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The Next Big Housing Fight: the 421a Tax Break
By: Barika Williams
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The de Blasio Administration and the City Council have already taken some bold steps to reform how public benefits are traded for affordable housing, including committing to mandatory inclusionary zoning. But now it’s time for the next big housing policy fight. The 421a Tax Exemption Program is set to expire next summer on June 16, 2015. This marks a crucial opportunity for affordable housing advocates, community-based groups, good-governance groups, and fiscal responsibility advocates, in partnership with City officials, to reevaluate this excessive and inefficient tax break, which currently gives away massive tax benefits to luxury residential developments while asking for little in return.
First, let’s call 421a what it really is – the Developer Tax Break.
The 421a Developer Tax Break is an overly generous, as-of-right tax abatement given by the State and the City which automatically exempts developers that build new multi-family residential buildings of four or more units from paying the vast majority of their taxes on the building for as long as 25 years. Estimates suggest that the 421a Developer Tax Break covers more than 153,000 units, and cost New Yorkers over $1.1 billion in deferred tax revenue in the 2013 tax year alone.
The Tax Break is both expensive, and inefficient. If it had not been given away, the $1.1 billion would have been general revenue to be spent on priorities set by the voters, such as schools, police, and affordable housing. And, on a per-unit basis, the amount of affordability and the number of affordable units created by the 421a Developer Tax Break gives the taxpayers a comparatively poor return for their money. Astonishingly, most City neighborhoods get the Developer Tax Break without having to construct a single unit of affordable housing.
The 421a Tax Abatement Program is a holdover from an earlier era, initiated in 1971 as an incentive for the private sector to build new residential apartments in a city where, arguably, the private market needed a boost. However, New York City’s development landscape in 2014 is far from what it was in 1971. In many neighborhoods new residential development is booming, and at a pace and price that is leaving most New Yorkers behind. We do not need to provide this subsidy to simply generate market-rate units.
In some areas that fall inside what is called the Geographic Exclusion Area (GEA), new developments have to produce a token amount of affordable housing in order to get the Developer Tax Break. In these neighborhoods, which include all of Manhattan and some parts of the outer boroughs, the developer is required to set aside 20% of the units as affordable housing for 35 years.
But even when required to build affordable housing, developers have used loopholes to make this already overly generous tax break a more lucrative deal. Developers almost always triple-drip into City resources and count the same 20% set aside of affordable housing units for three different programs, combining their 421a tax break with the density bonus from the City’s inclusionary zoning program, and with direct subsidies from the City, all for the same units.
Up until 2008, the 421a Developer Tax Break was even more absurd, giving the automatic tax break, with NO requirement of any affordable housing to neighborhoods like Brooklyn Heights and Greenwich Village. In that year, pushed by community advocates, even the very developer-friendly Bloomberg Administration saw the need to reform the program by expanding the GEA.
But with the program sunsetting in 2015, and with a de Blasio Administration and City Council that better understand how to balance the interests of the taxpayers and citizens with the interests of the real estate market, now is the time to fix the 421a Developer Tax Break once and for all.
We believe there are two basic options:
- Eliminate the 421a Developer Tax Break all together and dedicate the resulting increased City revenues to much needed public investments, including specifically to affordable housing production and preservation; or
- Revamp the 421a Developer Tax Break to ensure that any tax breaks given to developers are being leveraged for the maximum possible investment in units that meet the real affordability needs of the local neighborhood residents, are permanently affordable, and eliminate loopholes that allow developers to access multiple subsidy sources for the same affordable units.
It’s long past time to re-evaluate the 421a-Developer Tax Break. Let’s ensure that if the program continues to exist, it truly meets the needs of our city’s taxpayers and neighborhoods.
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[i] The Geographic Exclusion Area includes (1) all of Manhattan; (2) portions of Claremont and Crotona Park in the Bronx; (3) Downtown Brooklyn as well as portions of Red Hook, Sunset Park, East Williamsburg, Bushwick, East New York, Crown Heights, Weeksville, Highland Park, Ocean Hill, Prospect Heights, Carroll Gardens, Cobble Hill, Boerum Hall, and Park Slope; (4) parts of Long Island City, Astoria, Woodside, Jackson Heights, and the East River Waterfront in Queens; and (5) portions of St. George, Stapleton, New Brighton, and Port Richmond in Staten Island.