Land Doesn't Pay

illustration: Anthony Freda

It's budget season in the city, and Mayor Michael Bloomberg's latest "fiscally prudent" offering is a mixed bag of increased revenues with what are by now accustomed service cuts—in library hours, park workers, youth programs—and a gloomy forecast.

For those wondering why New York City always seems to be pinching pennies despite being home to some of the world's most valuable real estate—41 percent of local tax revenues come from property taxes, more than double what the city collects from income taxes—Bonnie Brower may have an answer.

The director of the budget watchdog City Project has been poring over tax records to conduct a first-ever census of exactly how much city land is exempt from property taxes. Her startling conclusion: A full 57 percent of the assessed value of land within the five boroughs currently goes untaxed or partially taxed—amounting to more than $7 billion a year in lost city revenue.

"We are shrinking our various tax bases inordinately, and putting tax burdens on people who shouldn't have them as a result," says Brower. "If our property taxes were more rational, we might not need a sales tax."

For decades, it's been an open secret that New York is one of the most generous states for handing out property tax breaks—state law includes more than 200 different exemptions, everything and everybody from colleges and hospitals to veterans and the elderly. As a result, about one-quarter of the state's $1.6 trillion in assessed land value is currently exempt from taxation.

"We always used to say that the Boy Scouts in New Jersey can only have five acres of [tax-exempt] land, so all the Boy Scouts in New Jersey own land in New York, because they can own 1,000 acres and it's tax-exempt," says David Gaskell, who ran New York's property tax office under Mario Cuomo.

In New York City's case, Brower's research points a stern finger directly at New York State itself, and its many public authorities. According to "State of Distress," a City Project report issued in February, the state and its authorities own approximately 5,000 properties in the city, virtually none of which pay property taxes; since the mid '80s, the resulting city tax losses have soared from $117 million a year to more than $1.5 billion.

Much of this stems from the explosive growth of the authorities, which have handed out increasing numbers of tax incentives to grease the wheels of private development. (Adding insult to injury, the expanding authorities invariably locate their own new office space in the city—for which they then don't pay tax.) Brower's examination of just five authorities for which records are available—the Battery Park City Authority, Dormitory Authority, Power Authority, Urban Development Corporation, and the MTA—found that while they owned land worth under $800 million in 1985, today that figure is over $11 billion, resulting in a city "tax expenditure" of nearly $1.3 billion a year.

To see the buildings that are benefiting, just take a walk around Times Square. During the redevelopment boom of the 1990s, the office towers that went up there were largely built on land transferred to the state Urban Development Corporation, and so were exempt from property taxes. Five Times Square, for example, the headquarters of Ernst & Young (as well as Rudy Giuliani's consulting firm) on the southwest corner of 42nd and Seventh, single-handedly rakes in more than $36 million in tax breaks every year—more than triple the mayor's favorite bogeyman, the $11 million-a-year tax exemption enjoyed by Madison Square Garden. And the same pattern is about to be replicated several blocks to the west, where the new Hudson Yards development would make below-market payments in lieu of taxes (PILOTs) on dozens of square blocks of prime midtown parcels.

These are the aboveboard tax breaks, part of the nearly $2.3 billion in tax expenditures listed in the mayor's own budget. (Most are classified as either housing or "economic development," municipal code words for UDC tax breaks and the like.) As Brower discovered, though, there are billions more in missing tax revenues not listed in the city budget: $212 million on properties owned directly by the state, for example, and another $800 million for the MTA, mostly in the form of easements for underground rail lines. When Con Ed digs a tunnel, it pays property tax; when the Long Island Rail Road does so, the city eats the whole bill.

The largest tax-exempt city landlord, of course, is the city itself, which controls nearly a quarter of its own land in the form of parks, schools, and other public properties. (Even New York City's government has never been so byzantine as to tax itself.) After the state and its authorities, the next biggest exemption category is nonprofits and charities, which include both religious institutions and such major landholders as New York's hospitals and major universities like NYU and Columbia.

While tax breaks for nonprofits may sound like a no-brainer—isn't that, after all, why nonprofit corporations exist in the first place?—there are some problems when their exemptions are extended to property taxes. One, notes Brower, is that not every charitable institution can benefit from the tax exemption—only those that own property.

As a result, she says, "the nonprofits that benefit are the oldest, most well established, and wealthiest. Where's the support for Make the Road by Walking, or Community Voices Heard, or, god forbid, City Project? It leaves out all the grassroots groups, virtually all of whom are paying property taxes if they're renting in commercial buildings, because commercial buildings pass through the full property taxes to their tenants."

Likewise, argues Brower, something has gone wrong when tax laws allow a university or hospital to buy residential buildings and turn them into tax-free housing for their staff. "The people getting subsidized housing are well-paid doctors, nurses, and faculty members, rather than working stiffs," she says. "If the universities and hospitals want to subsidize housing for their people, that's fabulous, let them do it. Do not take it from the taxpayers."

The state's harshest critics don't really think that the city will ever collect taxes on, say, the Cross Bronx Expressway or St. Patrick's Cathedral. But they still spot plenty of low-hanging fruit that could be collected, if the legislature saw fit to match our laws to those in other states. Connecticut, for example, requires PILOTs equal to 77 percent of the property tax rate on land owned by universities; even taxing educational institutions at one-third that rate would, according to the city Independent Budget Office, generate more than $60 million a year for the city treasury.

At the very least, say critics of tax breaks, City Hall and Albany should be required to file public reports on their annual tax expenditures, so that it's possible to tell where the money is going without digging through mounds of Department of Finance printouts. Other options proposed by City Project include allowing communities to opt out of allowing state authorities to buy up private land, taxing subsequent increases in land value once it's been taken off the rolls, or at the very least, negotiating for PILOT payments on state-owned land.

Last year, recalls Brower, the state made headlines by buying over 500 acres of upstate land for conservation purposes, and agreeing to pay PILOTs to Putnam County. "The governor made a big deal of the fact that the state decided to pay property taxes, telling the locals, 'It ain't gonna come off the tax rolls anymore.' The problem is, it's still coming off the tax rolls in New York City."

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