New York City’s Proposed 9.5% Real Estate Tax Hike Hits A National Nerve

Key Concepts

• Real Estate/Property Taxes: Local taxes levied on real estate based on assessed value, primarily funding local services.
• SALT Deduction: State and Local Tax deduction on federal income tax returns, currently capped.
• Assessed Value: The determined worth of a property, typically based on comparable sales or income data.
• Tax Cuts and Jobs Act (2017): Federal legislation that capped the SALT deduction at $10,000.
• Revenue Neutrality: The concept of replacing lost property tax revenue with alternative sources to avoid cuts to public services.

New York City’s Proposed Real Estate Tax Hike and National Implications

This report focuses on New York City Mayor Zoran Mdani’s proposal to increase property taxes by 9.5% as a potential solution to budget shortfalls, particularly if the state of New York doesn’t raise taxes on millionaires. This proposal has sparked national attention due to the broader implications for property taxes and the federal SALT deduction.

The Significance of Property Taxes

Property taxes, more accurately termed real estate taxes, are a crucial source of revenue for state and local governments. In fiscal year 2022, they accounted for 27.4% of total state and local tax collections nationwide – the largest single category. At the local level, property taxes are even more dominant, representing 70.2% of local tax collections. Governments favor these taxes due to their stability; the tax base (land and buildings) is relatively immobile and property values generally appreciate over time.

Property Valuation and Tax Rate Application

Each city or county employs an assessor’s office responsible for determining property values. For residential properties like houses and condos, this is typically done by analyzing recent comparable sales – examining prices of similar properties in the area. Commercial properties are often assessed based on income data, including rental income, expenses, and net operating income. Once the assessed value is established, the applicable tax rate is applied to calculate the property tax owed.

Property Taxes and the Federal Tax System – The SALT Deduction

Property taxes impact federal income tax returns through the State and Local Tax (SALT) deduction. Taxpayers who itemize deductions can deduct state and local taxes paid, including property taxes, state income taxes, or sales taxes. Prior to 2017, there was no limit on this deduction.

However, the Tax Cuts and Jobs Act of 2017 imposed a $10,000 cap (or $5,000 for married filing separately) on the total SALT deduction. This cap became a point of contention during recent congressional negotiations, leading to a temporary increase to $40,000 (and $20,000 for married filing separately) for 2025, adjusted for inflation, before reverting to $10,000 in 2030 unless Congress intervenes.

Visibility and Affordability Concerns

Property taxes are particularly sensitive because they are “visible” to taxpayers, unlike less noticeable taxes like sales tax. Rising property values, especially, can contribute to concerns about housing affordability. The report notes that some states offered property tax relief using budget surpluses immediately following the pandemic, but maintaining these cuts is becoming challenging as revenue growth slows.

State-Level Responses to Property Tax Concerns – Case Studies

Several states are grappling with property tax issues and exploring potential solutions:

• Wyoming: Lawmakers are considering expanding property tax relief while simultaneously exploring alternative revenue sources like increased sales taxes. Projections indicate that fully replacing property taxes would create a substantial revenue shortfall.
• Florida: Governor Ronda Santis has advocated for eliminating property taxes altogether, but proposals have faced resistance from local leaders who fear cuts to essential services like fire and emergency departments without a replacement revenue stream.
• Texas: A $10 billion property tax relief package relies heavily on one-time surplus funds to offset revenue losses for school districts. The long-term sustainability of this approach is uncertain once the surplus is depleted.

“The tax base doesn't move and it rarely shrinks significantly. Houses and commercial properties don't relocate across state lines and over time property values tend to rise rather than fall.” – Kieran Meadows, Forbes.

This quote highlights the fundamental reason why state and local governments rely so heavily on property taxes – their inherent stability and predictable revenue stream.

Synthesis

The proposed property tax hike in New York City is a symptom of a larger national conversation surrounding property taxes, affordability, and the federal SALT deduction. States are actively exploring ways to provide property tax relief, but finding sustainable solutions that don’t compromise essential public services remains a significant challenge. The interplay between local property taxes and the federal tax system, particularly the SALT deduction cap, continues to be a critical factor in these discussions. The report underscores the importance of revenue neutrality – replacing lost property tax revenue with alternative sources – to avoid detrimental impacts on local government funding.