Fiscal Note: Implications of Lowering the Class 1 Assessment Ratio

Introduction

The New York State Real Property Tax Law (RPTL §1805(1)) requires that:

“The assessor of any special assessing unit shall not increase the assessment of any individual parcel classified in class one in any one year, as measured from the assessment of the previous year’s assessment roll, by more than six percent and shall not increase such assessment by more than twenty percent in any five-year period.” [1]

Because of this limitation, properties in Class 1 (mostly 1-3 family homes) that appreciate faster than the cap face lower tax rates. As a result, over time, the difference in taxation between neighborhoods has become substantial.

The City’s property tax is a fractional assessment system where the tax rate is applied to a fraction (“assessment ratio”) of the market value estimated by the Department of Finance (DOF). DOF has discretion in setting a “target” assessment ratio, which currently is 6%. However, properties fall below the 6% target due to the caps imposed by State law, resulting in a lower tax burden.

In this note we document the wide distribution of assessment ratios among Class 1 properties based on FY 2024 data. In addition, we simulate the impact of lowering the target assessment ratio for Class 1 on the distribution of tax burden. In general:

1. Lowering the target ratio redistributes the tax burden toward properties that benefit more from the caps.
2. The lower the target ratio, the larger the amount of the redistribution.
3. Without State legislation, the City cannot devise programs to avoid tax increases on vulnerable homeowners, such as income-based exemptions for primary residents and circuit breakers such as those proposed by the NYC Advisory Commission on Property Tax Reform in its final report.
4. Because caps would still be in effect under a new target ratio, inequities would only be reduced temporarily. The policy change could only be repeated until the target ratio hits a lower bound close to 0%, such as in Nassau County where it sits at 0.1%.

Using FY 2024 data, we simulate a 4% target ratio (close to the observed median ratio) and a 1.5% target ratio (close to the 5^th percentile). A 4% target would temporarily narrow the dispersion of assessment ratios, while a 1.5% target would temporarily equalize them for essentially all properties. In either case, we recalculate existing exemptions to obtain new tax bills DOF market values remain unchanged.

Each scenario is modeled with and without revenue neutrality. In the first case, the redistribution of tax burden is essentially confined to Class 1. In the second, we keep the overall property tax rate constant at its current level of 12.283%. Because a lower target ratio means lower assessed values, leaving the overall tax rate constant means that the total tax levy decreases. Formulas in State law dictate that the reduction is distributed to all tax classes according to their share of the levy (which, in turn, depends on market values as estimated by the NY State Office of Property Tax Services). As a result, most of the tax reduction would not accrue to Class 1.

Lowering the Class 1 target ratio from 6% to 4%.

1. Revenue neutral. 64.2% of parcels would experience a tax increase (defined as an increase greater than $100 or 2.5%) while 30.0% of parcels would experience a tax decrease (a drop greater than $100 or 2.5%). The average tax increase would be $441 (median of $394) while the average tax decrease would be $985 (median of $666). The Class 1 tax rate would increase from 20.085% to 21.480% and the overall tax rate would change little.
2. Not revenue neutral. The overall levy would decrease by $203 million, of which $31 million would accrue to Class 1. There would be a slightly lower share of parcels with a tax increase (63.1%) and a corresponding increase in the share of those with a tax decrease (30.9%). The average tax increase would be $405 (median of $362) while the average tax decrease would be $996 (median of $678).

Lowering the Class 1 target ratio from 6% to 1.5%.

1. Revenue neutral. 30.1% of parcels would experience a tax increase while 66.4% of parcels would experience a tax decrease. The average tax increase would be $3,035 (median of $1,629) and the average tax decrease would be $1,578 (median of $1,289). The Class 1 tax rate would jump from 20.085% to 47.405%, lifting the overall tax rate by 65 basis points from 12.283% to 12.937%.
2. Not revenue neutral. The overall levy would decrease by $1.8 billion, of which $227 million would accrue to Class 1. There would be a lower share of parcels with a tax increase (25.2%) and a corresponding increase in the share of those with a tax decrease (71.9%). The average tax increase would be $3,040 (median of $1,747) while the average tax decrease would be $1,748 (median of $1,453).

The findings in this fiscal note echo those in previous analyses, among which the following excel: Independent Budget Office (2006) Twenty-Five Years After S7000A: How Property Tax Burdens Have Shifted in New York City and (2018) Will a Lower Target Assessment Ratio Ease Disparate Tax Burdens Among Owners of One- to Three-Family Homes? (which includes a discussion of the temporary effects of lowering the target ratio), and NYC Advisory Commission on Property Tax Reform (2020) Preliminary Report and (2021) Final Report.

The Dispersion of Assessment Ratios

The City’s property tax is a fractional assessment system: a tax rate is applied to assessed values that are a fraction of DOF market values. DOF has discretion in choosing the assessment ratios for all property classes. For Class 1, the target assessment ratio was 18% in 1983, dropped to 8% in 1991, and was lowered again to 6% in 2006.[2] However, the distribution of assessment ratios is far from the target. Chart 1 shows that in FY 2024 the median assessment ratio before subtracting exemptions was 3.9% and only a small fraction of parcels (primarily newly built) was at 6%. On the one hand, this shows that target ratios are binding only temporarily because of the assessed value growth caps imposed by RPTL §1805(1). Second, there is a wide variation in assessment ratios denoting that caps benefit some submarkets more than others.

Chart 1. Fraction of Class 1 Parcels by Assessment Ratio

Source: NYC DOF FY 2024 tax roll, Office of the NYC Comptroller. Assessment ratios are gross of exemption programs, which are intended to generate dispersion in a targeted fashion.

RPTL 1805(1) caps assessed value growth of Class 1 to no more than 6% in any given year and 20% over five years. When DOF market values increase faster than the caps, the assessment ratio decreases and drifts farther below 6% unless market value growth slows or becomes negative. Other things equal, a lower assessment ratio corresponds to a lower ratio of tax to market value (the effective tax rate or ETR). The regressivity of assessments is shown in Chart 2, which divides Class 1 into bins each containing 5% of the properties based on their DOF market value and shows the relationship between median DOF market values and median assessment ratios.

Chart 2. DOF Class 1 Market Values and Assessment Ratios

Source: NYC DOF FY 2024 tax roll, Office of the NYC Comptroller. See notes for Chart 1. Each dot represents the median DOF market value and median assessment ratio for 5% of Class 1 parcels.

The dispersion and regressivity of Class 1 assessment ratios is also evident geographically. Chart 3 reports median assessment ratios by decile of 2020 Neighborhood Tabulation Area (defined by the NYC Department of City Planning), as long as they contain at least 100 Class 1 parcels. The map makes clear that large swaths of the Bronx, Queens, and Staten Island are taxed at a much higher rate than brownstone Brooklyn.

Chart 3. Median Assessment Ratio by Neighborhood Tabulation Area

Source: NYC DOF FY 2024 tax roll, NYC DCP, Office of the NYC Comptroller. See notes for Chart 1. Only NTAs with at least 100 Class 1 parcels are included.

Simulating the Impact of a Lower Class 1 Target Ratio

What would happen if the target assessment ratio were reduced? We start with a stylized example to provide intuition.

Stylized Example

Table 1 includes two fictitious properties (A and B), with DOF market value of $2 million and $500 thousand and assessment ratios of 3% and 6%, respectively. Assuming a similarly fictitious tax rate of 20%, property A pays $12,000 ($2m times 3% times 20%) while property B pays $6,000. Property A has an ETR of 0.6%, which is half the ETR of property B. In other words, property A is four times more valuable than property B but only pays twice as much tax.

Table 1. Assessment Ratio and Tax Inequity

Source: Office of the NYC Comptroller.

Table 2 assumes that the assessment ratio is lowered to 3% and that the change is revenue neutral: it is designed to keep the total property tax constant at $18,000. After the change, assessment ratio and ETR differences are eliminated (temporarily, as argued earlier). As a result, property A faces a tax increase while property B benefits from a tax decrease. To obtain revenue neutrality, the tax rate needs to increase from 20% to 24%.

Table 2. Lower Assessment Ratio: Revenue Neutral Case

Source: Office of the NYC Comptroller. The table assumes that DOF market values remain constant despite the change in ETRs.

Suppose now that the change is not designed to be revenue neutral. In this case, it is necessary to expand the example to include two property classes: residential (R) – which includes property A and B from the earlier tables – and commercial (C). To simplify, assume that R and C have the same total DOF market value ($2.5 million), the same tax rate (20%), and that each bear 50% of the total levy.[3] Lowering the assessment ratio of class R to 3% without changing the 20% tax rate, would imply a levy of $15,000 on class R ($2.5m times 3% times 20%), which is $3,000 less than the starting point of $18,000. However, half of the reduction needs to go to class C because that is its share of the levy. This means that each class benefits from a tax reduction of $1,500 and that the tax rate in class C goes down (less levy at unchanged assessed values). Table 3 summarizes the changes for class R: property A faces a smaller tax increase and property B benefits from a deeper tax reduction than in the revenue neutral case. Correspondingly, ETRs are 0.66% instead of 0.72%.

Table 3. Lower Assessment Ratio: Non-Revenue Neutral Case

Source: Office of the NYC Comptroller. The table assumes that DOF market values remain constant despite the change in ETRs.

Simulation results

In the simulations, we lowered the target Class 1 assessment ratio before exemptions to 4% (close to the FY 2024 median) and 1.5% (close to the 5^th percentile of the FY 2024 distribution), respectively. In each case, we modeled a revenue neutral scenario which lets class-specific tax rates adjust to keep the FY 2024 levy unchanged and a non-revenue neutral scenario which keeps the overall tax rate unchanged at its current level of 12.283%.[4] In either case, the adjustment in class-specific tax rates is based on the formula set in State law. Table 4 summarizes the tax rate and levy implications.[5]

In the revenue neutral 4% target ratio simulation, the dispersion of assessed values is reduced without a large increase on the class 1 and overall tax rates. Should the change be calibrated to keep the overall tax rate constant, the FY 2024 levy would have been reduced by $203.0 million, with $30.8 million accruing to Class 1 parcels.

The results of the 1.5% target ratio simulations are more dramatic because assessed values (before exemptions) would be in effect equalized across the board, even if temporarily. Therefore, in the revenue neutral case, the Class 1 tax rate would need to more than double to 47.405% and the overall tax rate would go from 12.283% to 12.937% (the levy distribution across classes would change little). Should the overall tax rate instead be kept constant, the levy would decrease by $1.8 billion, with $226.6 million accruing to Class 1 parcels.

Table 4. Tax Rate and Levy Implications of Lowering the Target Class 1 Assessment Ratio

Source: Office of the NYC Comptroller

Chart 4 shows the median percentage tax change within each percentile of FY 2024 assessment ratio before exemptions (the relationship is smoothed using a locally weighted regression). The chart presents the revenue-neutral simulation for the 4% and 1.5% target ratios.[6] The two curves provide the basic intuition for the results:

1. 4% target ratio: about one third of parcels sees a tax decrease, despite the fact that 4% is close to the median of FY 2024 assessment ratios. This is because the tax rate for Class 1 has to rise to maintain revenue neutrality. Roughly speaking, parcels with an assessment ratio below 4% in FY 2024 see a tax increase of approximately 7%, which is the percentage increase in Class 1 tax rate (from 20.085% to 21.480%, as shown in Table 4). These parcels represent the flat section of the 4% target ratio curve.
2. 1.5% target ratio: because the target ratio is lowered to the 5^th percentile of the FY 2024 assessment ratios, two thirds of the parcels have lower taxes. At the same time, the distribution of tax changes is wider, representing a deeper redistribution of the tax burden. Because there are fewer parcels with tax increases funding larger tax decreases, taxes more than double among parcels that benefited the most from the assessment caps.

Chart 4. Median Percentage Tax Change by Percentile of FY 2024 Assessment Ratio

Source: Office of the NYC Comptroller

To elaborate further on the distributional implications, we define tax increases as levy changes greater than $100 or 2.5% and tax decreases as levy changes lower than -$100 or -2.5%. Tables 5 and 6 provide summary information on the distribution of tax changes within Class 1 in the 4% target ratio and 1.5% target ratio simulations, respectively.

Table 5 shows that the number of tax increases is larger than that of tax decreases, and that the average and median tax increases are smaller than for tax decreases, as seen in Chart 4. This is true in both the revenue neutral and not revenue neutral simulations.

Table 5. 4% Target Ratio Summary of Tax Changes

Source: Office of the NYC Comptroller. Note that the cumulative amount of tax decreases is higher than the cumulative amount of tax increases because individual parcels can benefit from the STAR exemption, which increases in value due to the higher Class 1 tax rate. NY State reimburses the City for the cost of STAR exemptions. The exemption is closed to new homeowners, who can apply for a NY State tax credit instead.

Table 6 shows the same data points for the 1.5% target ratio simulation. Because the reduction in assessed values under a 1.5% target ratio, tax decreases exceed tax increases. As a result, the Class 1 tax rate needs to more than double (see Table 4) and tax increases are larger than tax decreases.

Table 6. 1.5% Target Ratio Summary of Tax Changes

Source: Office of the NYC Comptroller. See note to Table 5.

Focus on low-income homeowners

Among those with tax increases are low-income owners in areas that benefited more from the caps. To  identify a sample of these owners, we look at properties that in FY 2024 received a Senior Citizen Homeowners’ Exemption (SCHE), a Disabled Homeowners’ Exemption (DHE), or an Enhanced STAR exemption (which benefits senior homeowners). The recipients of these exemptions elect the parcel as their primary residence and have household incomes up to $58,400 in the case of SCHE and DHE or 2023 income of $93,200 in the case of Enhanced STAR. We are restricted to this subsample because, unlike DOF, our office does not have access to income and residency information matched to property records. Table 7 reports summary data of simulated tax increases for these owners.

Table 7. Summary of Tax Increases Among Recipients of SCHE, DHE, and Enhanced STAR Exemptions

Source: Office of the NYC Comptroller. See note to Table 5.

The City does not have the authority to eliminate the tax increases on vulnerable homeowners as it cannot, without State legislation, create or change exemption and abatement programs. These could include income-tested homestead exemptions to benefit primary residents and circuit breakers to limit the share of income devoted to property tax payments, such as those proposed by the NYC Advisory Commission on Property Tax Reform in its final report. On its own, the City could expand its tax deferral programs, which are, in essence, payment plans where the deferred taxes are not abated and accrue interest over time.

Conclusions

The Class 1 assessed value growth caps of 6% in any given year and 20% over five years are set in State legislation and generate an inequitable distribution of the tax burden. This fiscal note analyzed the implications of administratively lowering the target assessment ratio within Class 1 to shift the tax burden toward the parcels that benefited more from the caps. The lower the target, the larger the shift and the narrower the resulting distribution of tax burdens. However, because the caps would remain in effect in State law, the impact would be temporary and inequities would again start building over time, as they did in the past after similar policies were adopted.

Because the distribution of tax burden among tax classes as well as tax exemptions and abatements are set in State law, the City would not be able to shift the tax burden away from parcels that are, for instance, the owners’ primary residence or are owned by low-income residents. The City would also not be able to reduce the overall tax paid by Class 1 parcels without also lowering taxes on all other property classes.

This fiscal note does not estimate market impacts deriving from a lower target ratio but they should be expected to be more pervasive for larger redistributions of the tax burden (that is, for lower target ratios). While in theory a reduction in the target ratio could be scheduled by DOF to take place over time, the City does not have a mechanism to phase in the transition to address potential market effects.

Acknowledgements

This fiscal note was prepared by Francesco Brindisi, Executive Deputy Comptroller for Budget and Finance, and Yaw Owusu-Ansah, Director of Tax Policy and Revenue Analysis. Addison Magrath, Graphic Designer, led the report design and layout.

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Endnotes

[1] Class 1 properties’ assessed value growth due to market conditions is subject to these caps. Assessed value growth tied to physical changes (e.g., new construction and improvements) is not capped. Slightly higher assessed value growth caps equal to 8% in any one year and 30% over five years are applied to small Class 2 residential buildings (generally, buildings with up to 10 units). Market value growth due to physical changes is not phased-in nor capped and it flows through to assessed values in proportion to the target assessment ratio (6% for Class 1 and 45% for small Class 2, except for additions and improvements of small Class 2 which have an assessment ratio of 15%).

[2] See NYC OMB (2023) Tax Revenue Forecasting Documentation, p.31.

[3] The actual formulas that determine class shares are a considerably more convoluted and derived in part from parameters provided by the Office of Real Property Tax Services (ORPTS). An overview of the calculations is available in NYC Office of Management and Budget (2023) Tax Revenue Forecasting Methodology, p.23-24.

[4] The overall tax rate has been 12.283% since the second half of FY 2003, except for FY 2008 and the first half of FY 2009 when the rate was 11.423%.

[5] Due to the mechanics of the State formula, the Class 1 levy in the revenue neutral cases is not exactly equal to the FY 2024 levels. However, the difference is minimal.

[6] Non-revenue neutral percentage tax changes are lower but have the same shape.