NEW YORK CITY—James Nelson of Cushman & Wakefield sat down with Maria Doulis, VP of the Citizens Budget Commission, to discuss New York City tax reform and its impact on real estate.

James Nelson: Maria, please tell us a about CBC and what is it that you do.

Maria Doulis: CBC is a non-profit, non-partisan fiscal watch dog that was established in 1932 to provide oversight for New York State and New York City government. Our members come from the businesses across New York City. It is a lot of the businesses that are for the foundation of the city's economy and so we have members representing the real estate industry, banks, technology, higher education, health, really the whole gamut.

Nelson: Does the CBC have a stance on the recent tax reforms? If so, have they done anything to speak out on the topic?

Doulis: I think that a lot of the focus on the President's agenda has been on what the cuts will be to the budget, and those are important. The city gets about $8 billion in federal aid annually, directly to the budget, but there are impacts that span the economy and could also affect the city's competitiveness. The state and local tax deduction is an example of that. New York State is a high tax state that benefits tremendously from the deduction, which allows people to deduct their personal income and their property taxes from their personal income tax liability. It really would impact high earners who represent so much of the money that the city collects from the personal income tax. The top 1% of filers for the personal income tax compose about 50% of the personal income taxes collected in New York City. Eliminating the deduction would be a big tax bite for them and would surely affect the city's ability to keep them here and paying taxes here, but it would not only affect high earners. The Controller's office did an analysis recently that said that for households earning between $75,000 and $100,000, about 3/4 of them would be affected by this as well. It is bad news for the city. It is bad news for the state and we have been urging a lot of caution on that front.

Nelson: Do you have a sense of the total tax contributions we give to the federal government versus what we receive in exchange?

Doulis: New York elected officials like to point out or point to very consistently that there is an imbalance. We send more than we get. One of the functions from a public finance perspective of the federal government is to be redistributed and there is a lot of wealth here. The CBC does not frown upon that so much considering the fact that this is part of what the federal government does and the federal government can do it more effectively than say the lower levels of government. Again, nevertheless, it does not mean that we should just sit by and let some of these tax changes go by without a hard fight.

Nelson: The city just passed the 2018 fiscal plan for $85 billion. Can you talk about what were the priorities in this fiscal plan? Are there any notable cuts?

Doulis: No notable cuts rise to mind in my head. Mostly what we saw is additions, meaning the city's economy continues to grow and so what we see here is that there is additional tax revenue that then facilitates and allows for additional spending. Some of the more high profile items in this budget discretion this year were for the indigent defense of undocumented immigrants, air conditioning in schools, help for opioid abuse and other support, and a pilot program for 3K, as it is known, following the success of the universal Pre-K program. The budget is projected to grow slightly over 3% for the year, but I think in some ways, it is instructive when you consider priorities to think about what the priorities have been since the mayor has been in office.

We have seen about $5.5 billion in new needs base lined into the budget plan, meaning there are new supports, new programs, new services being added. About 20% of that has been in the Department of Education, but also other programs. About 18% has been in the Department of Homeless Services, given the expansion of the shelter population and how many people are coming into shelters. The city is also trying to help with preventative services as well as Uniformed Services in health and welfare.

The expansion of these services has also been facilitated or supported by an expansion in city personnel. We have seen 30,000 new people since the beginning of the De Blasio administration working for city government.

Nelson: Between property taxes and transfer taxes, which contributes to almost half the city's budget, are we relying too much on the real estate community for this tax base? Are taxes relative to other cities?

Doulis: Property taxes and transfer taxes for property compose about 50% of all taxes that the city collects. Compared to other places, other local governments, that is actually a low share. Other local governments tend to be relying almost exclusively on the property tax. In the city, we have a more diversified mix. However, the property tax system in New York City is broken and it needs to be fixed. There is an interesting lawsuit that has just been filed from the Tax Equity Now group saying that the taxes are unfair to a certain tax class of multifamily that makes the burden on the tenants too high. We are supporting the case as hopefully an impetus or a catalyst to reforming this system because to date, there has not been the political will to sort of step forward and bring stakeholders to the room to consider how to amend broken features. The property tax is extremely complicated. It taxes different classes of property differently and applies different assessment rules and different methods of capturing the value of property as that property value grows to different types of property, so what you get as the outcome of this, and I'm oversimplifying greatly, is this really bizarre system where similar properties are taxed very differently.

You also have this gaping inequity between class one home owners, which are one, two, three family home owners and in particular, owners of large rental buildings and also commercial real estate owners and to the advantaging, if you will, of small home owners is not uncommon. You see that in other cities, but what the research shows us is that New York is way out of line compared to other large cities for both the large rentals and the commercial. In the case of commercial tenants, those costs are passed down to customers when they enter a store to buy a good or to procure a service. Similarly, this is a city of renters and renters are paying the cost of this broken property tax system.