In an effort to extend a tax on New York corporations, state lawmakers wrote a bill that would triple or quadruple a tax on co-ops and raise owners’ dues by thousands of dollars a year.
The mistake set off alarm bells for the real estate industry and apartment owners. Legislators are now pledging to fix the error before it has a chance to become law.
“We goofed,” said Manhattan Sen. Liz Krueger, chair of the Senate Finance Committee.
She spent Friday reaching out to co-op dwelling constituents who “bombarded” her with emails from the Upper East Side, Midtown, Murray Hill and Kips Bay.
“I’m writing them back saying, ‘We never meant to. I’m sorry. We’re not doing it,’” she explained.
Here’s how it happened.
Lawmakers were looking for revenue sources to close what they thought was a pandemic budget gap. They came across an expiring tax on corporations’ capital base and proposed extending it.
But their bill dropped a key carveout for co-ops — a provision that has kept their rate at 0.04 percent, a fraction of what all other corporations pay. Without the carveout, the extension would have raised the rate to 0.15 percent (in the Assembly bill) or 0.12 percent (in the Senate version).
“The co-op tax was within the language of corporate tax because co-ops are defined as corporations,” said Krueger. “But no one actually noticed it there.”
The proposal blindsided the residential real estate industry, but it was able to quickly mobilize, having founded lobbying groups and built support for months to ward off a pied-à-terre tax. The groups scrambled to register their opposition and outrage.
The NYC Homeowners Coalition sent an alert on Wednesday warning its members that the proposal “could raise your maintenance by hundreds or thousands of dollars every year.”
“Don’t let your state senator and Assembly member sneak this harmful tax into the state budget proposal at the 11th hour!” it read.
The capital base tax was set to expire this year — a change made long ago, as part of the fiscal 2015 budget. The extension, including the co-op tax hike, would generate about $150 million next fiscal year. (The Cuomo administration has since said there is no budget gap to close for the next fiscal year, which begins April 1.)
Before Krueger’s explanation, real estate leaders claimed to be at a loss to understand the proposal, which might not have made it into the state budget anyway, as the governor largely controls the process.
Stuart Saft, a partner at Holland & Knight, a founder of the NYC Homeowners Coalition and chair of the Council of New York Cooperatives and Condominiums, said they only became aware of the proposal to revive the tax last week.
“It just doesn’t make any sense,” he said on Thursday. “This is not necessarily a tax that’s going to affect wealthy people. It’s going to affect anybody living in a co-op,” he said.
James Whelan, REBNY president called the proposed taxes “perplexing.”
The Homeowners Coalition calculated that annual maintenance for an Upper East Side co-op shareholder could rise by $1,600 to $2,000, and between $125 and $157 for one in Sheepshead Bay.
Crain’s first reported the problem and Krueger’s mea culpa on behalf of the legislature.
“None of us actually understood this was caught up in the corporate franchise tax that we were changing, and so this was an unintended consequence,” she told the paper. “Nobody is pursuing it, so I do not believe anyone needs to be concerned that we are actually going to increase the capital base tax.”
The Homeowners Coalition said in a statement that it was encouraged to hear that lawmakers were not genuinely motivated to hike co-op taxes.
But Whelan expressed doubt that lawmakers would rectify the error.
“While at least one lawmaker has now stated that this proposal was ‘an unintended consequence,’ it is worth recalling that negative impacts on co-ops were also an ‘unintended consequence’ of the HSTPA of 2019,” he said in a statement, referring to the Housing Stability and Tenant Protection Act, which owners of rent-stabilized apartments have called a disaster.
“That problem has still not been fixed by state officials,” he noted.
Krueger is a co-sponsor of a bill introduced in late 2019 that would clarify that the HSTPA did not apply to co-ops or condominiums. The bill is still in committee.
The senator declined to respond to Whelan’s comment directly, but said, “Nobody wanted to make this mistake, trust me. But [the] tax code is complicated. Tax law is complicated.”