NYC's Proposed 1% 'Pied-à-Terre' Tax Aims to Raise $500 Million Annually

New York Governor Kathy Hochul is backing a proposal to levy an annual tax on pieds-à-terre valued at $5 million or more, aiming to generate at least $500 million in yearly revenue to help close the city's projected $5.4 billion budget gap. The proposed surcharge targets non-primary residences, including those owned by out-of-state residents and investors, in a renewed effort to make the ultra-wealthy contribute more to city services.

"If you can afford a $5 million second home that sits empty most of the year, you can afford to contribute like every other New Yorker," Governor Hochul said in a statement. "This proposal simply ensures that they’re contributing in a meaningful way to keeping New York City the greatest city in the world."

The tax would apply to the approximately 59,000 pieds-à-terre identified in a 2023 survey, a decrease from 75,000 in 2017. The push for the tax gained momentum after high-profile luxury purchases, such as Ken Griffin's $238 million penthouse in 2019, which was assessed at just $9.4 million for tax purposes. While the exact tax rate is not finalized, previous proposals have suggested a sliding scale.

The debate over the pied-à-terre tax highlights a larger struggle in New York City to address affordability and a structural budget deficit without driving away high earners. While Mayor Zohran Mamdani and Governor Hochul see the tax as a way to fund essential services, some economists, like Robert P. Inman and Michael S. Knoll, argue that a broader tax on land value would be a more economically efficient and less distortionary way to raise revenue. The proposal will be negotiated as part of the state budget, which is currently overdue.

A Land Value Tax as an Alternative

While the pied-à-terre tax is gaining political traction, some policy experts argue for a different approach. Robert P. Inman and Michael S. Knoll, from the Wharton School and University of Pennsylvania Carey Law School, propose a split-rate land value tax. This system would tax the land under buildings at a higher rate than the structures themselves.

The authors argue that a land tax is the "best, least distortionary way" to fund the city's agenda. Unlike taxes on income or wealth, which can cause high-earners and entrepreneurs to leave, land is an immobile asset. A higher tax on land could also encourage development and reduce vacancies, as seen in cities like Pittsburgh, which implemented a similar tax in 1979 and saw a subsequent increase in commercial building.

Political and Economic Implications

The proposed pied-à-terre tax is not a new idea. A similar proposal was defeated in 2019 after heavy lobbying from the real estate industry. However, the current political climate, with Mayor Mamdani's focus on affordability, has created a new opening.

The tax is designed to make out-of-state owners of luxury apartments contribute to the city's upkeep, including police, fire, sanitation, and transit services, which they use without paying city income tax. Other global cities like Paris, Singapore, and Vancouver have implemented similar taxes to raise revenue and encourage the use of empty properties as long-term rentals.

The success of this proposal will depend on the final details of the tax structure and the ability of lawmakers to overcome opposition from the real estate sector. If passed, it could set a precedent for other US cities grappling with similar issues of housing affordability and budget deficits.

This article is for informational purposes only and does not constitute investment advice.