On February 7th, the Residential Resales table in the Sunday Real Estate section of the New York Times reported on two similar, recently-sold houses, one in Oyster Bay, Nassau County, Long Island and one in Fresh Meadows, Queens, New York City. The former was a 3-bedroom, 2 bath, 51-year-old ranch, on a 100-by-100-ft. lot that sold for $535,000. The latter was a 3-bedroom, 1-bath, 67-year-old brick-and-stucco-sided colonial-style house on a 40-by-100-ft. lot that sold for $635,000. According to the Times, the suburban house owed $10,455 in property taxes, while the city house owed $3,729, but city residents also have to pay New York City’s virtually unique local income tax. So in which location would a prospective buyer pay more in taxes overall? The answer, calculated using the TurboTax program, is that the break-even point for a working couple with two children and only wage and salary income would be $225,000. Above that amount, the city income tax would hit hard enough to more than offset the property tax savings, but below that amount the Oyster Pay property taxes would pose more of a burden. The details, and spreadsheet with chart, follow.
First some assumptions. The Times doesn’t indicate whether the property taxes paid are net of STAR and property tax rebate checks, or gross. I’ll assume that the reported figures are net of the regular STAR program, which is really just another form of school aid designed to provide less to the children of New York City, but before any rebate check. Therefore, I have deducted the $400 Bloomberg check in New York City, and the Spitzer “middle class STAR” check in the rest of the state, from the figures reported by the Times. For the New York City income tax I report the most boring tax situation possible, with the standard deduction and wage income only. A more detailed scenario with mortgage interest might bring the city tax down; if the city couple earned self employment income, and was subject to the Unincorporated Business Tax, NYC tax payments would be higher. I also start the analysis proper at $100,000 in income, and go up to $500,000. Below $100,000, one is unlikely to be able to afford either of these homes; above $500,000, most (but I should stress here not all) Americans would look for something more expensive, even if they would be just as happy in these homes.
The price of both houses seems a little high relative to incomes here, and will likely fall as the housing bubble unwinds. In New York City, since assessments have lagged far below market values, this will have no effect on taxes paid. In Oyster Bay it is hard to say what would happen if the price of the house fell to, say, $400,000. Assessments might fall, but rates could rise to offset this. Or the school district and town could resist reassessment.
In any event, at $100,000 in income, the suburban couple would owe $10,171 in local property taxes once the “middle class STAR” rebate was factored in, while the city couple would owe about half as much, or $5,080 in local property and income taxes net of the Spitzer and Bloomberg checks. At $225,000 in income, each couple would owe about the same — $10,265 for the suburban couple, and $10,208 for the city couple. Note, however, how little the suburban tax burden increases with income. At $500,000 in income, the city couple would owe $20,306, or nearly double the suburban total of $10,455. The tax burden in New York City would continue rising from there. The suburban tax burden would not. Those earning over $225,000 presumably account for a large share of the city’s local taxes; in fact it is likely that the city’s millionaires and billionaires carry a huge share of the burden, and the city’s large low income population pays little.
This example is an unusually favorable property tax situation for NYC. If the unit was an apartment, a condo, co-op or rental of comparable value, the New York City couple (or their landlord, passed on to them in rent) would pay considerably more in property taxes. So the suburbs would gain the advantage at a lower income than $225,000. Of course, most suburban jurisdictions permit few if any multiple dwellings within their borders. Moreover, as mentioned previously, if the city couple had self employment income, they would also owe the city’s Unincorporated Income Tax, and their burden would be higher at the same income, shifting the tax advantage further to the suburbs. On the other hand, if the suburban couple earned self-employment income in New York City, they would owe the city’s UBT as well, since for the self-employed the commuter tax lives.
There are two situations, on the other hand, in which it is definitely an advantage to live in the city. One is if something goes wrong, such as the loss of a job, and income falls. At $75,000 in income the NYC income tax virtually disappears, and at $50,000 it does disappear, leaving only the low property tax to contend with. In Oyster Bay, on the other hand, they want nearly the same high property taxes from you when your are broke as they do when the money is rolling in — no wonder those for whom the money is always rolling in prefer the more regressive suburban tax structure. This difference explains how the city and suburbs react in a recession. New York City is forced to cut spending deeply, since pension and public assistance costs tend to rise as tax revenues fall. The suburbs increase spending, providing jobs for insiders who need them and sucking more money from the rest, who then demand that state funds for New York City schools be cut to relieve their burden. Usually successfully.
The second group that pays less in New York City is the retired, since pension, 401K and Social Security income are exempt from both the local and state income tax. It wouldn’t matter if your total for that kind of income was $1 million (and lots of top executives are granting each other $1 million per year pensions these days), only the low property tax would have to be paid. I explained the extent to which New York City’s senior citizens were favored over the young, in federal, state AND local taxes, here. Even if the state and local income tax code didn't favor senior citizens with the exact same income to such a great extent, the city's tax structure would benefit the retired to the extent that their income fell.
The government-provided advantages of the suburbs for a young couple and the city for senior citizens extend beyond taxes. In fiscal 2005, New York City spent $15,025 per public school pupil, far more than it used to be, while Oyster Bay spent $23,007, and since many of the NYC teachers live in the suburbs, suburban legislators repeatedly vote to divert NYC school money from the classroom to pensions. On the other hand, New York City’s Medicaid spending on senior citizens for things like home health and personal aides is higher than just about anywhere, with much less scrutiny about the income of the recipients of this supposedly program for the poor than anywhere else. The decision to favor the seniors and disadvantage the children in New York City dates back to a time when the white middle class moved en-masse to the suburbs, leaving their aging parents behind to be paid for and care for by someone else. These decisions are kept in place at the state level, where New York City’s state school funding and Medicaid program are decided on.
Moreover, note that the sales price in Queens was higher than in a presumably more affluent area of Long Island, a place with a more exclusive character and better schools. Shouldn’t the Fresh Meadows house have sold for the same as a similar three-bedroom house on the south shore, in a place like Seaford or Merrick? After all, Fresh Meadows is out beyond the subway, and doesn’t even have good access to the LIRR unlike many areas of Queens.
The price difference may be because the Queens house is a better house, or the Oyster Bay house needs more work, but it may also have to do with taxes. When bidding for houses, prospective buyers calculate what they can afford to pay based on both the prospective mortgage payment and the prospective property tax payment. To the extent that a couple was below the magic $225,000 in income, they could afford to pay more for the Queens house, and probably would if they wanted to be the high bidder, since others would be in the same position. For those earning, say, $100,000 per year, the $5,000 in lower local taxes, therefore, could end up offset by $5,000 in extra mortgage costs for a similar house, leaving them no better off despite lower taxes. (The discussion of who actually gets stuck with taxes, vs. who is nominally assessed them, is called "tax incidence.")
The NYC tax structure once again benefits seniors who are cashing in and moving out, because they can sell for more as they leave. Given that younger generations are worse and worse off financially than those who came before, the idea that those who came before can in addition sell homes to their broke descendents for big bucks to support a cushier retirement is not a likely scenario on Long Island. The young will go elsewhere unless the price comes down. (In fact the price is falling in both locations).
All in all, it is no surprise that those of modest means feel burdened by property taxes in the suburbs, while the publications representing the views of the wealthy complain bitterly about taxes in New York City. Overall, other data shows, New York City taxes are higher as a share of personal income than suburban taxes despite the inferior schools, although the gap between the city and other parts of the state has been narrowing as more people with higher incomes live in the city and more suburban and upstate residents are retirees. We’ll get another read on this when the Census Bureau releases county level data from the 2007 Census of Governments some time in 2009.