If there were ever a tax that had clear and adverse effects on New York City, it was the Cuomo tax that levied a 10% surtax on gains on commercial real estate transactions of more than $1 million. Our David Lombino has told the story in a three part series that concludes today. After the tax, imposed in 1983,was repealed in 1996, real estate investment trusts came to New York and invested in a building boom that has seen annual building permits soar to 111,000 from 51,000 and the total value of all taxable real estate in New York City grow to $540 billion in 2005 from nearly $294 billion in 1996. Big real estate operators such as William Zeckendorf and Robert Knakal told us that while it was in effect the tax had consequences – “a tremendous chilling effect on development in the state and city of New York,” Mr. Zeckendorf said.

The amazing thing is after all that, there are still those on the left who are in denial. Mayor Koch, an intelligent man who is enough of a centrist to have crossed party lines to endorse both President Bush and Mayor Bloomberg for reelection, said of the tax, “it only affected people who were getting over $1 million. I regret that they repealed it.” A professor of public administration at Columbia University, William Eimicke, frequently quoted as an expert by the New York Times, called the idea that the tax discouraged development or that its repeal encouraged it “ridiculous.” Governor Cuomo to this day insists he doubts that a 10% tax would cause a developer to build in Newark, San Diego, San Francisco, or Boston instead of New York City. “Come on,” Mr. Cuomo said.

All this denial may stem from an error – the idea that the tax “only affected people who were getting over $1 million.” The error is that it leaves out all the New Yorkers who live and shop and work in neighborhoods that stagnated during the years of the Cuomo tax but that have since benefited from new construction. It leaves out the union construction workers who build or renovate and convert buildings that have been sold or erected since the tax’s repeal, and it leaves out the real estate brokers who rent and sell space in those buildings. It leaves out the public employees whose pension funds invest in REITS.

One person, at least, who seems to grasp this – as did Governor Pataki, who repealed the tax – is the Republican candidate for governor, John Faso. “Governor Cuomo called it the perfect tax, because it was only for millionaires. The fact of the matter is, those are the very people that helped to create economic activity by their investments,” Mr. Faso said. Ten years after the repeal of the Cuomo tax, the results of supply-side economics are clear in the building boom that has extended from Manhattan to Brooklyn and Staten Island, benefiting millions of New Yorkers of all economic backgrounds. The thing to take from the story of the Cuomo tax is that errors can be made in policy. The denial we read about in Mr. Lombino’s series suggests that if the Democrats make gains in Albany there is a danger that the real estate boom ignited by the repeal of the Cuomo tax could face new tax challenges and come to an all too abrupt end.

Also in this series:

Repeal of a Tax Ignited Boom In Real Estate, June 21, 2006
Pataki and Cuomo, 10 Years Later, Tilt Over Legacy of a Tax, June 22, 2006
Lust for a New Tax on Real Estate Could Tempt Albany Next Year, June 23, 2006