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by Stephen N. Hunt

New York’s property tax rates are way beyond national averages. The laudable efforts of the Who Does What Commission (1) and others obviously contribute to a rationale for reducing these rates. However, I am concerned that such necessary efforts will only slowly and gradually bring overall property tax relief, when time to make radical changes, to stem the area’s population loss and general economic stagnation, is slipping away. I am also concerned that the types of economic development proposals encouraged by the Buffalo Niagara Partnership and governmental planning entities involve governmental and tax support for specific industries (e.g., bioinformatics and other supposed “key” industries) instead of general relief for all property owners and tenants. The Partnership and governments also encourage land use pigeon-holing through master plans (Amherst spent $400,000+ and Erie County will spend a similar number on such plans) which discriminate against those businesses not favored, restrict property rights generally, and carry heavy environmental and preservationist baggage. I would recommend, instead, a property tax reduction program which is universal, industry-neutral, but designed to reward the risk takers of whatever type who want to expand their businesses, or otherwise improve their property, wherever in Western New York.

While incentives exist from IDAs for new construction, such incentives are not available for all industry types and are almost non-existent for improvements to existing properties. Indeed, the major reasons why perhaps the preponderance of 30+ year old commercial or residential real estate here is in very poor condition are (1) the always increasing construction regulations to which property improvements are subject (e.g., ADA (2), historic preservation, environmental, etc.) (2) always narrowing land use rights from master planning efforts — which embolden neighbors, special interest groups, or business competitors to further restrict commerce or personal land use through protesting property improvements and intimidation of government officials and (3) the anticipation of increased assessments on both the “as is” property value and the value of the new improvement, as the assessors are alerted by building permit applications. These factors in part (along with income and other high tax rates and regulations) cause our business and population contraction as the difficulty of site expansion is a reason why people and jobs find easier paths elsewhere. Construction regulations in New York State have gotten partial relief recently but there is still far too much regulatory difficulty, which is being fueled by the increasingly restrictive master planning at all levels of government. Radically changing construction regulations and reversing the master planning fetish do not seem to have a majority constituency here but tax relief for improvements to current properties ought to be popular as it coincides with concerns of many people about “sprawl.”

The attached spread sheet shows representative tax implications for a hypothetical 5,000 sf office purchase.

Example (1) is an existing office building worth $50.00 per square foot upon which the current owner or a purchaser contemplates a refurbishment of $20.00 psf under a representative, current tax structure of 3.5% ($35/thousand dollars assessed at 100% of value) for combined town, county, and school taxing authorities. In most, if not all, jurisdictions there will be a tax increase on the improved property based upon, at least, the value of the improvement, either as a building permit application alerts the taxing authority or the jurisdiction engages in a general reassessment. At these projected tax rates, the current, unimproved property worth $50.00 psf would generate $8,700/year in taxes and the $20.00 psf improvement would cost the owner another $3,500/year. The owner, then, after spending $100,000 to fix his property is rewarded by the taxing jurisdiction with an increased bill each year thereafter. For certain, fairly isolated, industries there are grants or incentives of various sorts but the typical owner wishing to improve his property (and thereby the general business or residential neighborhood) is punished for the initiative displayed, save for the pathetically small percentage IRS or New York State tax “cost recovery” subtracted from one’s income. The increasingly poor condition (I would say the preponderance) of older property, not just in Buffalo but throughout Western New York, demonstrates that people instead do not choose to make these improvements, in major part, I feel, because of the tax punishment. As the property improvements are not made the presumed tax revenue from those improvements is not received by those jurisdictions. Instead,
the gradual physical deterioration of properties as they all age makes them less and less valuable to businesses or homeowners, which increasingly justifies lower assessments and lower tax revenue. (Analogously, increasing restrictions on use devalues properties.)

The numbers in example (2) show what would happen if the owner is rewarded for investment by having the property’s assessment lowered by that same $20.00 psf (as confirmed by vendor invoices as part of the building permit process, e.g.). While there would be an apparent loss of real estate property taxes compared with example (1) above, the improved property itself would increase in value and the neighborhood would be improved, thus encouraging further investment. Also, in the case of commercial property, businesses would generate greater sales tax revenue. This is exactly what happened in 1978 in California after Proposition 13 cut property tax rates: sales and personal income tax more than made up for the property tax revenue drop as the economy boomed. Additionally, with property tax relief and, at least, the stabilization in property values, people would be building equity in their property, which can serve as the basis for reinvestment in other things. In low-taxing, growing states, property refinancing or selling is a mighty engine in for business growth. In fact, the rolling decline in property condition and resulting decline in properly values is more likely to continue to produce lower property tax revenue, increased property abandonment, declining general neighborhood condition, and worsening general economic conditions without some rapid, dramatic property tax relief.

The incentives for property investment are currently almost exclusively for new construction upon vacant land, which are shown in example (3). Here (the Erie County IDA schedule for non-industrial commercial) the taxes start with 80% abatement on the new construction and increase each year. While typically such construction would be at the $100.00 psf projected here, the tax revenue achieved would only be $30,000+/- different over 10 years, and a present value difference of only about $17,000, from the tax achieved through example (2), where the existing building is fixed up through $20.00 psf. Also, the taxes in example (3) are $40,000 less, with a present value of $30,000 less, than those taxes paid in example (1) where existing property would be fixed up and then taxed more. The choice between (1) and (3) is the effective alternative now for people considering new versus improved premises and it is not surprising, therefore, that people who have the money to spend choose new construction. There are reasons of efficiency, market access, etc. why building new would be the rational, even necessary choice but currently, other things equal, building new for aggregate costs much higher than the existing psf value of older buildings is the only new location alternative which brings any property tax relief. High construction costs, whether or not there is property tax relief, are an absolute prohibition for most businesses but it is even worse for single family residential development as there is no IDA financing to mitigate high construction costs.

The fair thing would be to immediately enact a California Proposition 13 reduction in property tax levels but that drop from around 3.5% to 1% would be politically impossible. The alternative suggested here would be offer dollar for dollar tax relief against the current full value assessment (after adjustment for current equalization rates) based upon any building permit applicant’s confirmed vendor invoices down to a base total County, Town, & School) taxation rate of 1% on that current property full value assessment. Initiative by residential or commercial owners or tenants would then be rewarded instead of punished. New construction should not be discouraged either, but the IDA schedule should also be applied universally to new residential or commercial construction. If such incentives for existing or new construction could be applied universally there would be no requirements for IDA or other boards and staff to be implementing or deviating from policies; permits for construction could be handled by current staff, or, ideally, increased staff required to handle the construction boom. There is here wide-spread cynicism over the rationale and implementation of IDA policies. Unifying the IDAs might stop some competition between municipalities or IDA jurisdictions but it does not touch the base, excessive taxation levels on the vast preponderance of residential and commercial property which is universally seen as a reason for this whole area’s economic suffering. Only a total, radical change of incentives for the entire area will bring some general relief here to encourage people to reinvest instead of leave, and to send a signal to the outside world that, at least this portion of New York State, gives a damn about its overtaxed people.

Stephen N. Hunt
July 4, 2003
cell: 716-444-0299
SHunt@huntcommercial.com

This article was originally written as a proposal to the Buffalo Niagara Partnership

Notes

1. An Erie County task force to reduce redundancies in government.
2. Americans with Disabilities Act

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