New York’s shamefully regressive property taxes

Work is finishing up on the tallest residential building in the Western hemisphere, 432 Park Ave. The penthouse apartments will go for around $100 million each. Here’s how the building compares to the total property values in some well-known American cities:

Screen Shot 2015-07-08 at 3.36.59 PM

That’s a pretty valuable piece of property.

As you know, I’ve often advocated a policy that progressive economists used to love, replacing income taxes with progressive consumption taxes.  In some cases it is hard to actually enact progressive consumption taxes (although not as hard as many assume). But in other cases it’s fairly easy.  I’ve often been dismayed to find out that progressive politicians like Ted Kennedy opposed luxury taxes on yachts, expensive cars, and fancy jets.

Real estate is one of the easiest forms of consumption to hit with a progressive tax. We already have property taxes, and we already estimate the value of properties. Just do it!

Unfortunately, liberal cities like New York do exactly the opposite, taxing the most expensive properties at far lower rates than average properties.  Those penthouse units may end being appraised at closer to $6 million, barely 6% of the actual market value:

Because of an odd idiosyncrasy in the New York City property tax system, the “market values” that the City assigns to real estate are not market values at all. For condos and coops, these values are generated by an antiquated pricing model, which underestimates true property values by as much as 95%.

An extreme example is this $100m penthouse, the most expensive sale ever in NYC. Despite having been purchased just six months ago, its official “market value” is reported as only $6m.

Here’s the ratio of appraised value to actual value by borough:

Screen Shot 2015-07-08 at 3.45.42 PMNotice that wealthy Manhattan is especially under-taxed.  And we see the same thing if we look at the ratio by price range:

Screen Shot 2015-07-08 at 3.47.13 PMI would find it much easier to accept the current progressive obsession over inequality if I saw more interest in progressive consumption taxes.  The rich can do one of three things with their money; invest it, donate it to charity, or consume it. If you aren’t taxing luxury consumption, you aren’t taxing the rich.  A billionaire trust fund baby, non-smoker, non-lottery player, can put all their wealth into muni’s and live in a $100 million penthouse paying an absurdly low tax rate. Meanwhile a working class guy in Queens who plays the lottery and smokes and has an average house gets hammered by NYC taxes. That’s not fair!  (And let’s not even talk about carbon footprints.)

PS.  432 Park is one of the few modern tall buildings with pleasant architecture. The interiors are very minimalistic, if that’s your thing. Pencil thin and about 100 floors tall, with six perfectly square windows on each side, all the way up.  Lots of white marble:

Screen Shot 2015-07-08 at 3.56.40 PMI don’t generally envy the rich, as I have little interest in their lifestyle. But even I have a tinge of envy when I think about how happy I’d be if I owned that bathroom. All that white makes me want to put on the Beatles White album (You say you want a revolution . . . )

And I’m in the top (global) 1%!   :)

Screen Shot 2015-07-08 at 4.17.20 PM

Don’t care for that chandelier.  Hopefully the tasteful monochrome interior will never be messed up with colorful children’s toys.


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39 Responses to “New York’s shamefully regressive property taxes”

  1. Gravatar of Blue Eyes Blue Eyes
    11. July 2015 at 11:19

    If it’s any consolation at all, in the UK we mainly tax property when it changes hands. The annual “council tax” stops increasing beyond the value of a nicer-than-average family homes. The first, last, and only valuation was done in 1990.

  2. Gravatar of Ray Lopez Ray Lopez
    11. July 2015 at 11:20

    Sumner is gay, he likes minimalist white things. But seriously, this statement is bizarre: “real estate is one of the easiest forms of consumption to hit with a progressive tax. We already have property taxes, and we already estimate the value of properties.” – so Sumner is advocating a Federal property tax? Perfectly reasonable, but why doesn’t he just say so? Mystery writing again…

  3. Gravatar of James Hanley James Hanley
    11. July 2015 at 12:11

    Loving your thoughts on economics, doubting your taste in architecture. 😉

    But without diversity of tastes, what a boring world it would be.

  4. Gravatar of Max Galka Max Galka
    11. July 2015 at 12:56

    Don’t think there is any suggestion here of federal property taxes, just that the regular property taxes be made more progressive. Hard to dispute.

  5. Gravatar of AIG AIG
    11. July 2015 at 13:08

    I’m having an anxiety attack just looking at that building.

    Do you have similar info on other cities? It might be mainly a NYC phenomenon.

  6. Gravatar of Jerry Brown Jerry Brown
    11. July 2015 at 13:22

    I agree with you. One other thing the rich can do with their money is influence policy. That might have something to do with the reason there aren’t progressive consumption taxes.

  7. Gravatar of ssumner ssumner
    11. July 2015 at 13:39

    Blue Eyes, That also sounds regressive.

    Ray, That’s an insult! Not that there’s anything wrong with . . . :)

    James, Recall that I am just comparing it to modern buildings, it’s obviously far inferior to the various art deco masterpieces in NYC.

    Max, I’d only favor a Federal progressive consumption tax if combined with abolition of Federal income taxes.

    AIG, Good question, my hunch is that it’s not as bad in other cities, as the longer article mentions many NYC specific factors as causes.

    Jerry, I’d add that perhaps America’s debtor lobby (rich and poor) is more powerful than our saver lobby (rich and poor.) And of course the producers who produce consumption for the rich in NYC are quite influential.

  8. Gravatar of benjamin cole benjamin cole
    11. July 2015 at 16:16

    Excellent blogging.

    By the way, probably every large city in America should zone in as much high-rise luxury housing as it can possibly get. There should be zero concern with building low-income housing.

    Why? If there is a lot of housing in any city, then rental prices will go down, benefiting everybody. Well, except real estate developers.

    The city of Los Angeles in particular is missing an opportunity. As a large city geographically they could zone in hundreds of thousands of high income condos. This would bring wealth into the city. Meanwhile the increased supply of housing would probably benefit the middle class and even the lower class.

    The “conservative” beach cities to the south are even worse than Los Angeles, and have effectively criminalized new housing construction.

  9. Gravatar of Rajat Rajat
    11. July 2015 at 16:52

    Scott, you’re into minimalism? I heard a rumour your place was full of, er, ‘antiques’..?

  10. Gravatar of dtoh dtoh
    11. July 2015 at 16:56

    @scott
    I’m glad to see you are getting on board with what I have been repeatedly advocating…. a progressive fixed assets tax (not just real estate but also cars, planes, boats) to fund state and local spending. And as I have said, all that stuff is already registered and assessed at the state level.

    A couple of additional points.

    1. You can have very high levels of progressitivity on fixed asset taxes because they are hard to evade.

    2. Many states have systems like NYC to cap taxes.

    3. It will be hard to implement this, because all the trust fund babies supporting the Democratic Party just like to talk about higher tax rates and rectifying inequality…. if their own lifestyles were impacted, they would go apoplectic.

  11. Gravatar of mbka mbka
    11. July 2015 at 18:42

    Scott,
    anecdotally, at least one social-democratic European country (Austria) uses the exact same methods. The appraised “market value” of real estate for purposes of estate tax estimation, is far lower than the actual market value (about 30% of it as I hear).

    Ray,
    according to your reasoning, all of Asia must be gay. Because this building is clearly catering to (East) Asian tastes. If that thing were built in Singapore the condos would fly off the shelves.

  12. Gravatar of TallDave TallDave
    11. July 2015 at 18:57

    Hehe, the all white marble bathroom is actually pretty awesome, I still sometimes look at mine and say “wow!” after a few years here. I joke that it was what persuaded the wife on the house. Of course being a short sale in the suburbs ours is much larger and our tub has jets. Thank God I don’t have to clean it though.

    Funny thing, when I bought my previous townhome, which was the trailer site and so the last one built, they had the white marble on display, but it was for a much ritzier development they had started. Saw it, had to have it.

    Anyways that tax code is absolutely insane. Isn’t NY supposed to be progressive? Sometimes I get the feeling all the progressives who aren’t poor are just laughing behind their hands at their supporters.

  13. Gravatar of Tom Brown Tom Brown
    11. July 2015 at 20:58

    Scott, thanks for the post. Interesting information. I had no idea.

  14. Gravatar of Tom Brown Tom Brown
    11. July 2015 at 21:04

    This info on taxes along with that bathroom photo makes me want to buy a drone. $100 million and still no privacy. :)

  15. Gravatar of John Hall John Hall
    11. July 2015 at 22:20

    The problem with NYC real estate (as someone who has lived in the area for nearly 10 years) is a lack of supply due to over-regulation making it difficult to build. You seem to have made an argument about what type of construction builders will choose to build. I.e., that it is more profitable to build expensive luxury buildings rather than lower ends of the market. Thus, the market disequilibrium is not being rectified. You also seem to be arguing that it is more profitable to build expensive luxury housing in NYC than other cities due to higher demand with low taxes. Is this correct?

  16. Gravatar of ChrisA ChrisA
    12. July 2015 at 02:45

    Scott

    Re the bathroom – if it is any consolation you would quickly lose the ability to enjoy the view once you had seen it a few dozen times. Until recently I had a corner office with floor to ceiling windows on the 50th floor in an Asian city. I was there for 6 years, the view was amazing the first time you saw it, one view was down to the bay and across the islands, the other side looked towards the mountains across miles of city scape. When the sun was setting behind the mountains on a non-smoggy day it was breaktaking at first. But I barely looked up from the monitor after the first month or so. The Japanese have a concept that you can spoil yourself for beautiful things, so some of them keep their precious works of art hidden away and only view them infrequently. I think this is right.

  17. Gravatar of W. Peden W. Peden
    12. July 2015 at 02:47

    That building looks fairly pleasant on the inside if you don’t have any young children or your children wear motorcycle helmets, but from the outside it’s astonishingly soulless. I suppose that also attracts buyers, since the building is one area you’re guaranteed not to see it. I prefer having this building as the one I look at across the street every weekday at work-

    http://mw2.google.com/mw-panoramio/photos/medium/15997385.jpg

  18. Gravatar of Ray Lopez Ray Lopez
    12. July 2015 at 02:49

    @mbka – “Ray,according to your reasoning, all of Asia must be gay” – yes, all of Asia is gay. I think something like 20% of SE Asia is gay say statistics and eyeball estimates, as opposed to 3-10% in the Western world. And it’s no big deal, there’s a ‘ladyboy’ in every household here. Literally, not that it matters.

    As for Asian minimalism, I will take your word for it. My experience here in the Philippines and in Thailand, and visiting China, is that the Asians are like the Greeks and like “baroque” or “Oriental Byzantine” architecture, meaning a gaudy, clashing, often over-the-top in gold trim and doo-dads, nothing like the Scandinavian minimalism that Sumner likes. But I could be wrong since Japan (which I also visited) likes the clean, sharp, minimalist design (Zen Buddhism influence). I’ll let the professional architects comment, it’s outside my area of expertise, which is, among other things, economics (lol, anybody can be an expert there).

  19. Gravatar of Major.Freedom Major.Freedom
    12. July 2015 at 04:56

    The shamefully regressive system of central banking.

    But we can’t say that, since it is “not pragmatic”.

  20. Gravatar of Benny Lava Benny Lava
    12. July 2015 at 05:06

    Why do you think New York is a liberal city? Didn’t they elect republican mayors for a long time?

  21. Gravatar of ssumner ssumner
    12. July 2015 at 06:21

    Ben, I agree.

    Rajat, You said:

    “I heard a rumour your place was full of, er, ‘antiques’..?”

    Oh come on, spit it out—you mean junk, don’t you? I have many different visual tastes, I like both antiques and minimalism, depending on my mood. It’s my musical appreciation that is impoverished. :)

    dtoh, Agreed, but doesn’t “getting on board” imply I’m a recent convert?

    mbka, Don’t be too hard on Ray. If someone calls me gay after I offer an opinion on interior design, I take that as a compliment. :)

    Talldave, I’m not sure what progressivism is all about, but it’s apparently not about helping the poor. (Just as the GOP is not about free markets.)

    Tom, You said:

    “$100 million and still no privacy.”

    The definition of luxury is that it is so exclusive that you don’t need shades.

    John, No, that’s not my argument. My argument is that New York property taxes are regressive.

    ChrisA, Great comment–I like that Japanese idea. And I was sort of half joking about the bath making me happy—I knew it would only be for a few days.

    Your office sounds like Hong Kong.

    Ray, Don’t confuse nouveau riche taste with Asian taste. There’s plenty of minimalism in China among the more educated classes.

    W. Peden, I also much prefer older buildings. I’m just saying that if it has to be modern, I don’t want it tarted up like a cheap . . . .

    Boston (where I live) is full of ugly skyscrapers (with one exception). Chicago (where I used to live), has lots of really tasteful ones.

    Benny, RINO mayors. Why do I think it’s liberal? Because they voted overwhelmingly for Obama. Because the city council is very liberal.

  22. Gravatar of Steve Steve
    12. July 2015 at 10:30

    A bunch of observations:

    1- The bathroom pictured is actually “Bath 2” a guest bath. “Her Bath” is privately angled toward Central Park and the UES.
    http://432parkavenue.com/floorplans/432_FP_Availability_PH91-96.pdf

    2- The penthouse, with NYC’s loftiest residential view, was reportedly purchased by a Saudi. Which means he will have an excellent view of the Freedom Tower.

    3- The building is reported to cost $1.3 billion to construct, not counting the $500 million value of the demolished Drake Hotel. The property values are reported at $3.12 billion, yielding a nice $1.32 billion profit even allowing for the demolished hotel.

    4- By my math, 8255 sq.ft penthouse times 96 stories is ~792k sq.ft residential space, depending on the layout of lower floors. That is $1640/sq.ft construction cost and $3940/sq.ft market value

    5- Do you or any readers know the breakout of the $1640/sq.ft construction cost? Materials like iron, coal, oil, marble? Or is it all inflated NYC worker wages, police details around the construction site, etc. Keep in mind the typical US home has a replacement cost of only $100/sq.ft What accounts for the 16x higher replacement cost/sq.ft?

  23. Gravatar of Benny Lava Benny Lava
    12. July 2015 at 14:29

    Oh now we’re calling Guiliani a RINO? Hahaha he’s a real liberal that one! That’s cute.

    Meanwhile in the real world someone complains that republicans and former republicans don’t enact enough liberal policies and boy doesn’t that shame the liberals? And you wonder why I don’t take you seriously.

  24. Gravatar of Jeff Jeff
    12. July 2015 at 15:38

    We should all take the time to go read up on Henry George and his land tax. The only non-distorting tax proposal I know of. If it could be implemented, it would solve a lot of problems.

  25. Gravatar of Major.Freedom Major.Freedom
    12. July 2015 at 16:01

    Jeff:

    There is no such thing as a non-distorting tax.

  26. Gravatar of Jeff Jeff
    13. July 2015 at 04:32

    MF, George’s land tax is non-distorting because land, in classical theory, is the only fixed factor of production. Tax land or don’t tax it, you’ll still have the same amount of land, and something like the Coase Theorem means that the tax won’t change how the land is used.

    The other reason classical economists liked the land tax was that most of the value of land stems from its location, rather than any action of the land owner. If I own a nearly worthless parcel of land out in the Nevada desert and one day the mob decides to build Las Vegas next door, the value of my land goes up without me doing anything. What’s really happened is that I have captured some of the wealth created by the mob’s decision. It’s a positive externality.

    The land tax is a tax on a positive externality. The nature of an externality is that it doesn’t affect economic decisions. That’s all “non-distortionary” means.

  27. Gravatar of benjamin cole benjamin cole
    13. July 2015 at 05:09

    Fama is right on bubbles…but are gold, Andy Warhol “paintings” and $100 million penthouses really investments—or some other category of activity? Invesumption?
    I smell peak pricing…

  28. Gravatar of Floccina Floccina
    13. July 2015 at 07:27

    Here is Florida home owners get an exemption for the home that they live in. So renters pay more in property taxes but home owners tend to richer than renters. A funny thing is owners of rental properties think that they pay the tax rather than the renters and they complain about it but the renters are blissfully unaware.

    The Florida home owners get an exemption is called a homestead exemption. It reduces that tax value of the home, I think by about $60K.

  29. Gravatar of Doug M Doug M
    13. July 2015 at 10:51

    “but are gold, Andy Warhol “paintings” and $100 million penthouses really investments”

    I have had this discussion with many people. I my view the house that you live in is primarily a luxury. But, it is a luxury good that tends to hold its value.

  30. Gravatar of Yancey Ward Yancey Ward
    13. July 2015 at 15:34

    Wow, that is a beautiful view. You would even be able to see the airplane coming towards you while you take a dump.

  31. Gravatar of ssumner ssumner
    14. July 2015 at 04:59

    Steve, Very interesting data.

    Floccina, Good example.

  32. Gravatar of Scott Sumner: New York’s shamefully regressive property taxes « Economics Info Scott Sumner: New York’s shamefully regressive property taxes « Economics Info
    14. July 2015 at 06:00

    […] Source […]

  33. Gravatar of blue blue
    14. July 2015 at 08:00

    As a retired New York State property tax professional, I am dismayed to see how few of the above commenters actually “get” the point of your article.

  34. Gravatar of Tuesday lunchtime linkage | Brokelyn Tuesday lunchtime linkage | Brokelyn
    14. July 2015 at 08:05

    […] Barclays Center is a damn car crash magnet [DNA Info] Reminder: NYC’s property taxes are all out of whack [TheMoneyIllusion] The city will pay Eric Garner’s family $5.9 million [BBC] Uber wants […]

  35. Gravatar of Jim Glass Jim Glass
    14. July 2015 at 08:25

    “Empire State of Mind”: The Land Value of Manhattan, 1950-2013

    https://nephist.wordpress.com/2015/06/10/empire-state-of-mind-the-land-value-of-manhattan-1950-2013/

  36. Gravatar of anon_coward anon_coward
    14. July 2015 at 09:49

    so the average guy in queens smokes and plays the lottery? more like you’re an idiot and don’t know what you’re talking about. almost every new construction in NYC gets a 15 year tax abatement.

  37. Gravatar of ssumner ssumner
    14. July 2015 at 09:58

    Anonymous Coward, I see you are new here. We prefer commenters who know how to read. I never said what you imply I said. And your second point has no bearing on this post.

    Good name though.

  38. Gravatar of Morgan Warstler Morgan Warstler
    15. July 2015 at 01:54

    Steve, great stats.

    But I can’t find the wood burning fireplace.

    http://432parkavenue.com/floorplans/432_FP_Availability_PH91-96.pdf

  39. Gravatar of Steve Steve
    15. July 2015 at 06:02

    Morgan,

    The Wood Burning Fireplace is in the Library, so you can hear the crackling wood as you read your WSJ and watch a layer of smoke accumulate at 1500ft between you and the Empire State building.

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