Slump? Real Estate Tax Revenue Keeps Rising
By MIKE McINTIRE
New York Times
December 14, 2005
Real estate values in New York have risen so much that a modest decline in the market will not seriously disrupt the stream of revenue from property-transaction taxes that has helped balance the city's budget in recent years, according to a new report by independent analysts.
The report, released yesterday by the city's Independent Budget Office, a nonpartisan fiscal watchdog, suggested that the city has been understating its projected revenues from real estate and mortgage taxes. It said that these tax revenues have continued to defy expectations of a decline, and that it now appears any future slowdown will not be as pronounced as was once feared.
The rosier outlook is due as much to a quirk of the city's tax structure as it is to the region's economic vitality.
Real estate and mortgages valued at more than $500,000 are taxed at higher rates when sold or refinanced, and with more residential and commercial properties priced above that threshold, the flow of money from that revenue stream has ballooned. Thirty-three percent of residential sales last year involved homes priced above $500,000, up from 10 percent in 2000, the report said.
"Barring an unprecedented fall in property values, this increase in the share of transactions subject to the higher rates is unlikely to be fully reversed," the report said. "Thus, at least some of the recent tax revenue growth is probably locked in thanks to this bracket creep."
What is more, unlike the income tax rate, which declines when applied to lower incomes, the higher real estate transaction tax rate applies to the full sale price. So if a home sells for just a few dollars more than $500,000, the seller must pay 42 percent more in transaction taxes on the entire amount, not just the portion that exceeds the half-million-dollar mark.
The surging real estate market has helped bail the city out of its financial troubles in recent years, and is on track to do the same next year. Just last month, Mayor Michael R. Bloomberg released updated estimates showing an extra $3.4 billion from taxes, much of it real estate related, coming in over the next two fiscal years.
Despite the improved tax collections, the administration remained loath to change its assumptions of a looming real estate market decline and its negative effect on the city's $52 billion budget. The city still anticipates reduced revenues over the next few years, which, coupled with rising expenses, results in a projected deficit of more than $4 billion in the fiscal year that begins in 2007.
Yesterday, Jordan Barowitz, a spokesman for the mayor, said there was nothing in the Independent Budget Office report that would prompt the administration to revise its cautionary long-term outlook.
The report said that despite rising mortgage interest rates, which had been expected to be a drag on real estate sales, there has been little sign of a market slowdown this year.
In the first quarter of the fiscal year that started in July, property transaction taxes totaled $404 million, or 56 percent of what the administration anticipated for the full year. Similarly, taxes on mortgages totaled $458 million, or 62 percent of the projected annual total. As a result of the steady increases, the city last month said it now expected taxes from both categories to end the fiscal year about 50 percent above what was originally expected.