New York Mayor Bill de Blasio is considering a proposal that would place a property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. surcharge on residences that are worth $5 million or more and owned by non-New Yorkers, according to the Wall Street Journal. The surcharge was proposed by the Fiscal Policy Institute, an independent research and nonprofit organization located in New York.
The taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. surcharge would be added to the property owner’s tax liability, starting at 0.5 percent for a property's value greater than $5 million and increasing to 4 percent for properties greater than $25 million. The surcharge would be based on the market value of the properties rather than the assessed value, which makes the surcharge more burdensome than other property taxes.
Under the current property tax structure, property taxes are paid based on assessed value rather than market value. In New York City this is 6 percent or 45 percent of market value, depending on property type, giving current New York City effective rates ranging from 1 to 5 percent of home values.
The proposed surcharge will not value property based on assessed value, so while 0.5% to 4% sounds small compared to the 19.157% property tax already levied on some properties, the effective rate is quite large. Added to the current property tax, the proposed surcharge could up to double the property tax burden on effected properties.
While the angst of billionaires and their penthouses might not elicit the most public sympathy, such damaging taxes can negatively impact economic growth. High tax rates can decrease demand for luxury properties that generate significant economic activity. Rich potential owners may readily find that Boston or London are more to their liking. But the most likely result of such a tax would be to drive down purchases by out-of-state individuals and create more condo leasing through New York-based holding companies (much like how high income individuals lease or own “shares” of private jets). So property taxes would still not increase.
As we have written in the past, New York has struggled to increase its number of millionaires in comparison with the rest of the country, lagging behind the national average. The state already sharply increases tax rates on incomes over $1 million and even institutes an “income recapture” provision to raise rates on lower income brackets, thus it’s unclear why the state would add still more punitive taxes to its repertoire.
Additionally, if New York City did implement a special surcharge targeting out-of-state property owners, it could open the city to constitutional challenges. The US Constitution was instituted precisely to prevent such beggar-thy-neighbor policies that discriminate against people in other states, and it has several provisions that restrict such actions. Not least among them are the privileges and immunities clause (which has been interpreted to offer a “right to reside” which could prohibit such discriminatory taxes), the interstate commerce clause (asset purchases across state lines can be considered interstate commerce), or even possibly the equal protection clause.
Simply put, a high tax directly aimed at a narrow base (only 1,556 properties satisfy the criterion in NYC) contradicts the principles of sound tax policy. If the city needed to raise revenue, a broadened base and lowered rates would be far less destructive and also promote growth, which in turn brings more revenue.
Read more on New York here.
Read more on property taxes here.
Read more on millionaire taxes here.
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