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By JAMES B. STEWART
Bill de Blasio has made New York’s “Tale of Two Cities” a centerpiece of his Democratic campaign for mayor. “One New Yorker is rushing past an attended desk in the lobby of a majestic skyscraper,” Mr. de Blasio said in a speech at the New School earlier this year, while “a few miles away, a single mother is also rushing, holding her two young children by the hands as they hurry down the steps of the subway entrance.”
But Mr. de Blasio’s point was only partly correct. Relatively few wealthy owners of ultraluxury apartments are rushing through their buildings’ lobbies, because they’re rarely, if ever, there.
To address the inequities of the two cities, Mr. de Blasio has proposed raising taxes on the wealthy, whom he defines as those making more than $500,000, to pay for prekindergarten and after-school care. This may be a laudable goal, but people making $500,000 who are actually living and working in the city already pay high federal, state and local income taxes as well as property taxes. They’re not the ones buying apartments in places like One57, where two penthouses have sold for more than $90 million each. Places like One57, 15 Central Park West and Plaza Hotel are another New York entirely, one for the ultrawealthy with a primary residence elsewhere, for whom a $55 million condo is a pied-à-terre and just another place to park their wealth. Mr. de Blasio’s proposal would have little, if any, effect on them. They pay no city income tax and comparatively low property taxes even as the city’s services prop up the value of their trophy real estate.
The One57 tower, another property that caters to the ultra-wealthy who have a primary residence elsewhere.
“It certainly might be more palatable for a new mayor, subject to the approval of the Legislature, to inflict pain on those whose resident status is purely a fiction of the law, rather than on real residents, meaning those who are domiciled in New York and vote there as well,” said Robert Willens, the president of a tax and accounting service in New York City and adjunct professor at Columbia Business School. “I can see this sort of a change as one that a new mayor would seriously consider.”
Ultra-wealthy nonresidents who own property in New York City certainly make a ripe target for potential revenue. People who spend fewer than half the year in New York City don’t pay any city income tax, even if they generate much of their fortune in the city. Many have elaborate systems for keeping track of their whereabouts. Since even one minute in a 24-hour period may count as a day for residency purposes, there’s often a frantic, Cinderella-like dash to cross the city line before midnight, although it’s black limousines ferrying the passengers rather than horse-drawn carriages.
In one multiyear case, the hedge fund manager Julian Robertson avoided paying $26.7 million in New York City income tax after a judge ruled that he had proved he was outside the city for 183 days in 2000, the year challenged by the state’s division of finance. Mr. Robertson’s primary residence was in Locust Valley, on Long Island, but he owned an apartment on Central Park South, and his office was on Park Avenue. He also owned places in Australia, New Zealand and Sun Valley, Idaho, and he rented a place each summer in Southampton.
Nonresidents who spend at least 183 days outside New York City and state — who live, for example, in Alpine, N.J., or Greenwich, Conn. — pay no New York City income tax. And foreign residents who spend at least 183 days outside the country, pay no United States income taxes.
Nonresidents are an enormous potential source of tax revenue. According to the New York State Department of Taxation and Finance, in 2010, the most recent year available, there were 820,000 nonresident tax returns reporting $273 billion in income from all sources. Nonresidents appear to be disproportionately affluent. Their total income represents 33 percent of the total income of residents and nonresidents combined, but just 8.6 percent of the 9.5 million returns filed in those categories. (The state doesn’t break out nonresident filings by city or county.)
Tax experts said there was nothing sacred about the half-year rule, and the state could impose a much more stringent test for nonresidents. A spokesman for the Department of Taxation and Finance said, “This has been in the statute for a very long time and aligns with the time frame used in many other states and by the I.R.S.” Before 1999, nonresidents who earned income in New York City did pay income tax on that income — the so-called commuter tax — but that requirement was repealed at the behest of suburban lawmakers.
London, which seems to have experienced an even more dramatic Tale of Two Cities, earlier this year tightened its eligibility standards for nonresident status. Individuals may be subject to income tax there if they spend as few as 16 days, if they also have four “ties” to Britain, one of which is maintaining a residence there.
Not only do wealthy nonresidents escape income tax liability in New York, but their property taxes are extremely low compared with the value of their real estate, and they end up paying a much lower rate than owners of much more modest homes, as The New York Times reported last year.
That’s because ultraluxury buildings are assessed at ludicrously low percentages of their actual value under the arcane state laws that set real estate valuations for tax purposes. Apartments in 15 Central Park West, for example, are valued for tax purposes at an average of just $332 a square foot, even though actual sales there have averaged more than $7,000 a square foot. An apartment that sold for $88 million to a Russian billionaire (which amounted to nearly $11,000 a square foot) was valued at a mere $2.97 million for tax purposes. Property taxes were only $59,000 in 2012, thanks to the low valuation and a tax abatement.
The same article revealed that an apartment at the Plaza Hotel that sold for $48 million last year was valued for tax purposes at $1.7 million, or 3.5 percent of its sale price. A condominium at 80 Columbus Circle that sold for $30.55 million last summer was valued at $2 million, or 6.5 percent.
“You could structure the property tax to have a much more progressive rate,” said Daniel N. Shaviro, a professor of taxation at New York University School of Law. “Property tax rules would be a great way to get at the issue of the nonresident billionaire.”
A spokesman for Mr. de Blasio said he hadn’t taken a position on tax policy toward nonresident property owners. A spokeswoman for the Republican candidate, Joseph Lhota, didn’t respond to requests for comment. But Mr. Lhota has called for tax cuts, and said at a recent debate, “If you’re in the middle class, hold onto your wallet, because no one has ever been able to just tax the rich.” Mr. de Blasio is far ahead in polls.
The idea that nonresidents should pay little or no tax has long rested both on notions of fairness, since they’re not around much to use city services, and pragmatism, because of the fear that higher taxes will drive them away. Fred Feingold, a founder and tax expert at the New York law firm Feingold & Alpert, who successfully represented Mr. Robertson, said that higher property taxes on luxury residences might depress real estate values, discourage construction and have a ripple effect throughout the local economy. And “the so-called rich have the resources and means to go elsewhere and are more likely to do so if they thought the rules to be less than fair,” he said, adding that many of his wealthy clients are extremely tax-sensitive.
But no one knows for sure how many billionaires would leave, especially if tax increases were relatively modest. “I’ve always been skeptical of the assertion that higher taxes might cause the victims of those levies to flee the locality in which the higher taxes are imposed,” Mr. Willens said. “I think there are many other factors of surpassing importance, which do not involve taxes, that go into the decision of where to live and, except at the margin, my experience as a tax practitioner tells me that the imposition of higher taxes would not cause a noticeable exodus of wealthy people from the city or from the state.”
Professor Shaviro, of N.Y.U., agreed. “Look at how they’re bidding up real estate prices,” he said. “They’re obviously willing to pay a very high premium to live in New York City. That suggests that New York has some leeway to tax the very wealthy. If you could figure out exactly how much they’d be willing to pay without leaving, it could be an incredible bonanza for New York City. And if they’re willing to pay so much for those empty apartments, maybe they should also do something to help make everyone else better off.”
Still, the logistics of any changes in tax policy are daunting. Gov. Andrew M. Cuomo has sounded cool to Mr. de Blasio’s proposal for higher taxes on wealthy residents of New York City. Mr. Feingold said he thought it was “a very long shot that there would be legislation enacted in the near term and signed into law.”
Professor Shaviro said that “there’s not much any mayor can do” to make a fundamental difference in income inequality in the city. “New York City is a cork bobbing on the waves of the global economy,” he said. Even so, it might be worth trying. “If you’re lucky enough to be a destination city, you don’t want to blow it,” he said. “But why not try to use that to your advantage?”
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