What brings excitement to the air in your home town? Perhaps some annual festival, or the first flowers of spring, or maybe the arrival of the Christmas season? Well, here in New York it’s a little different. We feel excitement in the air when our politicians finally figure out how to stick it to the evil rich people who are so offending us by coming here and spending their money. And thus right now there’s some real excitement in the air, because we are about to teach those sinister people the lesson of a lifetime in the form of a brand new “pied-à-terre” tax.
Just a couple of months ago — January 23 to be precise — things were different. Then, it wasn’t excitement that was in the air, but rather the seething resentment felt by all right-thinking highly-successful Manhattanites when they find out that there is somebody out there who is even more successful and is going around showing off the wealth. January 23 was the day that the Wall Street Journal reported that a hedge fund guy from Chicago by the name of Ken Griffin had just closed on the purchase of the most expensive home ever bought in the United States. The home in question is a multi-level penthouse apartment at a new tower just being completed on Central Park South, lately known as “billionaires’ row.” The Journal reported the closing price as $238 million. Worse still, Griffin doesn’t even live principally in New York; and even on top of that, he’s been going around snapping up hugely expensive properties in one city after another:
Earlier this year, Mr. Griffin bought several floors of a Chicago condominium for $58.75 million, setting a record for the most expensive home ever bought in that city. He snapped up a penthouse in Miami Beach’s Faena House in 2015 for $60 million, setting the record for a Miami condo. Since 2012, Mr. Griffin has spent close to $250 million assembling land to build a mansion in Palm Beach, Fla., according to public records. And earlier this month, he acquired a London home for about $122 million in one of the priciest deals ever done in that city, according to people familiar with that deal.
Really, can we stand for this? Here’s the comment from City Council Speaker (and my own City Councilperson) Corey Johnson (quoted in Thursday’s New York Times):
“When over six million New Yorkers are dealing with a crumbling and dysfunctional subway and the crisis in public housing, to see this opulence in the sky by someone who doesn’t even live here, struck a chord,” the City Council speaker, Corey Johnson, said.
The answer? A “pied-à-terre” tax, which is to say a special extra tax on highly-valued pieces of real estate owned by people who don’t live here most of the time. What a perfect idea — we’ll raise big bucks by socking it to a handful of evil billionaires who can’t even vote here. Who could be against that? The Times provides a small amount of relevant data:
The financial impact could be significant. New York City has about 75,000 pieds-à-terre, according to a city estimate in 2017. Of those, about 5,400 residences were sold for $5 million or more, the threshold where the proposed pied-à-terre tax would begin to kick in.
Does this have the potential to raise significant money, given that only about 5400 people are expected to pay the tax? A Times article from February 9 provides some details of the proposed legislation and an estimate of the revenue potential:
[The proposed pied-à-terre tax legislation] would create a sliding tax surcharge: For properties valued between $5 million and $6 million, a 0.5 percent surcharge would be added on the value over $5 million. Fees and a higher surcharge would apply to homes that sold for more than $6 million, topping out at a $370,000 fee and a 4 percent surcharge for homes valued at more than $25 million. The office of the city comptroller, Scott M. Stringer, estimated that a pied-à-terre tax would bring in a minimum of $650 million annually if enacted today.
$650 million annually — that would be around $120,000 each year from each of those 5400 high-end “pieds-à-terre,” on top of pre-existing property taxes of course. But naturally most of the money is to come from a tiny number of people at the very top. By the formula in the February 9 Times piece, Mr. Griffin’s apartment by itself would get socked with an annual “fee” plus “surcharge” of just under $10 million.
Before we start giddily counting the money, perhaps we should pause for a moment to consider whether the revenue potential is real, let alone whether such a hefty tax directed specifically at a very few disfavored people might have some collateral consequences.
In the past few years, Manhattan has seen a spurt of construction of super-luxury condo towers seemingly aimed at the “pied-à-terre” market. But the market was different when the construction started a few years ago, and Mr. Griffin probably entered into the contract for his place one to two years ago. How is the market today? Let’s try to get some more recent reports. This is from CNBC’s “Inside Wealth,” October 2018:
What started as a blip is now a year-long slump for Manhattan real estate. And it shows no signs of turning around. Total real estate sales in Manhattan fell 11 percent in the third quarter compared with a year ago, marking the fourth straight quarter of double-digit declines, according to new data from Douglas Elliman Real Estate and Miller Samuel Real Estate Appraisers & Consultants. It was also the first time since the financial crisis that resales of existing apartments fell for four straight quarters. Prices fell, inventory jumped and discounts were higher and more common. Real estate brokers say the Manhattan real estate market is suffering from an oversupply of luxury units, a decline in foreign buyers and changes in the tax law that make it more expensive to own property in high-tax states.
Or, from the Financial Times in the same month:
Unsold Luxury Property Piles up in Manhattan. The number of new homes sold in Manhattan in the year to September is down 39 per cent on the same period in 2017, according to new data from real estate firm Douglas Elliman. Median sale prices fell 9 per cent over the period. . . . The slowdown has been most pronounced among the priciest homes, many of which are to be found in the slew of new super-slim residential skyscrapers that have sprung up along Billionaires’ Row.
They’re already running out of buyers for the $10+ million apartments, and now the politicians are planning to add from several hundred thousand to several million dollars per year of additional taxes onto each of those apartments. What could go wrong?
For an analogy, consider the federal luxury tax on yachts and private planes, enacted in a spasm of jealousy against the rich back in 1990, and taking effect in 1991. The tax was 10% on the price of a yacht in excess of the first $100,000, or a plane in excess of $250,000. How did it work out? James Glassman had a write-up in the Washington Post in July 1993. By that date the tax was already in the process of repeal, after being in effect for only two years.. Excerpts:
Back in the summer of 1990, when the nation was still governed by the man from Kennebunkport, the budgeteers figured that the sort of people who buy yachts, private planes and jewelry and furs over $10,000 could afford to pay a little extra. What went wrong with the luxury tax was that, in trying to go after the rich guys' toys, Congress put the toymakers out of business. . . . [A spokesperson for the National Marine Manufacturers Association said,] "The whole industry is off 40 percent, but the big-boat segment is off 80 percent." He estimates that about half the sales losses can be attributed to the recession and half to the tax, and that 25,000 to 30,000 "on-line blue-collar manufacturing jobs" have been lost out of a total of about 50,000 in the last three years. . . . Ken Kubic, legislative chairman of the Rhode Island Marine Trade Association, says that "half of the boating businesses [in Rhode Island] do not exist anymore" and that 12,000 jobs have been lost, "directly or indirectly, because of the boating tax."
So far in New York, nobody seems to have given a moment’s thought to the jobs of the people who are building and selling these apartments. It’s an industry that could disappear more or less overnight, as the jet-setting buyers figure out that a place in Los Angeles or Miami or Toronto would be just as good.
But in the excitement of the moment, don’t be surprised if this tax sails through the New York legislature. I would bet on revenue of maybe a third to a half of Stringer’s initial projection, and declining from there as people figure out how to avoid this eminently avoidable levy.