CSS Testimony- Oversight Hearing: A Review of the 421-a Tax Benefit Program

Testimony of Tom Waters Housing Policy Analyst, Community Service Society

Thank you for this opportunity to comment on the exemptions on New York City property tax under Section 421-a of the Real Property Tax Law. The Community Service Society is an independent nonprofit organization that addresses some of the most urgent problems facing low-wage workers and their communities here in New York City, including the effects of the city’s chronic housing shortage.

Tax exemptions under Section 421-a were created in 1971 to encourage development in New York City. At that time, private construction in the city had stalled and New York City appeared to be suffering in competition for investment with other cities. During the 1980s, the city’s development picture for New York City was improving, but instead of curtailing 421-a, lawmakers responded by adding provisions related to affordable housing. These provisions were then strengthened in 2006 and 2007. But these changes have not made 421-a into an affordable housing program worthy of the name. They have only provided a new justification for what is better seen as either an obsolete and unnecessary investment incentive or a plain and simple tax giveaway.

In 2014, the city devoted $1.1 billion in tax expenditures to 421-a, covering 163,000 apartments. This was the city’s largest single housing expense. It is more than the entire budget of the Department of Housing Preservation and Development. It is more than the combined rents of all tenants in the New York City Housing Authority and also more than NYCHA’s federal operating subsidy that supplements those rents. It is more than the total amount of federal Section 8 vouchers that NYCHA administers.

In fact, the 421-a tax expenditure represents enough money to create 100,000 new vouchers to provide affordable housing for the city’s poorest people – the ones with the greatest unmet need for affordable housing.
But instead we use this to provide a tax subsidy for 163,000 apartments, most of which are not affordable at all. Probably well under ten percent of those apartments – fewer than 16,000 – are affordable, mostly to households with incomes around $45,000 a year for a family of three. These are not the city’s poorest people, but a group just below the middle of the income distribution. This group does face significant housing stresses in New York City today, but the needs of poorer people are even greater. It also costs much less to make housing affordable to this group than to lower-income people.

The value of the affordability created through 421-a is around $6,000 per apartment, or $100 million all told, out of a tax expenditure of more than $1 billion. Thus only 10 percent of the foregone revenue benefits the tenants in affordable apartments.
421-a is a very inefficient program, even more so since a large share of the affordable apartments created under the program also receive other subsidies. Last year, the Real Affordability for All Campaign analyzed recent 421-a exemptions in an area of downtown Brooklyn. Apparently because most of the developments received their exemptions under the pre-2008 rules, most did not include an affordable component. Of those that did, RAFA found that all but one received other subsidies in addition to 421-a. And that one remaining development, with six affordable apartments, received an inclusionary zoning incentive. So it is not possible to say that the city is receiving anywhere near the full $100 million in affordability benefits in return for its $1 billion in tax expenditures.

We can expect that the modest reforms to 421-a enacted in 2006 and 2007 will gradually increase the program’s efficiency, because developments in more areas of the city will have to include affordable apartments to receive the subsidy. There could also be further reforms, and the city could also curtail the use of additional subsidies on top of 421-a benefits. But even if the affordable share of 421-a apartments doubles and additional subsidies are eliminated completely, $1 billion in tax expenditures will still produce only around $200 million in affordability – a 20 percent rate of efficiency. These reforms will never make 421-a into a genuinely efficient affordability program. Its origins as a pure development incentive will continue to haunt it.

The Community Service Society opposes the renewal of the 421-a tax exemption when it expires in June. If New York City is to use a tax benefit to promote affordable housing, it should scrap the as-of-right exemption approach embodied in 421-a and instead create a tax credit that would be competitively awarded to development projects in proportion with the affordability benefit created, similar to the federal Low Income Housing Tax Credit.

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