If You Live In New York And You Rent, You're Paying A Huge Tax You Don't Even Know About

If you live in New York City, you probably know that your income taxes are high. A combined city and state tax rate of 10.4% kicks in at just $22,000 of taxable income for a single person.

You probably don't know that New York City has some of the country's highest taxes on apartment buildings—and if you're not subject to rent control, much of that cost is flowing through to you as a renter.

Not all property taxes are high here: New York actually has very low taxes on owner-occupied homes. Our property tax system is a perverse cross-subsidy from relatively poor renters to relatively rich homeowners.

If we just taxed all property at the same rate, apartment building taxes would fall by $1,000 to $1,500 per unit.

Here are a few charts that show just how bizarre New York's tax system is, and how renters are getting screwed.

First, the high apartment taxes. Of the 50 largest cities in the United States, only one has a higher tax rate on apartment buildings: Detroit. New York apartments are taxed at more than double the national average rate.

That chart actually understates how crazy high New York City's taxes on apartments are. You'll notice that the other highest-tax cities are Detroit, Indianapolis, and Memphis: Not exactly places with red-hot expensive property markets. Typically, the higher real estate prices are, the lower property tax rates should be.

The next chart compares New York just against large cities in metropolitan areas where median apartment rents exceeded $1,000 in 2011. Other than New York, most of these high-rent cities have below-average property tax rates. Washington, D.C. taxes apartments at a rate 80% lower than New York does.

I excluded California cities because of that state's extremely tight property tax cap: All large California cities have apartment tax rates between 1% and 1.3%. If I had included them, New York would look like even more of an outlier.

New York City does not levy high taxes on all kinds of property. Our tax rates on owner-occupied homes are actually some of the lowest among large cities. But who can afford to buy here?

Some amount of tax preference for homeowners is normal, but New York City takes it to an outlandish degree. In large cities nationally, apartment tax rates tend to be 1.4 times higher than tax rates on owner-occupied homes. In New York City, they're 6.4 times higher.

In 2006, New York City's independent budget office estimated that taxing all property in the city at the same rate would cut taxes by about $1,500 per unit for elevatored apartment buildings and $1,000 for walk-ups. Part of that cut would be felt as lower rents.

You might be saying: But I don't pay property tax, my landlord does. And that's sort of true. The difficult question is how much of the tax on apartment buildings gets passed through to renters.

One study looked at cities near Boston and found that the lion's share of property tax increases (85%) gets borne by landlords. But there is good reason to think that much more of the burden gets shifted to renters in New York City.

The reason that landlords would bear most of the cost of a property tax increase is that apartment demand is more elastic than apartment supply: If property taxes go up and my landlord tries to raise my rent, I can move to the next town but he can't move his building there. But New York City is a geographically large jurisdiction whose residents have a strong preference for living within its boundaries; renters here are much more captive than those in some specific suburb of Boston.

Renters are also more likely to bear the burden of New York's high property taxes because they are specific to apartments. A landlord can't move his building but he often can convert it to a condominium or a co-op. Such conversions have been a major trend in New York City real estate over the last 40 years. Rents must rise so that landlords are willing to keep their buildings as rentals despite the unfavorable tax treatment.

Rent control does shield many New York renters from the burden of property tax increases. But that doesn't help market-rate tenants like me. And tax abatements for new rental buildings are tied to requirements to set aside affordable units; again, the benefit of the abatement does not flow through to tenants paying market rate.

Living in New York is crazy expensive. Partly, that's for reasons outside the control of policymakers. But one reason is this hidden tax on renters that New York has decided, uniquely among large cities, to impose. It's a big mistake.

Data on national property tax comparisons used in this post come from the Lincoln Institute of Land Policy.