Academic journal article Stanford Law & Policy Review

Property Taxes and Their Limits: Evidence from New York City

Academic journal article Stanford Law & Policy Review

Property Taxes and Their Limits: Evidence from New York City

Article excerpt

INTRODUCTION   I. WHY ARE PROPERTY TAXES SO HATED?  II. TAKING THE EDGES OFF WITH ASSESSMENT CAPS      A. The Proliferation of Assessment Caps      B. Assessment Caps Are Tax Expenditures III. THE BENEFICIARIES OF PROPERTY TAX CAPS IN NEW YORK CITY      A. Overview of New York City's Property Tax Caps      B. Data      C. Analysis         1. Who Currently Benefits from the Caps?         2. What Has Changed in Neighborhoods with the Largest Cap            Benefits?  IV. EVALUATING NEW YORK CITY'S CAPS CONCLUSION 

INTRODUCTION

The property tax is the largest source of tax revenue for local governments and an irresistible policy instrument for municipalities wanting to influence the urban landscape and the local distribution of income and wealth. (1) But the widespread use of the property tax for planning and redistribution means that virtually no jurisdiction straightforwardly calculates the tax liability for a property as a fixed percentage of its market value. (2) Instead, property tax rates tend to vary with the use to which a property is put or the identity of its owner. As a consequence, many of the potential benefits of the property tax, such as ease of administration, transparency, the clear reflection of the costs and benefits of local services, and the intuitive fairness of imposing taxes in proportion to property wealth, are lost.'

At the same time, each of these rate variations is designed to remedy a perceived defect with taxing only in proportion to property value. In this Article I report empirical evidence on the distributional effects of one such deviation: caps on annual assessment increases. Assessment caps limit the rate at which a property owner's taxes can increase from year to year, and are ubiquitous. (4) From a policy perspective, assessment caps are designed to create neighborhood stability and prevent cash-poor homeowners from being forced out of their homes because of escalating property values. I find that, in New York City, property tax caps on small residential properties represent a significant tax benefit that accrues to the most valuable properties and in the wealthiest neighborhoods. Moreover, rather than benefiting long-time homeowners on fixed incomes, who are their putative targets, the largest benefits go to the properties that are most likely to have been recently sold and to be located in neighborhoods where cash incomes have increased the most.

My study provides a more comprehensive and detailed description of who benefits from assessment caps than has previously been reported. This study is also the first to examine how the neighborhoods that benefit the most from assessment caps have changed over time. One justification for assessment caps is to foster neighborhood stability, particularly for cash-poor households, yet previous work has not explored how the dynamics of neighborhood change correlated with assessment caps. (5) Part I describes the context in which assessment caps were popularized: one of widespread dissatisfaction with particular features of the property tax. Part II describes how assessment caps proliferated in response to taxpayer frustration and the harms that they were meant to address. In Part III, I report the original results from my study of assessment caps in New York City, and in Part IV I evaluate how well the caps have achieved their purposes. I find that, in the case of New York City's property tax caps, the cure for what ails the property tax has been worse than the disease, and I propose either a means-tested circuit breaker or a property tax deferral regime to address the liquidity issues facing truly cash-poor homeowners without conferring an unnecessary and expensive tax benefit on other households.

I. WHY ARE PROPERTY TAXES SO HATED?

The property tax is one of the most hated taxes in the United States. (6) A number of reasons have been offered for its unpopularity: (i) it is very salient to property owners, (7) (ii) valuation can seem arbitrary or, worse, discriminatory, (8) and (iii) it is often perceived as regressive, imposing relatively greater burdens on middle class and lower income households. …

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