UPDATED, Sept. 24, 6:37 p.m.: This week, State Senator Brad Hoylman indicated he plans to introduce legislation that would levy a tax on pieds-à-terre. While the bill has yet to be introduced, the specter of such a proposal has some real estate insiders and tax policy experts sounding dire warnings about the chilling impact the levy would have on the market.
The legislation, based on a proposal by the Fiscal Policy Institute, would amend the Real Property Tax Law, allowing the city to tax pieds-à-terre at escalating rates depending on the value of the property. At the low end, homes owned by non-residents worth between $5 million and $6 million would be subject to a surcharge equal to half a percent of the value of the unit. Condos and co-ops valued above $25 million would be charged $370,000, plus 4 percent on excess over $25 million.
The Fiscal Policy Institute estimates that such a measure would generate $665 million in tax revenue. The institute notes that the policy is engineered to drum up most of that money — 83 percent — from those whose pieds-à-terre are in the top bracket.
“The pied-à-terre tax addresses the free rider problem of the super-rich non-resident,” Hoylman told The Real Deal. “Currently, non-residents who purchase luxury apartments don’t pay their share towards city services and infrastructure maintenance because they’re exempt from income taxes. I think the pied-à-terre tax is a simple and fair way to fix that.”
But Steven Spinola, president of the Real Estate Board of New York, cautioned that the threat of hefty new taxes on homes would have an immediate impact on buyer sentiment at various price points.
“The problem is that when you propose this kind of economic hit on any segment of the market, you’re putting a significant chill into the market,” said Spinola. “What’s going to happen while there’s this uncertainty about whether or not this tax is going to be adopted?”
One possible result, said Spinola, is that non-residents will seek to renegotiate prices to offset the new tax burden. If would-be buyers back out of deals, prices could begin to fall in the face of softening demand, real estate professionals said.
“I think the talk probably puts a lot of potential sales on hold because people aren’t going to be able to predict what the tax impacts are,” said Carol Kellermann, president of the Citizens Budget Commission. “Uncertainty is never a good thing.”
According to Kellermann, the proposal does not pass what she calls a simple two-step process for assessing a new tax. The first step is to ask whether the city needs additional revenue, and if so, how much. The second step is to determine the best way to go about raising that revenue.
She said the legislation doesn’t seem to address either of those questions, and instead appears calculated to correct what some see as unfairness in the housing market — namely, that part-time residents enjoy tax-funded benefits without paying for them.
“It’s not good tax policy to use a property tax to exert pressure or extract something from individuals that you think should be contributing,” said Kellermann
Senator Hoylman took issue with the notion that the city does not need to raise additional revenue.
“Our city needs new lines of revenue to address critical infrastructure needs,” said Hoylman. “Anyone who suggests otherwise obviously hasn’t been to one of the public housing developments in my senate district in Manhattan or across the five boroughs.”
He also pointed to the city’s chronic shortage of affordable housing and the “crumbling infrastructure of our public housing, mass transit and city colleges” as sources of financial shortfalls with no solution.
In explaining its rationale behind the proposal, the Fiscal Policy Institute wrote, “These [pied-à-terre] owners bid up the price of NYC residential real estate, and since they don’t spend much time in these units, contribute little to the local economy compared to full-time residents.”
The idea that pied-à-terre owners aren’t contributing because they don’t live in New York and pay taxes annually is flawed, said Hall Willkie, president of Brown Harris Stevens. The problem with the logic is it fails to factor in the outsized impact that wealthy part-time New Yorkers have on the broader economy.
“I think it’s in the interest of New Yorkers and the New York tax base to attract as many people who invest in real estate and go to restaurants and go shopping as possible,” said Willkie. “This is going to scare them away.”
Indeed, some industry insiders are particularly concerned about the effect the tax would have on international investors, who are increasingly purchasing second homes in New York City. John Burger, a top broker with Brown Harris Stevens, said if the legislation became law, it could potentially jeopardize Manhattan’s position as the leading international safe haven for blue chip real estate investment.
“I can’t imagine that given how incredibly profitable foreign investment has been in elevating the Manhattan market to a new historical high that this would be regarded as a wise idea,” said Burger.