Ten years after the repeal of the “Cuomo tax” – the 10% surtax on capital gains for real estate transactions of more than $1 million in New York State – the politician the tax was named for, Mario Cuomo, defends his decision to impose it.

And the politician known for repealing it, George Pataki, defends his decision to end it, calling the tax a “revenue loser and a job killer.”

Governor Pataki, in an interview with The New York Sun, acknowledged that the business cycle and low interest rates also have led to the current boom, but he said the repeal of the tax directly resulted in an increase in real estate activity, created construction jobs, and increased state tax revenue.

“It made no sense to me that a private investor, who could invest anywhere in the country, would want to have New York State as a 10% silent partner,” Mr. Pataki said. “Entrepreneurs are going to make money. If they don’t make it in New York, they will make it elsewhere.”

Mr. Pataki said the tax revenue lost by repealing the Cuomo tax was made up many times over by an increase in revenues from other taxes linked to the thriving real estate market.

Governor Cuomo, for his part, blamed the market downturn on the recession and the upturn on a vastly better economic situation, both in New York and nationally. Mr. Cuomo, in an interview with The New York Sun, said he doubted that the gains tax would force a developer to “build a skyscraper in Newark instead of Manhattan” for “only a dime on a dollar.”

“Do you believe there is another real estate market that matches New York?” Mr. Cuomo asked in disbelief. “Would they rather build a high rise in San Diego, San Francisco, or Boston? Come on.”

Mr. Cuomo said the gains tax, “cost me a lot,” including the support of the real estate industry.

“They called it the Cuomo tax, they derided me, they stopped supporting me, because we made $800 million a year that would have been theirs. I understand that and I love them anyway,” said Mr. Cuomo, now a lawyer in Manhattan.

Mr. Cuomo acknowledged mistakes in the way the tax was administered, specifically that some investors who lost money still owed taxes.

“There were people who were hurt unfairly,” Mr. Cuomo said.

Mr. Cuomo said demand for New York real estate is so strong that it could not be discouraged by a 10% tax.

When Mr. Pataki was elected in 1995, he promised to repeal it. “There was still that philosophy that it was only millionaires who were paying it,” Mr. Pataki said. He said the repeal “was easy to demonize as a tax cut for the rich, when it really was an economic stimulus.”

The debate at the time came down to how much abolishing the Cuomo tax would cost New York State, which was estimated to be about $100 million a year.

A 1996 report by Wharton Econometric Forecasting Associates, which was sponsored by real estate groups, measured the cost and the benefit of the tax cut more broadly to include “feedback” effects, like job creation and a soaring number of real estate transactions, which would lead to more revenue from real estate transfer taxes. The report said repealing the tax would cost the state a net $18 million a year but boost New York City tax revenues by $215 million and create nearly 8,000 jobs.

Official data from the state and city show a sharp rise in real estate transfer taxes corresponding with the repeal of the gains tax. In 2005, the real estate transfer tax generated more than $1.06 billion for the city. For the state, it generated $729 million in 2005, up from $181 million in 1996. Revenues from the current real estate boom are also captured in mortgage recording taxes, fees, and state and federal income tax in the form of capital gains.

In the interview, Mr. Cuomo left open the possibility that he might have repealed the tax in the improved economic climate of the mid-1990s, had he been re-elected.

“Who knows what would have happened? I would have done what I thought was best for the state at that time,” he said.

“I did the gains tax only because the state needed the money desperately. When the need went down, then the need for the tax went down. It got easier to repeal it,” Mr. Cuomo said.

Mr. Cuomo’s Commissioner of Taxation and Finance from 1988 to 1994, James Wetzler, said the repeal of the Cuomo tax was “wise.” He said the real estate environment changed drastically between 1983 and 1996.

“In 1983, the tax law was such that a typical owner of commercial real estate didn’t pay very much, if any, federal or state income tax,” Mr. Wetzler said.

But he said that federal tax reforms in the mid-1980s drastically increased the tax burden for real estate investors.

“The real property gains tax became an additional burden over and above what was more normal,” Mr. Wetzler said.

“Any tax burden like that is reflected in lower real estate prices,” said Mr. Wetzler, now with Deloitte & Touche. “The tax also locked people into holding real estate that they might have wanted to sell.”

Mr. Pataki said he would expect the issue to surface when a new governor takes office next year.

“There will be enormous pressure coming from Assembly leadership to raise the income tax and bring back the gains taxes we got repealed,” Mr. Pataki said. “It is not uncommon, in the name of raising revenue, that policies can be enacted that dramatically reduce economic activity.”

Yesterday’s installment, assessing the Cuomo tax 10 years after its repeal, is available at nysun.com.

Tomorrow: The chances for the Cuomo tax’s reinstatement.

Also in this series:

Repeal of a Tax Ignited Boom In Real Estate, June 21, 2006