Earlier this week, a Staten Island judge temporarily paused the city’s rollout of its surcharge on second homes in the five boroughs in response to a suit brought last Friday by homeowners, which argued the way City Hall rolled out the tax created “mass confusion.” Therefore, the suit said, the 17,000 property owners who received mailed notices telling them they may owe the new tax should have more time to challenge whether they are responsible for paying it, and the city should not be allowed to keep a list of 900,000 properties and their owners up on its sites.
State Supreme Court Judge Wayne Ozzi — whose own home appears on that 900,000-property list — agreed with those bringing the suit that the city’s strategy of asking those property owners to prove they didn’t owe the tax or were eligible for an exemption placed an unfair burden on them, and that the city didn’t have permission to publish that list of 900,000 property owners on its site and social media. The city immediately appealed, which essentially reversed Ozzi’s pause.
New York Law School professor Stephen Louis said he thinks it is likely for things to remain that way. He said both of the plaintiff’s arguments – that the city placed an undue burden on property owners by asking them to tell the government if they’d mistakenly gotten a tax notice in the mail and that it wasn’t allowed to publish that list of property owners — are “fairly weak.”
“This is a new program,” Louis said. “The city has to have some discretion in figuring out how best to roll it out. There’s obviously a lot of elements that require the city to gather information about value, about residency, all those things. The city isn’t necessarily required to do it in the very best possible way it possibly could be done. It just has to be done in a way that doesn’t discriminate and isn’t irrational.”
The rollout may not have been “magnificent,” Louis said, but for any of its imperfections, it wasn’t illegal. One could argue, he said, that maybe the 17,000 letters sent to people the city thought could possibly be required to pay the tax could have been “better drafted and done differently,” but that it was also in the city’s best interest to cast a wide net and ensure people understood the importance of paying the tax if they had a second home.
“There’s nothing unlawful, in my opinion, with the fact that they sent it out,” Louis said. “And, when there were certain issues, they adjusted the time frame.”
Those who originally received a letter had until Aug. 21 to tell the city whether they thought it had made a mistake in mailing them a tax notice. Now, people have until Sept. 18 to do so.
The surcharge itself applies to certain high-value New York City properties that are not used as qualifying primary residences. For one-, two- and three-family homes, the surcharge applies to properties valued by the city at $5 million or more, with rates ranging from 0.8% to 1.3% and condo and co-op units valued at $1 million or more may face rates of 4% to 6.5%.
Louis also emphasized that the list of 900,000 properties the city published was essentially a duplicate of a tax list the city publishes every year anyway and doesn’t include any “secret” information. He added that he wasn’t sure what purpose Ozzi issuing a temporary order blocking the tax rollout was, when the letters had already been mailed and the online list had already been published.
Crucially, the suit only challenges the rollout, not the legality of the tax itself – but Louis said he didn’t think a suit challenging the tax’s legality would work out well, either.
Did NYC cross the line on pied-a-terre list?
Lloyd Reisman, a partner at real estate firm BBG, however, said he wasn’t so sure the city hadn’t crossed a line by mailing out the notice to so many people.
“The focus of the challenge is an argument that the city had an obligation to make an internal determination using available information that would have presumably shortened the list of individuals and/or apartments who were subject to the surcharge from the outset, which would have alleviated the burden of … several thousands of apartments receiving these notices,” Reisman said. “I think there’s a compelling argument there that the city may not have met its burden in rendering that initial determination.”
If a judge ultimately agrees with that argument, Reisman said the city might have to void the notices it sent out, redetermine who should get them and reissue the mailings.
However, Reisman also said he agreed that the city had an interest in casting a wide net regarding who might have to pay the tax and expected the city’s tax rollout to continue as planned.
“The pied-à-terre tax is going to move forward one way or the other,” Reisman said. “If the list [of who pays] gets shorter, okay, the list gets shorter. But, there’s still going to be people on it.”
Property tax expert Benjamin Williams said that while it was not surprising that the way the tax was rolled out prompted a legal challenge, it was likely to continue moving forward without much delay.
“This case is more likely to affect the timing of the tax than its long-term future,” said Williams, a member of Rosenberg & Esits, P.C. “If the City prevails, it will essentially be business as usual, and implementation will continue. If the plaintiffs prevail, the City may have to pause, address the procedural deficiencies identified by the court, and reset the process, but the tax itself is unlikely to disappear.”
He added that property owners who received that July letter should “keep their paperwork moving” and that any courtroom delay should “not be mistaken for a tax holiday.
Emily Eisner, a chief economist at nonpartisan think tank Fiscal Policy Institute, said that she believed the city wouldn’t have implemented a tax rollout that wasn’t legally sound, and that, if the suit did delay the city’s collection of the tax at all, it would be a minor one, and wouldn’t greatly impact the city’s budget.
“The maximum amount that I expect to be collected by this tax is $500 to $700 million a year. That is a very small amount relative to the size of the city budget,” Eisner said. “The precise timeline of when they’ll be able to collect that amount of money will not create a big problem. I think it’s unfortunate that there might be a delay, but I honestly don’t anticipate there to be a major delay.”
Eisner also added that the suggestion wealthy people would leave the city due to the tax was inaccurate, according to her think tank’s research on property taxes.
“Overall, we find that there’s very little migration out of the city and the state in response to the tax increases,” Eisner said. “Wealthy, high-income people want to make a big show of how burdensome taxes are because it very effectively makes the case for taxes to be decreased on them.”
Both parties will be in court Aug. 31 to argue over whether the city’s allowed to continue rolling out the tax as planned.