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A Guide to New York City Taxes: History, Issues and Concerns Business Real Esta

A Guide to New York City Taxes: History, Issues and Concerns Business Real Estate Personal Income Sales and Use Excise Marilyn M. Rubin December 2010 A GUIDE TO NEW YORK CITY TAXES: HISTORY, ISSUES AND CONCERNS Marilyn Marks Rubin John Jay College December 2010 Funded by the Peter J. Solomon Family Foundation Marilyn Marks Rubin Peter J. Solomon Professor Chairman John Jay College Peter J. Solomon Company City University of New York 520 Madison Avenue 445 W. 59th Street New York City, NY 10022 New York City, NY 10019 (212) 508-1600 (212) 237-8091 pjsolomon@pjsolomon.com mrubin@jjay.cuny.edu http://www.pjsolomon.com/ Preface The origin of the Guide was a report on New York City taxes prepared in 1979 by Dr. Marilyn Rubin, a consultant to me when I served as Deputy Mayor for Economic Policy and Development under Mayor Edward I. Koch. When I entered NYC government in the late 1970s, the City was deep in its financial crisis and tax policy and its effect on the City’s budget and economy were critical. I was surprised to learn that there was no comprehensive summary of all the taxes imposed by the City, and that the Mayor and other policy makers lacked basic information to make decisions. In the ensuing 31 years, no government office, public policy organization nor academic institution has, to our knowledge, provided a comprehensive and comprehensible report on taxes in New York City. Before embarking on this project, we confirmed that observation. I commissioned Dr. Rubin through the Peter J. Solomon Foundation and under the auspices of John Jay College, where she is a Professor of Public Administration and Economics, to prepare this Guide. She is a recognized expert on state and local taxes and is an elected fellow of the prestigious National Academy of Public Administration (NAPA), chartered by the U.S. Congress to help government leaders build accountable, efficient and transparent organizations that deliver results. I am indebted to Dr. Rubin for her usual thorough and thoughtful analysis. Her colleagues Dr. Catherine Collins at George Washington Institute of Public Policy and Dr. Yi Lu at John Jay College provided extensive input into the report as did current and former students in the College’s MPA Program: Annemarie Eimicke, Dov Horwitz and Lauren McNerney. Dr. Rubin and I are grateful to the many professionals who have read and commented on the report including David Frankel, Commissioner of the New York City Department of Finance, and Michael Hyman, the Department’s Assistant Commissioner for Tax Policy, and his staff. We thank John Grathwol, Assistant Director of the NYC Office of Management and Budget, and his staff, for providing us with the data we needed to produce the report, and Ronnie Lowenstein, Executive Director of the NYC Independent Budget Office (IBO), and her staff for their helpful comments, particularly Michael Jacobs, David Belkin, Ana Champeny and Alan Treffeisen. We also thank Steve Spinola, President of the NYC Real Estate Board, and Michael Slattery, the Board’s Senior Vice President, for their valuable comments, Stephen Solomon and Kenneth Moore of Hutton & Solomon, LLP for their input on some of the more technical aspects of the City’s taxes and Diane Coffey, my partner at our firm, for her editing and publishing assistance. New York City and State are once again faced with severe budget issues. We hope that this Guide, clearly defining the history of NYC taxes, their rates and bases, who pays them and the issues associated with each will allow more informed tax policy decisions and a better understanding of the effect of changes. As we completed the Guide, the State had passed its 2010 budget, which includes several changes to its tax structure and rates (see Exhibits 3 and 4 in Executive Summary). With the exception of the increased NYS tax on cigarettes, which was already in place before the Guide was completed, these changes are not reflected in the report, nor are any changes made to NYC taxes, including the elimination of Off-Track Betting. In closing, the work is ours and, while we have received many helpful suggestions from the persons listed above, we bear full responsibility for its accuracy and completeness. We welcome comments. Peter J. Solomon Chairman, Peter J. Solomon Company, L.P. December 2010 CONTENTS Executive Summary ……………………………………………………………………… i Real Property Tax ……………………………………………………………………..…. 1-1 Real Property Transfer Tax …………………………………………………………….. 2-1 Mortgage Recording Tax ………………………………………………………………... 3-1 Commercial Rent Tax …………………………………………………………………… 4-1 Personal Income Tax …………………………………………………………………….. 5-1 Sales and Use Tax ………………………………………………………………………... 6-1 Cigarette Tax …………………………………………………………………………….. 7-1 Hotel Tax ……………………………………………………………………………….… 8-1 General Corporation Tax ……………………………………………………………….. 9-1 Unincorporated Business Tax …………………………………………………………... 10-1 Banking Corporation Tax ………………………………………………………………. 11-1 Utility Tax ………………………………………………………………………………… 12-1 Other Taxes ………………………………………………………………………………. 13-1 Executive Summary i EXECUTIVE SUMMARY Introduction The purpose of the Guide to New York City Taxes is to provide information to a wide range of readers on New York City taxes in a format that is broad in scope and non-technical in its presentation. The information presented in the Guide can be found in several other sources.1 None, however, provides a broad non-technical picture of NYC taxes, showing their structural elements as well as other relevant details – how they have evolved over time, how much revenue they generate and how they compare to similar taxes imposed in other U.S. cities. Nor do these other sources, with few exceptions, look at the extent to which NYC taxes are imposed in addition to New York State taxes on the same base. The Guide provides this information for all of NYC’s major taxes as of FY2009. It also presents issues and concerns associated with each tax that need to be addressed as part of the City’s ongoing efforts to maintain its competitive position for businesses and its standing as one of the best places to live in the U.S. Overview New York City is home to more than 8.3 million people. It is the largest city in the U.S., more than twice the size of Los Angeles, the second-largest city in the nation, and close to three times the size of Chicago, the third most populous. If New York City were a state, it would rank as the 12th largest in the U.S. with respect to population size. This would place it behind New Jersey with its 8.7 million residents and ahead of Virginia with its 7.9 million residents. New York City’s tax structure also resembles that of a state but with two critical differences. The first is that states are sovereign with respect to taxation; cities are creatures of the state. The second is that the taxes paid by NYC residents and businesses to both the City and State are much higher than those in other localities in the nation. Cities as Creatures of the State Under the U.S. Constitution, states retain the power to impose any tax that does not violate the U.S. Constitution or their own state constitutions. This means that states are generally free to decide how, what and whom to tax. The U.S. Constitution, however, does not mention local governments. Instead, each state decides what types of local governments to allow and what powers they may exercise. Cities are thus creatures of the state unless specific state action alters this relationship by permitting home-rule for local governments. The creature of the state principle is based on what is known as Dillon’s Rule, which dictates that municipalities only have the powers explicitly given to them by the state. Established in 1872 in a treatise on municipal corporations authored by Iowa Supreme Court Judge John F. Dillon, the creature of the state principle remains the legal doctrine governing current city-state relationships throughout the U.S., as modified by individual state laws permitting home rule. Most states, including New York, have modified Dillon’s Rule by providing home-rule powers to certain or all local governments, either under their constitutions or by statute. Home rule municipalities are taken out from under Dillon’s Rule and permitted to operate under their own charter, which establishes local governance and administrative practices. In general, however, home rule authority does not extend to autonomy over the power to tax, with few exceptions. The only tax-related action that NYC, a home rule jurisdiction, is permitted to take without NYS legislative and gubernatorial approval is the setting of its annual Real Property Tax rates and even this action is taken within NYS constitutional and statutory constraints. All other actions related ii to the NYC Real Property Tax and to any other tax are subject to initiation or approval by the NYS Governor and Legislature. NYC and NYS Taxes: A Double Burden The second factor that differentiates New York City from the 50 states is that City residents and businesses pay high taxes to both NYC and NYS, sometimes on the same base. Figure 1 shows that of the 19 taxes imposed by the City and included in its General Fund revenues, 11 are also levied by the State.2 NYS imposes more than 20 taxes that impact City residents and/or businesses, including the Estate and Gift Tax and the Insurance Tax uploads/Finance/ city-guide-web.pdf