Repeal of a Tax Ignited Boom In Real Estate
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Ten years after the repeal of the “Cuomo tax” – the 10% surtax on capital gains for real estate transactions more than $1 million in New York State – some see in the tax’s death the beginnings of New York City’s building boom.
Beginning in 1983, the tax collected $4.3 billion in revenue for New York State. Governor Cuomo said that the unpopular tax may have been a reason he lost the 1995 election to George Pataki. Governor Pataki, if he seeks higher office, will certainly trumpet his role in the 1996 repeal of the tax.
Critics of the tax, who include real estate interests, tax professionals, and fiscal conservatives, call it one of the worst taxes in New York State history. They compare the booming real estate market of the last decade to the static building environment of the early 1990s as proof that the tax stunted growth here. Its repeal, they say, is one of the factors behind the current boom, arguably the greatest in the city’s history.
Developer William Zeckendorf said discrepancies in the way the tax was calculated made the tax on profits for condominium development more like 25% than 10%.
“Governor Cuomo happened to think developers made too much money and therefore a tax for them would have no consequence,” Mr. Zeckendorf said. “But the tax had a tremendous chilling effect on development in the state and city of New York.”
The man who was head of the state Senate tax staff and also Mayor Giuliani’s budget director, Abraham Lackman, said the Cuomo tax hurt the real estate market.
“It was the law of unintended consequences,” Mr. Lackman said. “Real estate transactions slowed to a trickle.”
Collecting the complicated tax created a cottage industry of real estate accountants and lawyers to navigate the regulations and find loopholes. This, in turn, spawned the need for a special unit at the state department of taxation and finance to handle compliance and audits. Around 40% of the Cuomo-tax collections came out of audits. Since the tax’s repeal in 1996, the state has netted about $100 million in revenues from it stemming from audits and deferred payment plans.
“Every project required an audit,” Mr. Zeckendorf said. “You wouldn’t know what the gains tax would be. It depended what mood they were in.”
Developers complained that they were forced to pay the “gains tax” even when they lost money on a deal.
The chairman of Massey Knakal Realty, Robert Knakal, said the Cuomo tax slowed sales volume and created an additional disincentive to sell.
“It is already very expensive to transfer property here relative to other places in the country,” Mr. Knakal said.
He said it was “very prevalent” while the Cuomo tax was in force for owners to “say it was just too expensive to sell,” and that it was common then to see properties priced just less than $1 million, or deals structured creatively to avoid the tax.
The market “certainly spiked right after the repeal,” Mr. Knakal said.
From the outset, the real estate lobby pushed hard against the Cuomo tax, saying it penalized residential development and discouraged investment in New York. They complained about the administration of the tax, and at a time that New Jersey’s office market was developing, they said the tax adversely affected New York’s ability to compete with other states for corporate tenants.
The president of the Real Estate Board of New York, Steven Spinola, who lobbied against the Cuomo tax, said it stunted the city’s growth.
“People were being forced to hold on to property that they could sell and put into more productive use,” Mr. Spinola said.
Another issue, he said, was the loss of national investment at a time when real estate investment trusts, or publicly traded companies known as REITs, started to increase in popularity with investors and become more active players on the national market. Mr. Spinola said the 10% gains tax discouraged the REITs from investing their capital in the New York market.
“REITs were becoming more and more popular, but none were focusing on New York,” Mr. Spinola said.
During the last year of Mr. Cuomo’s administration, a provision was made in the budget that exempted REITs from the tax. Then the debate turned to outright abolishment.
The increased number of real estate transactions since then is visible both in the number of cranes dotting the city’s landscape and in official data.
The city’s department of buildings says the number of total building permits issued by the city is an indicator of the level of activity in the real estate market. Those permits reached more than 111,000 in 2005, up from 51,000 in 1992. Permits for residential buildings numbered more than 31,000 in 2005, after a low of 4,100 in 1992, a recession year.
The total value of all taxable real estate in New York City has grown to $540 billion in 2005 from nearly $294 billion in 1996, according to data provided from the city’s department of finance.
Mr. Spinola said several REITs arrived in the New York City market after the Cuomo tax was repealed, including Vornado Realty Trust, SL Green Realty Corp., and Boston Properties.
In 1997, developer Bernard Mendik’s large portfolio of apartment and office buildings was sold to Vornado Realty Trust, a REIT, for about $656 million, eluding the 10% gains tax. Vornado is now one of the city’s most active developers and, in cooperation with the Related Companies, recently proposed a multibillion-dollar deal to move Madison Square Garden, remake Penn Station, and transform the surrounding blocks with high-end office and residential towers.
Defenders of the tax say the growth in the real estate market has been driven by other factors, like the regular economic cycle and interest rates.
A professor of public administration at Columbia University, William Eimicke, said, “If you look at New York State real estate over the course of a 20-year period, it has to do with business cycle, not the tax. … Real estate sales skyrocketed after its implementation.”
“The idea that this discouraged people is ridiculous. The idea that the repeal encouraged people is also ridiculous,” he said.
“The developers never went to New Jersey or Southern California. They stayed,” Mr. Eimicke said. “There are a lot of no-tax, low-tax places. But they stay here.”
When the real property gains tax was enacted by Mr. Cuomo and the state legislature in 1983, it was widely described as the first tax of its kind in the country. Mr. Cuomo wanted to tap the city’s booming 1980s real estate market to generate more revenue for Albany, which the governor says was mired in budget deficits and saddled with increased responsibilities because of federal spending cuts.
Initially, Mr. Cuomo envisioned less than $100 million in tax revenue a year, but almost immediately, the tax generated big returns, bringing in nearly $400 million in its first full year, and rising to just less than $800 million by 1987, its peak.
The tax was levied on nearly all types of commercial real estate, including commercial and residential buildings, long-term leases, retail centers, and corporate properties when a corporation was acquired. The tax was not levied on sales of one- or two-family homes or townhouses.
About half of all the tax revenues were generated from Manhattan transactions, with less than 10% originating from outside the New York City metropolitan area.
When the national economy went into recession in 1990, the city’s real estate market tanked. Critics of the tax said that in a down market the tax became a further impediment to transactions. In the down market, revenues from the Cuomo tax plummeted, falling to about $143 million in 1992 from $542 million 1989, before leveling off around $100 million in 1994.
Mr. Lackman, the Senate budget director at the time of the initiation and repeal of the Cuomo tax, called the tax’s influence “unambiguous.”
“After the tax was imposed, the real estate market in the city slowed considerably. After it was repealed, it increased,” Mr. Lackman said. “Can you say with 100% certainty that it was cause and effect? No, but it is a strong hypothesis.”
Also in this series:
Pataki and Cuomo, 10 Years Later, Tilt Over Legacy of a Tax, June 22, 2006