Large Share of Property Taxes Borne by Rentals, Report Says

New York City's arcane property tax system is increasingly favoring homeowners over the owners of rental apartment and commercial buildings, according to a report to be released today by the city's Independent Budget Office, which says the system could hurt the city's competitiveness.

Measuring the "effective tax rate," or the tax paid on every $100 of market value, the report says one-, two-, and three-family homes make up 41% of the market value of property in the city, but only generate 14% of total property tax revenue. Commercial property makes up 16% of market value and generates 43% of tax revenue, according to the report.

While the tax rate has dropped 65% for homeowners since 1984, it has dropped only 18% for commercial properties. Property taxes are the city's largest source of revenue, bringing in an estimated $13 billion this fiscal year, roughly 40% of all local tax revenue, according to IBO estimates.

In 1981, the state Legislature enacted property tax changes that maintained tax breaks for homeowners, a powerful political force. In the city, the changes included the creation of four categories of property, each taxed at a different percentage of their true market value. The IBO report released today finds that 25 years later, those changes correspond with a growing disparity in the tax burden. Taxes are becoming increasingly costly to the owners of rental and commercial buildings.

A professor specializing in municipal finance at New York University, Richard Netzer, said increasing taxes on some homeowners would be a difficult political fight, but he said some change is desirable.

"New York State had the worst property tax system in the United States by a wide margin in the '70s," Mr. Netzer said. "A terrible set of changes was then put on top of a very bad tax system."

In addition, property tax breaks may not be going to the homeowners that need them. The report finds that a 1997 tax abatement for the owners of condos and co-ops was overly generous, giving owners of those properties lower tax rates than owners of one, two or three family homes, and benefiting condo and co-op owners on the Upper East and Upper West side of Manhattan over owners in the other boroughs.

The report finds the tax on commercial properties is higher in New York than in other large U.S. cities, and many times higher than the tax on local residential properties. The result, the report says, "is a disproportionately heavy tax burden on the city's commercial real estate."

A senior vice president of the Real Estate Board of New York, a real estate lobbying group, Michael Slattery, said yesterday the city's high commercial property tax rate influences relocation decisions of businesses. While most businesses are willing to pay a premium to stay in New York, Mr. Slattery said that cost-conscious firms choose to move part of their workforce to cheaper locations, including across the Hudson River in New Jersey.

"Cost matters. We are more expensive than other major cities and significantly more expensive than other neighboring municipalities. That poses a problem for us," Mr. Slattery said.

There is also a widening disparity in tax burdens between rental buildings and co-ops, the report says. Ten years ago, the tax rate for rental apartment buildings was 1.8 times higher than co-ops. Now the effective tax rate for rental buildings is 5.5 times higher than coops.

Mr. Slattery said owners of rental buildings have complained to the Real Estate Board of property tax rates that amount to more than 30% of their gross rental income, a cost that is often passed on to renters, he said. Raising more property tax revenue from homeowners, including co-op and condos, could help fund the city's basic needs, he said.

The former speaker of the City Council, Peter Vallone Sr., said that raising property taxes on homeowners would be "absurd." He said the current property tax system shares the burden equitably among homeowners and the owners of income producing properties, like office or rental buildings. He said small homeowners need a break to stay in New York.

"You want to keep your middle class in the city. They are getting a tremendous break, but that is to keep them here. If you lose them, what are you going to have?" Mr. Vallone said. "Everyone aspires to own a home, condo or coop. That's the American way."

Assuming the city's tax revenue must remain constant, the IBO report suggests several methods for creating a more equitable share of the tax burdens. One suggestion would institute a single tax rate for all classes of property. That would equalize the disparities, but would result in an average annual tax increase for homeowners of $5,326, according to the report.

A spokesman for the city's Department of Finance said Commissioner Martha Stark is reviewing the IBO report. Ms. Stark is scheduled to address the IBO findings today on a panel at the New School with Mr. Netzer, Mr. Vallone, Mr. Slattery, and others.