at one fairly large corner of the city budget: tax expenditures.

Maybe this neglect is because tax expenditures are money foregone rather than money spent. But the taxes foregone are substantial—$4.6 billion in taxes administered by New York City in fiscal year 2010, according to the Department of Finance’s most recent report on tax expenditures. That’s almost double the $2.4 billion foregone in 2003. Neither figure includes millions more in tax expenditures Albany requires the city to make: for example by not allowing the city to levy property taxes on colleges and universities.

These foregone billions are the result of dozens of individual tax exemptions or abatements. Each exemption or abatement is connected to a policy or programmatic goal such as creating and preserving affordable housing or spurring job creation and retention. But not all of the tax exemptions and abatements may be delivering the intended results, their costs may be outweighing their benefits, or they may conflict with more recent policy goals.

Take one such abatement, the tax break for co-ops and condos. Created 13 years ago, this abatement was intended to take a first step towards reducing the property tax for co-op and condo owners and making their tax burden more like that enjoyed by owners of one- to three-family homes. The co-op and condo tax break cost the city $393.4 million last year, according to the finance department. Yet as IBO has previously noted a large share of the abatement goes to co-op and condo owners whose property tax burdens were already as low, or even lower, than those of other homeowners. How much did these “extra” benefits cost? About $192 million in foregone taxes in 2010—enough to pay the salaries of roughly 3,000 teachers or 1,500 police officers.

There are other examples. How many New Yorkers know that residents of Manhattan get a special tax break when they reserve a long-term garage space for their cars? Not only does it cost city tax coffers about $12 million in lost revenue but it seems to run counter to more recent policies discouraging car use in the city. And many New Yorkers, including elected officials, have questioned the logic of continuing to exempt Madison Square Garden from property taxes at the cost of $14.1 million in revenue foregone last year.

Mayor Michael Bloomberg proposed the elimination of two tax expenditures in January, on aviation fuel and on the recording of mortgage for co-ops and condos. But it was a brief consideration, abandoned in his Executive Budget.

As policy- and opinion-makers comb through the city budget and consider the effectiveness and affordability of all sorts of city spending, they should follow the Mayor’s original impulse and not forget about tax expenditures; though they are harder to see, a dollar of taxes forgone costs as much as any other dollar spent.