The city’s venerable 421-a tax break for housing development, which expired last January and which Governor Cuomo now wants to renew and expand, has long come under fire from housing advocates as an insanely inefficient way to spur new residential construction. Now, thanks to a new report from the city’s Independent Budget Office, we can put a number on exactly how much tax money the city has been throwing down a hole: at least $250 million a year, and possibly much more.
The study’s methodology gets a bit hairy — IBO researchers looked at how much of a premium condo buyers in buildings getting 421-a breaks were willing to pay compared to non-421-a buildings. Their findings: “Owners in Manhattan spend on average 53 cents to 61 cents for each $1 of tax savings. Condo owners in the rest of the city spend on average 42 cents to 50 cents for each $1 of tax savings.”
Since the point of throwing tax breaks at developers is to earn them higher sale prices, providing a financial incentive to erect buildings they otherwise wouldn’t — thus boosting the housing supply and, in theory, lowering housing costs for all New Yorkers — that means that the other 39 to 58 percent of the tax breaks are “wasted,” in the IBO’s words. The total cost: between $2.5 billion and $2.8 billion in city money between 2005 and 2015.
And that could well be the tip of the iceberg. Other 421-a costs that aren’t evaluated by the IBO study include:
– Less than a third of 421-a tax breaks go to condo buildings, according to city figures, with the rest largely going to rental housing. If developers end up skimming profits off the top of those as well, that would present an additional wasted subsidy.
– There’s no telling how much of the developers’ share of the tax breaks ends up incentivizing new construction, and how much just gets pocketed for projects they’d build anyway.
– As the IBO report notes, by making development more profitable, 421-a tax breaks drive up the price of land, making housing more unaffordable even as it (again, in theory) increases the supply.
Put it all together, and it’s little surprise that 421-a is one of the least efficient methods of promoting affordable housing, costing more than $1 million per unit, according to the Community Service Society. For a program that Cuomo recently redubbed “Affordable New York,” it might be worth rethinking the adjective.