421a’s finish means it is time for actual property-tax reform in NYC

For those who want to see New York City revive and thrive, the impending demise of the 421a housing-construction abatement, known by its section of state law, may seem like a blow. The annual $1.8 billion property-tax break, the city’s most lucrative, has enabled the construction of thousands of income-restricted “affordable” units. The majority of the city’s new residential development since 2013 (and 28% of affordable units) has made use of it.

But after 50 years, the subsidy looks to be at the end of the line in Albany. It’s likely to lapse as the result of progressive arguments that 421a is just one more tax break for the rich — and that its affordable units don’t reach the very poorest’s income levels.

But this is one case where those across the political spectrum should agree — and move forward to fix the underlying problem on which 421a has at best placed a Band-Aid: the city’s crazy-quilt property-tax system.

City Comptroller Brad v, who would politicize the city’s pension investments and sees rent regulation as inviolate, is right this time: He says the city’s “property tax system is notoriously opaque, unfair, and regressive. For the past four decades, rather than dealing with its structural flaws, New York State has layered on a patchwork of exemptions and abatements to lower tax rates for various owners.”

At the heart of the system’s complexity and capriciousness is the fact that city property-tax bills are often detached from a property’s actual market value. That’s what motivated 421a — but has also made it, as per Lander, just one more example of how doing business in New York requires one to be a well-connected firm with access to top legal talent. It’s the same reason Walgreens had to buy Duane Reade to get a foothold in the city: Real-estate development is a specialist’s skill here rather than the “as of right” option available to the willing entrepreneur in, say, Houston.

Albany lawmakers are set to let 421a expire in June.Hans Pennink

The underlying problem is so well-known as to be old news — but still worth reviewing. As NYU’s Furman Center has found, rental apartment buildings have a higher “effective tax rate” than one-to-three-family homes, making it no surprise that nonregulated rents keep rising. And because condos and co-ops are taxed as if they are single-family homes, a Park Avenue condo can pay far less tax than its value would suggest.

Commercial real estate has long been a cash cow — a situation that post-COVID work patterns may no longer permit. And the disproportionate burden on rental properties means developers have a financial incentive to build only for the luxury market. Those who would build “affordable” units need a range of subsidies — including 421a.

The system’s vagaries have not escaped elected officials, including former Mayor Bill de Blasio, who convened a commission to come up with an alternative. The good news is that the Advisory Commission on Property Tax Reform did just that in a December report. Among its key proposals: putting all small residential property — one-to-three-family homes, four-to-10-unit rental buildings, condos, co-ops — in the same tax class and “ensuring that rules are applied uniformly regardless of property type.”

Progressives like City Comptroller Brad Lander have argued that 421a is a tax break for the rich.Progressives like City Comptroller Brad Lander have argued that 421a is a tax break for the rich.Photo by Noam Galai/Getty Images for One Fair Wage

The way to do that would involve “sales-based market value.” In other words, don’t tax Upper East Side co-ops as if they’re rent-controlled apartments.

To be sure, reform would create winners and losers, if viewed narrowly in terms of tax liability. The city’s Independent Budget Office found that if all residential properties in the city paid property taxes based on market value, nearly 500,000 would get a median tax cut of $1,100. Homes on Staten Island would almost all get a tax break — but 98% of those in Park Slope would get a whopping median tax increase of $11,000. Of course, that’s the result of gentrification — and the neighborhood liberals should be willing to pay their “fair share.”

The demise of 421a sets up a “Put up or shut up” moment for progressives in Albany, which must approve a new property-tax regime for the city. We will find out if they were only interested in punishing real-estate developers who’d gotten the tax break — or whether they are serious about general property-tax reform, as Lander urges.

A full-throated New York City comeback will require a great many factors to fall in place, from getting the homeless off city streets to reducing crime across the board. But making it far easier to build housing — and not need a complex tax subsidy to do so — is key. Albany must act.

Howard Husock is a senior fellow at the American Enterprise Institute.