Let 421-a Die! -- Part II

Here in New York, the epicenter of serious progressivism, after a century or so of government-supported housing programs (rent control, public housing, and "affordable" housing initiatives of every stripe) we still seem to have the most expensive housing in the country.  The most recent concept for getting so-called "affordable" housing built is to offer developers tax incentives in the form of reduced real estate taxes on their development, in return for construction of the units.  The particular program goes by the name "421-a," after a section number of the applicable statute.  Somehow, the right to hand out the tax abatements belongs to the State of New York, even though the lost real estate taxes are a cost to the City of New York.  The idea that such a tax incentive program could make the people better off is highly analogous to the idea that you can raise yourself up off the ground if only you pull hard enough on your bootstraps.  But, of course, the difference is that the right tax incentive program can conceal vast opportunities for graft.

This 421-a program has been around for well over 40 years, since the early 70s.  It has been designed to expire regularly -- resulting in a perfect opportunity every few years for the pols to hit up the developers for a new round of contributions to keep the gravy train running.  Remarkably, late last year, the program actually did expire without being renewed.  Then it got an interim extension until June, but again was not renewed.  It has now been out of business for about four months.

Back in June, when the program had just expired without any immediate prospect of renewal, I had a post strongly advocating that this was a perfect opportunity to let this corrupt program expire.  My back-of-the-envelope calculations suggested that this program cost a ridiculous $1 million or so for each so-called "affordable" housing unit created.  My post in addition pointed out that New York's Community Service Society had also done a study of how much 421-a cost the taxpayers per affordable housing unit created, and they also came up with a figure of around $1 million per apartment.  With average per unit housing costs in this country running well less than one-third of that, there is no way that this program can be justified.

But of course, this is New York; so the latest news is that 421-a is back!  The New York Times gives a rundown in Thursday's edition, headlined "Cuomo Strikes Deal to Revive Affordable Housing Program."   A fair summary is that the reason for the stall has been that a new special interest group has wanted to get in on the graft, and was in a position to block any deal until it got its payoff.  The new graft recipient is New York's construction unions.

The Times describes a supposed negotiation that has been taking place as to the renewal of the program between and among Governor Cuomo, representatives of the developers, and the unions:

Gov. Andrew M. Cuomo has forged a deal with developers and union construction officials to revive a program designed to create apartments for poor and working-class New Yorkers. . . .  Details of the new deal were hashed out by state officials; members of the Real Estate Board of New York, the industry’s powerful lobbying arm; and union officials. 

But wait -- in this "deal" the developers and unions are to get handouts in the form of abatements of New York City real estate taxes for the developers and minimum wage levels for the unions.  Those on the paying end of the deal are the rest of the New York City real estate taxpayers who don't get any abatements.  Who represented them in the negotiations?  You guessed it -- nobody.  So in effect this is three hangers-on dividing up a pile of someone else's money.  

And what is the "deal" that has been "negotiated"?  In summary, developers get greatly increased property tax abatements over previous levels, and the unions get an agreement from developers that there will be minimum wages on these construction sites of $60 per hour for large projects in Manhattan, and $45 per hour for projects in Brooklyn and Queens within a mile of the waterfront:  

Under the new deal, builders would get the special tax benefits for a longer period — a 100 percent tax abatement for 35 years. . . .   The deal sets a pay schedule for developers who get the tax breaks in prime areas. In Manhattan below 96th Street, they would have to pay an average $60 an hour in wages and benefits for workers on buildings of 300 or more units.  On the fast-growing waterfront in Brooklyn and Queens, the average would have to be $45 an hour on buildings of 300 or more units.

The newly-proposed 35 year tax abatement will be up from a range of about 15-20 years under the prior version of the program.  In short, they are proposing to roughly double the taxpayer cost per subsidized "affordable" apartment.  If the old cost was around $1 million per apartment, the new cost will be more like $2 million per apartment.  Some of the extra money will end up in the pockets of developers, but much will be siphoned off by the construction unions, who will now be guaranteed wages of up to $60 per hour.

This so-called "deal" is now subject to approval by the state legislature (although, remarkably, not by any City body).  We will see who among New York progressives is capable of doing the simple math that establishes that this program is a gigantic waste of taxpayer funds.  In the past, even the usually-sensible Howard Husock of the Manhattan Institute has been lured into supporting 421-a (albeit with modifications, and not the newly-proposed super-ripoff that has just come out).

As an interesting aside, a very unexpected person came out last week against 421-a renewal.  It was Eliot Spitzer!  Spitzer spoke on Tuesday, November 8, at the annual lunch of the Young Men's and Women's Real Estate Association.  As reported in The Real Deal, he spoke out strongly against renewal of the program:

“I’m here to tell you that 421a doesn’t work,” Spitzer  told the members of the Young Men’s and Women’s Real Estate Association at their monthly luncheon. “421a, in its current incarnation, is not going to solve the problem.”  Spitzer said his real estate firm did a back-of-the-envelope calculation on the program, and found it costs taxpayers $375,000 for each affordable unit. When the city’s mandatory inclusionary housing (MIH) program is factored in, he said, the number jumps to more than $1 million.

Looks like he came up with about the same figure per apartment as yours truly and the Community Service Society.  Except that two days later, our genius governor gave away the store and upped the cost to more like $2 million per apartment.

And now that Hillary has failed to win the presidency, they are saying that Cuomo is one of the leading candidates for the Democratic presidential nomination in 2020.  Lord help us. 

UPDATE, November 14:  To prove that the progressive tooth-fairy-economics bug sooner or later infects nearly everyone in New York, the normally sensible New York Post this morning has an editorial endorsing Governor Cuomo's new 421-a deal.  Headline is "Hope for City Housing":

The city needs this done, and Cuomo has a duty to finish cleaning up the mess. . . .  Inaction is unacceptable. . . .  

The Post praises Cuomo for negotiating the unions down from their prior even-more-outrageous average wage demands (the number $65 per hour had been reported).  OK, but the idea that nobody will ever build less-than-luxury housing in New York City without subsidies is just false.  The problem is that, once you have subsidies, they get baked into the price of land, and then nobody can build without subsidies.  Let the subsidies go away for a couple of years, and the price of land will decline, and construction will resume.  The Post should have listened to their own columnist Kyle Smith, who wrote an op-ed on this subject back in August, headlined "Why Cuomo wants you to pay unions to build luxury housing":

New York state taxpayers have just become an unlikely participant in Gov. Cuomo’s gonzo scheme to solve a dispute between billionaire real-estate developers on the one hand and $65-an-hour construction workers on the other. The two sides couldn’t come to an agreement, so Cuomo is making you fork over the difference.  That’s right: If Cuomo’s harebrained scheme passes, you’ll be paying to help construct mostly luxury New York City apartments for other, rich people to live in.  I use colorful language because New York state, like every other government on earth, goes out of its way to use boring bureaucratic terminology to lull you to sleep so it can cheat you.