ALBANY, N.Y. (CN) — New York's high court heard arguments Tuesday that sought to strike down New York City’s method of taxing residential properties, a system critics say punishes minority neighborhoods and rewards wealthy, predominately white ones. But it is unlikely to overturn the decades-old system.
The legal challenge began in 2017 when an advocacy group comprised of developers, homeowners and civil rights groups sought to overturn the city’s labyrinthine property tax methodology.
In the complaint, advocacy group Tax Equity Now NY claim the city’s property tax assessment system unconstitutionally taxed similar properties at different percentages of value. Some tax abatements and caps on assessments were doled out to condos and cooperatives instead of rental housing since 1981, giving those properties unfair advantage.
While industrial and commercial buildings in New York City are taxed relative to their zoning type, residential buildings are split into two groups: properties with three or fewer units, and larger buildings with four or more units.
The former class of residential property is taxed at 6%, while other properties are taxed at 45%. However, because condos and co-ops are taxed relative to the value of units, including those that are rent-stabilized, which can lead to lower assessments.
The result of the discriminatory law, Tax Equity claims, is that some minority neighborhoods are taxed much higher than properties in predominately white neighborhoods. The group has said the 6% assessment cap on many homes has created a caste housing system in New York City.
In 2020, a trial court dismissed the due process claims. Months later the state’s appellate division dismissed the remainder of the claims, ruling the plaintiffs failed to state a cause of action. The appellate court also found the tax abatements and assessment caps had been created to protect homeowners from “sudden dramatic tax increases.”
In their appeal, Tax Equity argued the courts wrongfully dismissed the case during the pleading stage, thereby “cutting off discovery and the opportunity to crystallize the legal principles at issue.” The plaintiffs also say the city and state essentially insist that even though the property tax system is grossly inequitable there is nothing courts can do about it.
Attorneys for the city countered the complaint was nothing more than a compilation of complaints about New York City’s real property tax system. “The fact that the tax system has been described as imperfect and in need of reform does not establish that it is unlawful,” the city argued.
During oral arguments Tuesday, the Court of Appeals tried to navigate the maze of city and state regulations to determine whether to reinstate Tax Equity’s lawsuit. If the high court rules in favor of the group and reinstate the case, the city’s decades-old property tax code could be upended.
“The problem isn’t the statute,” argued Richard Bress of Latham & Watkins, who represents Tax Equity. “It is how the city is interpreting and applying it.”
Tax Equity is suing both the city and state, and Bress argues Legislature has already spoken on the issue and that it is now squarely in the judicial arena. He also noted the city can simply lower its assessment ratio to help out the Class-1 properties.
“Perfection is not something we can reach as humans,” Bress said, noting tax assessors are going to reach different conclusions regarding separate properties. “But we think it’s a different case when the city purposefully chooses to apply the caps with a consequence … of creating this uniformity.”
During questioning of Bress and also the state’s lawyer, Mark Grube of Cleary Gottlieb, judges suggested the city could use its discretion to change the taxes without changing the law. “Is there anything in the state law that would prevent the city from reducing the assessment ratio for Class 1 tomorrow from 6% to 0.6%?” Chief Judge Rowan Wilson asked.
Grube said that would be consistent with state law. Questions by Judges Jenny Rivera and Shirley Troutman also seemed to indicate they would be open to allowing the city to change the taxes without a change to the law.
The attorney for the city, Edan Burkett, claims the advocacy group hasn’t identified any constitutionally protected right and that the situation is incredibly complex, given that the city was still using land values from the 1960s and construction costs from the 1930s when the new law was passed in the 1980s.
“Here what we have are duly passed state statutes,” he argued. “And the appellants simply haven’t pointed to a specific policy, some sort of any aberrational policy, which is significant. What they’re pointing to is the outcome of a taxing system that is being enforced in compliance.”
Burkett also argued that many minority neighborhoods have actually benefited from the system since they have appreciated more over the last four decades than many other neighborhoods.
Bress said that argument was “entirely off base” and that statistics show otherwise.
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