Why New York Can’t Afford to Lose the 421a Tax Incentive
The past two mayoral administrations have both highlighted the importance of housing affordability, yet little has actually been done to create affordable housing. One of the few initiatives that has spurred this much-needed development activity over the past few decades is the 421a tax exemption program.
But the law now finds itself in the crosshairs of New York City Comptroller Brad Lander.
For advocates of 421a, opposition to this commonsense development incentive is frustrating — because it is misleading in its analysis and its termination would only exacerbate the very real affordable housing crisis in which the city finds itself.
The comptroller’s recent report arguing that the 421a program should be allowed to expire seems very much like a cudgel to force long-awaited property tax reform on lawmakers. The report has most effectively grabbed headlines with its conclusion that the 421a tax incentive program costs New York City $1.77 billion in foregone tax revenue. If that assertion is startling, it’s because it is not quite true.
The 421a incentive does not cost taxpayers a dime. On the contrary, the 421a program adds jobs to the economy in the short term and increases the city’s tax rolls in the long term. Critics of the program either don’t understand how the 421a tax exemption works or are willfully ignoring what is clearly written into the law.
The first version of the 421a program passed into law in 1972. Since then, the law has endured several renewals and revisions, but one aspect of it has never changed: 421a projects are subject to taxation during the lifetime of the benefit. That is, 421a is not, and has never been, a 100 percent property tax exemption; it is only a partial exemption.
The law’s benefits exempt any increase in taxes attributed to constructed improvements to the property. What this means is that the original tax assessment on the property before construction commenced is not subject to the 421a exemption. For example, if there was a $100,000 tax assessment on the property before the 421a project commenced construction, that $100,000 assessment remains 100 percent taxable throughout the 421a benefit term. Assuming a new building arises and the assessment increases to $1 million, the owner is still required to pay taxes on the original $100,000 assessment during the lifetime of the 421a benefit. (After the 421a benefit has expired, the $900,000 “new” assessment becomes fully taxable.)
The $1.77 billion figure the comptroller cited represents an aggregate of the increases in assessment resulting from construction. Using the earlier example, $900,000 in assessment (the difference between the $1 million assessment upon completion and the $100,000 before construction commenced) is the exempt amount and would be included in the comptroller’s $1.77 billion calculation.
The key issue with the $1.77 billion figure is that the $900,000 assessed improvement would not be built by developers — or placed on the tax rolls — if not for the availability of the 421 a benefit. The $1.77 billion in “foregone tax revenue” is not foregone at all — it never existed and never would exist if not for the incentive program.
The comptroller would be hard pressed to find an extra $1.77 billion in the city’s budget with the elimination of 421a. Not only would the city realize no increase in taxes, but it would likely see a marked drop in tax revenue. As the nonpartisan nonprofit Citizen Budget Commission concluded days before the comptroller’s report, “allowing 421a to lapse would significantly reduce rental housing development, worsen the city’s existing housing supply shortage and make New York City’s already scarce and costly rental housing scarcer and more expensive.”
The ripple effect caused by eliminating 421a would mean lost construction jobs, lost building service jobs and a loss of city residents due to the increased scarcity of affordable housing. If Lander wants to see meaningful property tax reform, 421a — an incentive program that on its face does not cost taxpayers anything — should not be held hostage to achieve this goal.
YuhTyng Patka is the chair of the New York City real estate tax and incentives practice group at the law firm Duval & Stachenfeld, where she is also a partner.