For years I have said that in order to run for an elected public office, a candidate should have worked in the private sector for at least two years and have taken at least one economics course. I thought about this position after hearing about the soon-to-be proposed bill which advocates for an additional real estate tax on non-resident owners of apartments in the city with market values over $5 million. The tax is trying to target foreign buyers of Manhattan real estate.
This so-called “pied-à-terre tax” is one of the more ridiculous proposals to be made in recent memory.
This tax, on non-primary residents only, would be 0.5 percent for the portion of the property’s market value between $5 million and $6 million and ratchets up to the point where, above $25 million in market value, the marginal tax is $370,000 plus 4 percent over $25 million.
In the residential market, some buildings impose a “flip tax” which is an additional one-time tax—typically paid by the buyer—that goes into a reserve fund for the building. This tax is usually about 1 percent. It is negatively viewed by market participants and some buyers move units with this tax into a lower status on their priority list. The pied-à-terre tax is tantamount to the imposition of a flip tax every year!
This proposed tax was initially conceived by the Fiscal Policy Institute and has now become a pet project of state Senator Brad Hoylman of Manhattan. Mr. Hoylman has claimed that the tax would get something from the “free riders”, would be “simple and fair” and is justified because there is a need for “new revenue.” Really?
The three reasons proponents of this new tax advocate for it are: non-residents don’t pay income taxes here, people buying these luxury units can afford to pay the tax, and London has a similar tax. Each of these reasons is flawed.
First, non-residents don’t pay income taxes. True, they don’t. So what? Neither do the hundreds of thousands of workers who have jobs in the city but live in New Jersey, Connecticut or Long Island. However, the foreign owners of luxury apartments are not really consumers of the good and services that government provides with income taxes to the same extent as full-time residents or daily commuters.
These folks also pay the city’s 1 percent mansion tax when they purchase their unit, mortgage recording taxes when they obtain a loan and a transfer tax when they sell. They also pay sales taxes and chances are that they pay much more in aggregate sales taxes during the short time they are in the city than the average full time resident pays in a year. Free riders? I don’t think so.
Another thing to consider is that many of these non-resident owners are CEOs or owners of companies that are based here or have an office here and employ New Yorkers.
As for the argument that people who this tax targets can afford to pay it—how absurd! So folks should be taxed because they can afford it? What’s next? Should people who drive into a gas station with a Bentley pay more for a gallon of gas than someone in a Ford?
If additional revenue is needed, elected officials should have two choices. One would be to really try to eliminate waste, fraud and abuse. If more money is needed for new initiatives, find it in the existing budget or have the guts to suggest tax increases that will be fairly imposed across the board.
As for London’s similar tax: again, so what? There are hundreds of taxes and policies that are implemented around the world. That doesn’t make them the right policy for us.
Nothing about our real estate tax policy is simple. The derivation of tax assessments has historically been an incomprehensible and inequitable process.
Another impact of this tax would be to devalue these luxury units, and the percentage decrease in value would increase as the values rise. At $6 million, the value would be decreased by about 2 percent.
When land doesn’t sell, buildings don’t get built. When buildings don’t get built, construction jobs are not created. Architects, engineers, lawyers and a host of others who perform services for these projects would have less work. Whether you like these big projects or not, there is no denying that they produce hundreds of millions of dollars in total taxes which provide tremendous support to our local budget.
Bob Knakal is the chairman of Massey Knakal Realty Services and has brokered the sale of nearly 1,600 properties having a market value of approximately $11.5 billion.