by Lindy Davies
Until recently, the debate over “sanctuary cities” was mainly a talking point among the right. Donald Trump, however, seems to be serious about stopping the flow of alien gun-running junkie rapists. One of his biggest campaign promises was to deny federal funding to jurisdictions that persist in adopting “sanctuary” policies toward undocumented immigrants. He has sought to fulfill that via Executive Order, an act that may not pass constitutional muster, but has, nevertheless freaked out a lot of people.
The “sanctuary cities” policy has been in place for some years now in many cities and counties (county governments often have jurisdiction over local jails). It is a common-sense policy, supported by most big-city police departments. If police have to act upon the immigration status of anyone with whom they come in contact, then immigrant communities won’t trust them. Crimes will go unreported, fear will increase and police will find it hard to do their jobs. Mayor after mayor has reiterated this point, vowing to resist the Order.
When a person is arrested, local law enforcement officials submit their fingerprints to the FBI, which then shares them with ICE (Immigration and Customs Enforcement). It’s in their interest to do so, because it allows them to access the full federal database of criminal records. If the person is undocumented, ICE sends a detainer order, asking that they be held for a longer period, typically 48 hours, past when they would otherwise have been released. Some local jurisdictions comply with these orders, but many don’t. New York City, with over half a million undocumented immigrants, says it is not its job to help the federal government enforce immigration policy. Trying to do so would lead to chaos. It seems that the law is on the sanctuary cities’ side: federal courts have ruled in multiple cases that the detainer orders are voluntary.
Though the legal status of Trump’s Order is dubious, the threat to withhold federal funds isn’t a mere fantasy. There is some precedent: the Supreme Court ruled (in South Dakota v. Dole, 1987) that Congress could legally withhold 5% of federal highway funds from states that did not raise the legal drinking age to 21. Proponents argue that since immigration policy is a national issue, its administration should be uniform nationwide. The legal prospects for Trump’s plan may depend on the ruling of a US Supreme Court that is moving solidly to the right. For New Yorkers, the worst case would be the loss of some $8 billion in federal funding for fiscal year 2018 — some 10% of the city’s budget. Pretty soon — as NYC Comptroller Scott Stringer details in a memo describing potential cuts in housing, education and law enforcement — you’d be talking real money.
Since Trump took office, progressives, libertarians and reformers of all stripes have been calling for regrouping and re-energizing. Not only should we not despair, we’re told — this really ought to be our finest hour: the time when we proclaim our goals and blaze a political trail toward achieving them. For Georgists, this challenge to sanctuary cities is just such an issue. Our analysis points to the only viable way forward for a sanctuary city. Mayor DeBlasio, wouldn’t you like to tell the president where he could put his federal money?
For guidance, we can start with the Henry George Theorem, a widely-accepted tenet of the mainstream economic canon. It tells us that the land rent of a reasonably well-run city is, by dint of economic theory and evident fact, enough to fund that city’s infrastructure and public-service needs. Why in the world would New York City, where land sells for as much as $125 million per acre, NEED eight billion dollars per year in federal tax dollars, paid by poor payroll-tax-paying schlubs in Petaluma, Pittsburgh and Park Slope? Seriously!
Suppose we could devise a plan by which New York City (as a bravely pioneering example to San Francisco and every other city facing this dilemma) could reorganize its tax policy to raise all of its budgeted federal grant money from local sources — and do so in a way that would improve its local economy! (I think back to Tom Waits’s description of an unsteadily inebriated hero’s approach to a double-bank pool shot: “Hard to believe? Perhaps even beyond the realm of conceivability? NAH…”)
Perverse Tax Incentives
While land (a.k.a. “house”) values fell precipitously across the country, and the world, in the wake of the Great Crash of 2008, they pretty much held their own in New York City. Since then, land values there have risen prodigiously.
Most New Yorkers live in apartments. Although there are some 644,000 1-3 unit private residences in the five boroughs, at least 50% of New Yorkers live in rented apartments — and most of them (though the number declines every year) hold rent-stabilized leases. Rent in these units can only increase by a set amount each year — currently 1% for a one-year lease and 2.75% for a two-year lease — and leases must be renewed if the tenant wants to stay.
Because the law keeps so many apartments below their market-clearing rents, a rental value accrues to holders of such leases — if they are savvy enough to successfully collect them, a feat which requires competent legal help. The highest recorded payout for a rent-stablilized tenant was $17 million, and six-figure settlements are common. I know of one poor fool, though, who accepted a payout of one month’s rent to quit his lease.
Landlords of rent-stabilized tenants have virtually no incentive to maintain their buildings. Their best bet is to wait for tenants to leave (often helping their decision along through harassment). Property taxes are low enough that owners can pay them on near-empty buildings for years. Often the rent from a ground-floor commercial tenant is more than enough to cover the tax.
Nevertheless, there are still a great many of these apartments, especially in those typical five-story brownstones that linger on from the great building boom of the 1920s. This leads to pockets of quaint, “retro” affordability amid every prevailing incentive for ritzy high-rise development.
Condos have been the hot trend in New York real estate. Luxury high-rises have been springing up. Building owners want to switch from rentals to owner-occupied units just as fast as they can. The influence of rent regulation is often blamed for this — but it isn’t the only factor: after all, developers can could still choose to build rental housing and lease it at market rates. It’s the tax system that makes condos such a better deal.
New York City raises about 30% of its municipal revenue from the real property tax. Land and building values are reported separately on the assessment rolls, a vestige of old Single Tax influence (though, alas, they are taxed at the same rate). Unfortunately, the reported values diverge spectacularly from actual market values. For example, according to NYC’s assessment rolls, the current market value of land in the five boroughs amounts to $393 billion. Everyone agrees that this is an absurdly low figure. Accurate records of land values aren’t kept; they can only be extrapolated — but a 2014 study estimated the land value of Manhattan alone at $1.4 trillion. (Coincidentally, this is the same figure that the city’s assessors attribute to the entire city’s land and buildings.)
The figures reported by the city’s assessors are claimed to be sincere guesses of market value, but they obviously aren’t. Instead, they are politically acceptable figures aimed at revenue targets. That is not to say, though, that the Assessor’s Office is either incompetent or dishonest; indeed many of the procedures behind their bizarrely incorrect assessments are mandated by law. New York City’s assessors do a top-notch job of assessing one type of real estate. Small residential buildings, referred to as “Class 1” (of which there are 684,037 citywide) are assessed using comparable sales, and the assessments are highly accurate. The Assessor’s Office can get away with this because, in NYC’s arcane property tax system, the property tax rate is applied to only 6% of the market value of Class 1 parcels. The rest of the four classes, which include residential rentals, utilities and commercial real estate, apply their tax rates to 45% of “market value.” These classes of real estate are routinely underassessed — often by mindbending amounts.
Yet some are more underassessed than others. Using sales figures (as opposed to fictitiously low market-value figures) the current effective tax rate, citywide, for condo units is 0.79%. For rental apartment buildings it is 1.44%. On the average, renters have far lower incomes than condo owners, yet their effective rates of property tax are nearly twice as high. (The rate for Class 1 homeowners is 0.87%. For commercial buildings, it’s a whopping 1.75%)
NYC’s sweet deal for condos is largely the result of how they are assessed and taxed. The law requires owner-occupied apartments to be assessed equivalently to comparable rental units. This completely ignores the asset value of the condo units, and masks the fact of their dizzyingly rapid appreciation. Since 2011, land values in Manhattan have jumped by 79%! This extreme rise in land values create a bias toward luxury construction, as developers hope to get top-dollar returns on their extremely expensive investments. This leads to a classic speculative bubble: as condo values are expected to go up, so does their collateral value, and hence the amount of mortgage financing available to buy them, which further increases demand, etc. These days, hundreds of Manhattan condos are bought by foreign investors, not to live in, but to “flip” — and the very low property tax rate on condo units facilitates this speculative scheme.
For decades it’s been a truism that that the free market is unable to provide affordable housing in big cities. That may seem odd, because the market does a fine job of providing affordable cars, clothing, food and furniture — but houses and apartment buildings have to be built on land — which, in a place like New York, is anything but affordable. New York City’s need for affordable housing has never been greater, as the working-class population increases, rent-regulated apartments disappear, land values soar, and luxury high-rises spring up like mushrooms. Mayor Bill DeBlasio announced “literally the largest and most ambitious affordable housing program initiated by any city in this country in the history of the United States of America,” through which he planned to build or preserve 200,000 units over 10 years. That sounds big, but it’s hardly enough; a 2015 report by the Citizens’ Budget Committee found that 379,000 households in New York City are severely rent-burdened, paying more than half of their income for rent. And as of December 2016, another 62,674 homeless people took refuge in the city’s shelters; a few thousand more were sleeping on the streets.
That’s the situation, in a nutshell: lots of luxury condos — you’d think the market would be glutted, but demand remains high: rich investors are eager to hold them for speculation — while vast numbers of working New Yorkers struggle to find any place to live.
But we were talking about “sanctuary cities” and federal funding. Surely, if New York digs in its heels to protect its immigrant population, and Trump makes good on his threat of withdrawing federal funds, that’ll just make things tougher on everyone, won’t it?
Maybe not — if we’re smart about it.
Here is a back-of-the-envelope calculation to show you what’s possible. The reported market value of Manhattan condo units is 19% of the price they actually sell for (this is based on a robust sample: 24,558 sales, over six years). Extrapolating that to all 103,046 Manhattan condos, we can estimate their true market value at $509 billion. If we wished to raise an additional $7 billion — nearly the full amount of federal funding — the tax rate we’d have to apply to that value is 1.53%. That’s only slightly higher than the effective tax rate on renters, 1.44% — and remember, condo owners generally have significantly higher incomes than renters.
Of course, that would be a rather significant tax increase on condos; their current assessed values are very, very low. But times are tough, and some shared sacrifice is called for. Everyone agrees that there is a glut of luxury condominiums in New York, which has been created, to a significant degree, by the bargain-basement property tax rates they have enjoyed. This development is not particularly healthy for the community. When people do unhealthy things like smoking too many cigarettes or burning too much coal, jurisdictions often tax those harmful activities. NYC’s property tax system incentivizes pricey condos, makes working-class housing unprofitable to build, and — in the USA’s most densely-populated major city — leaves large areas of land either vacant or grossly under-used. According to NYC’s 2017 assessment rolls, 46.6 square miles, 15.3% of the privately-owned land in New York City is either vacant, or has buildings worth less than 20% of the land’s value. A very good case can be made — in terms of efficiency, fairness, and economic stimulus — for New York City to take all of its municipal revenue from land values. And because, as we’ve seen, a great deal of the value of condos stems from location, a higher tax on condo units is part of a healthy reimagining of New York’s municipal tax system.
It’s a radical step, but this is a propitious time to take it: a moment in history in which an out-of-control federal government seeks to force cities to harass their immigrant populations in unconstitutional and destabilizing ways. New York City doesn’t have to take that. New York City can raise the full amount of its current federal grant money, from its own local tax base, and improve its economy in the process.
Are we stuck in the swamp?
But can we ever get this done, when all we have to work with is the roiling brew of awfulness that is New York City’s property tax system? Many a big-league reformer has swung at that, and whiffed. The system was enacted in 1981, over a gubernatorial veto. It divides real estate into four classes, each of which apply a different tax rate to a different percentage of “market value.” It was touted as a way to shield homeowners from unaffordable tax hikes. In the process, it found many ways to offer windfalls to well-connected investors. After thirty-five years, the system’s oddities and perks are firmly entrenched. Almost nobody likes it; almost everybody thinks it ought to be reformed, yet to date, no reforms have gotten traction. Probably the most significant change to the system happened in 2008, when vacant land in Manhattan above 110th Street was taken out of Class 1, with its very low tax rate. After that, vacant lots in Harlem had to pay more, which served to help along the wave of gentrification that was sweeping into that neighborhood. Yet vacant residential land in the four Outer Boroughs is still in Class 1, still taxed very lightly.
The long-recommended way to begin implementing Georgist tax reform has been to work with existing property tax systems, gradually increasing tax rates on land while decreasing tax rates on buildings, coupled with reform of inaccurate assessments. It might be possible to devise such a scheme for New York City. Any such plan would be highly complex — even more so than the mind-numbing mess that’s already there. If we could implement such a plan, we could slowly raise the tax penalty on hoarding land, make affordable housing incrementally more feasible and maybe, even, reduce the city’s reliance on deadweight taxes. But — this is the Real Estate Capital of the World. Strong political forces stand against such a proposal. Its initial stages would certainly have to be baby steps — like that vacant-land surcharge in Upper Manhattan: marginally helpful while doing no violence to the status quo.
To get where we need to go, we would need a bolder, simpler strategy, and we’d have to take it directly to the voters. First, all the land should be re-assessed, using the “building residual” technique that was devised, and successfully used a hundred years ago, by Georgist assessors William Somers and Lawson Purdy. Land should be valued at its highest and best economic use, as though it were vacant. The value of existing buildings would be the difference between the land value, so determined, and the parcel’s overall value. This would yield a reasonably accurate assessment of the true market value of the city’s land — which would, as we’ve seen, provide a generous tax base. Tapping the city’s land value for public revenue would yield a smörgasbord of economic benefits. Yet it would be a radical plan! We could only hope to sell it by shouting, from every public rooftop, its simplicity, its basic justice and its obvious economic benefits.
If an independent judiciary continues to function in the United States, Trump’s “sanctuary cities” order may be struck down. Or it may not be, or it may take years to wind through the courts. Could the threatened loss of $8 billion in federal funding motivate New York City to do what it should have done long ago (and what it started to do back in the 1920s)? If so, it would be nothing less than a gigantic step forward, not just for Georgism, but for economic justice and sanity everywhere!