A lawsuit that could upend New York City’s property tax system was cleared to move forward by the state’s highest court on Tuesday. The decision is a victory for housing groups that complain that the system favors owners of wealthy Brooklyn brownstones and high-end Manhattan condos over renters and owners in lower-income neighborhoods.
The 4-to-3 decision by the State Court of Appeals strikes at one of the most intractable elements of New York’s housing crisis: Nearly everyone agrees that the property tax system is inequitable and opaque and puts a burden on lower-income people. But while many politicians have proposed overhauls over the years, none have succeeded at making changes through legislative routes.
The lawsuit takes aim at both the city and the state, with the goal of forcing change through the courts instead. It was filed in 2017 by a group of property owners, renters and other advocacy groups called Tax Equity Now New York, or TENNY.
TENNY’s lawsuit says that homes with equivalent values are currently assessed and taxed at different rates depending on where they are, and one of its claims is that the system disproportionately affects racial minorities and may even perpetuate segregation.
The group’s complaint shows that a property in Canarsie, Brooklyn, for example, is assessed at “triple the rate of the same properties in Park Slope,” also in Brooklyn, according to the court’s Tuesday decision. The lawsuit also points out that the city taxes owners of rental buildings at higher rates than owners of higher-end condominiums and co-ops, one of the reasons tenants are charged high rents.
A lower court dismissed TENNY’s complaint in 2020, saying the disparities did not violate the law and that the Legislature had the power to make changes. Even many of the case’s supporters had viewed it as a long shot. But the decision on Tuesday allowed some of the original claims against the city to move forward and appeared to back up several of the group’s claims.
Martha E. Stark, TENNY’s policy director and a former finance commissioner under Mayor Michael R. Bloomberg, said there was no timetable for the case yet. It can now return to State Supreme Court in Manhattan. There will not be any immediate impact on New Yorkers’ property taxes, though the decision may put pressure on the city to make changes.
A City Hall spokesman told the Gotham Gazette last year that the “property tax system is in need of long-overdue reform,” saying “low-income and middle-income homeowners need relief.”
Speaking to reporters on Tuesday, Gov. Kathy Hochul called the decision a “rather dramatic shift,” adding that she still needed to work out its implications and decide with Mayor Eric Adams what the right solution would be.
Ms. Stark said the court’s decision made it clear that the city could and should act to make the tax system more equitable. It could mean that some people will eventually have to pay higher taxes while others’ tax bills could decline.
“The city has an opportunity here to fix its notoriously broken property tax system,” she said. “It has some of those tools within its own toolbox.”
On Tuesday, a spokeswoman for the city referred questions about the lawsuit to comments made by Sylvia O. Hinds-Radix, the city’s corporation counsel, during a news conference. Ms. Hinds-Radix said that the court did not say the lawsuit was over, and that the case would go back to a lower court where “determinations are going to be made.”
The four most liberal members of the court were in the majority on Tuesday. In a dissenting opinion, Judge Michael J. Garcia said that it was the Legislature’s prerogative to make major changes to tax policy.
Property taxes supply the city with around $35 billion every year and are the city’s largest source of revenue.
The bills for individual owners are generally determined by first judging the market value of a property. Then the city decides something called an assessed value — a share of the market value, which is about 6 percent of that value for one-to three-family homes. A tax rate is then applied to this assessed value to arrive at a property tax bill.
But a few peculiarities in this scheme create inequities within similar classes of properties.
For one, the city assesses condos and co-ops by comparing them with rent-stabilized properties — even though those properties typically have much lower market value. TENNY said in its lawsuit that “the city assesses some condominiums and cooperatives at values less than the selling price of a single unit in the same building.”
The court said on Tuesday that the city should be comparing condos and co-ops with similar market-rate rentals, not rent-stabilized properties. That could ultimately mean higher property taxes for condo and co-op owners.
Mary Ann Rothman, the executive director of the Council of New York Cooperatives and Condominiums, said her group is “watching with interest and hoping that this prompts progress towards a fair and equitable property tax system in New York City that is easy to understand.”
Another wrinkle in the property tax system is that there is a state-mandated cap on how much the assessed value of one-to-three-family homes can go up every year. That limits the amount of tax that can be collected in neighborhoods where home values grow rapidly, and leaves neighborhoods in the Bronx and Staten Island where values grow more slowly to carry more of the burden.
Overall, that means owners of smaller homes pay disproportionately less than bigger rental buildings.
A 2018 analysis from the Regional Plan Association, a nonprofit research group, found that these smaller homes made up 15 percent of the property tax revenue despite being about 47 percent of the market value of real estate in New York City. The result are large racial disparities among taxpayers, according to TENNY’s complaint. The lawsuit says neighborhoods where people of color are the majority are “overassessed annually by $1.9 billion.”
Vicki Been, a former deputy mayor for housing in the administration of Bill de Blasio, said the city will have to decide how long it wants to fight the lawsuit. Responding faster, she said, might mean raising taxes on some to even out the burden, which could be a politically risky proposition.
“I’ve worked on this issue for more than a decade,” she said. “It is not easy to understand; it is not easy to message; it’s not easy to deal with just the political fallout.”
Nicholas Fandos contributed reporting.