As the first shots of the coronavirus vaccine were being administered around the US, experts cautioned the public to remain vigilant about wearing masks and social distancing for the near future, maybe even all of 2021. Although the end of next year seems to be far away, the next fight over coronavirus is already beginning to be waged: how to pay for all the states and cities had to do as well as make up for the lost revenue from lost business and residents who moved away from large cities.
NYC and especially Manhattan is slowly crawling back. San Francisco, according to those I know on the ground there, still remains a ghost town. However, I am an optimist when it comes to people’s desire to live in cities, especially dynamic ones like these, even if the makeup of these places will change. We may end up seeing less of a footprint of large corporations in the city centers and more residents. This is a good thing. It will add new character and dynamism to areas like the financial district and midtown in NYC that have long been dominated by commerce during the day and dead at night.
My concerns are not about the city centers in the long run but more about the politicians and their logic when it comes to alleviating the poverty the pandemic has produced and how to fill the budget holes that it has created in the coming years. Given the current political climate, an easy target will be the rich. Politicians, especially those in New York, will find that the rich are an easy target to pick on to please their voters.
The policies they create though, may end up doing more harm than good, and in the end, it may sadly be the rich who actually benefit from them.
Taxes
One of the ways they will attempt to do this is through higher taxes on the rich. They may do this through income taxes or they may try to tax certain behavior. For example, a recent proposal has been floated for a second home or a pied a terre tax in New York City. The intention is to punish those wealthy folks who benefitted from the New York economy and having a New York job, while keeping an empty residence there and living somewhere else like the Hamptons. It’s an easy sell on the surface: our cities are empty because these wealthy folks have empty second homes and live far away from the reality that those of lesser means have at our disposal.
The reality is that this is merely to score political points and will barely affect anyone in the city. The authors of the bill acknowledge it will raise about $390 million which is around 0.4% of the city’s annual fiscal budget. Neither will it stop people from maintaining a second residency in New York. The tax would be only on homes valued at over $5 million. In addition to that, many of the people having a second residence in New York are being subsidized by the same politicians that want to tax those with empty homes.
I should know, I live in subsidized housing. I regularly have neighbors who leave to take jobs elsewhere for years at a time and leave their homes empty here in NYC. I have a neighbor that has been in Italy for years and started a family there, yet still has an unused apartment here. How does this make any sense in a place that has had a “housing emergency” for decades with people struggling to find an affordable place to live?
NYC is one of the few places that has a city tax in addition to a state tax. It’s one of the reasons that NYC residents are some of the highest taxed people in the US. Yet the city turns right around and throws housing subsidies that tend to benefit primarily the wealthy. How can this be? The people in public housing and in the Bronx are not rich. In what world does the government subsidize the rich by keeping greedy landlords from raising the rent on poor people?
Rent Control
That at least is the intent, but the reality is quite different once rent control is implemented. To put it again in terms of taxes, the largest source of revenue for the city is not income taxes but property taxes. Then comes Federal and State aid and then comes personal income taxes. These are easy figures to find. What these figures miss however, are the billions of dollars of taxes that the city government willfully gives up in order to have rent control in place.
You may think that those buildings with rent control are concentrated in poor areas where greedy landlords come in and want to buy up the properties and raise rents, the reality is quite different. In an analysis by the Wall Street Journal a few years ago, it was found that older and wealthier residents disproportionately benefit from rent control. As reason.com put it:
the price of a median rent-stabilized unit in wealthier Manhattan was $1,400—about $1,600 less than median market-rate rents. In the less affluent boroughs of Queens, Brooklyn, and the Bronx, the difference in price between median rent-stabilized apartments and market-rate units ranged between $130 to $250.
The same article also found an average person in the top income quartile paid $1,650 for a rent-stabilized apartment; some 39 percent less than what top income quartile renters were paying for market-rate apartments. Occupants of rent-stabilized apartments in the lowest income quartiles received a 15 percent discount on rent compared to their peers in market-rate units.
Even if the wealthy are a minority of rent control tenants, we can see from the figures that one wealthy rent control tenant in Manhattan can earns the subsidy of between 16 and 6.4 tenants in the outer boros. City taxes kick in just under $20,000 which means that not just the rich but the poor actually pay for these subsidies through a city income tax.
Who Benefits
There are some poorer people who benefit from rent control though and this is what muddies the water for most people. The typical story of rent control appeals to our emotions and is easy to understand: a little old lady on fixed income is being forced out of her apartment by someone that wants to renovate and raise rents. Public interest groups appeal to the politicians who swoop in and save the day by implementing rent control.
This kills any prospect of building upgrades because the landlord cannot raise the rent to pay for them. The only exception for this may be for those rich folks in Manhattan that save so much on rent, they can use their extra income to upgrade their own apartments or band together and do it for the building. Again, here the rich win and the poor lose.
It also creates the incentive for that little old lady to stay in the house for as long as she possibly can. If she is lucky enough to land this apartment at a young age and it has enough room for a family, it creates an incentive to effectively stay in that dwelling for life.
For all the talk of greedy landlords or landlords that run slum housing because they don’t invest in their properties, it turns out that those same politicians are the biggest slum lords in NYC. The largest landlord in the city is not Donald Trump or some private company but the NYC Housing Authority or NYCHA which runs public housing in the city, popularly known as the projects.
NYCHA acts according to the incentives which the city created for itself: to not invest in buildings and leave them dilapidated. The rent it receives doesn’t cover the costs of maintenance so it doesn’t invest in its buildings. Is it any wonder that tenants are suing due to substandard conditions and the city was forced by the Federal Government to divert funds to NYCHA for maintenance?
Even with dilapidated housing, the residents act just like we should expect them to act given the incentives: they remain as long as they can and don’t increase their income so that they can stay as long as they can given the prospect of finding another home at this price is near impossible. This keeps some housing in the hands of people that don’t need it as much anymore, think of an old lady in the projects with a 3 bedroom apartment and lives alone. Maybe even that same one which 40 years ago was single, had a low income and 3 kids which I alluded to in my previous example. With all the housing being tightly held onto by those who managed to get into NYCHA or rent controlled homes and no incentive to build for tenants that will never pay for the costs, the housing stock doesn’t meet the demand.
The winners are those first able to secure housing when the new public buildings are created or who first secured rent control. The losers are their children, who now can’t find affordable places to live. Back in the 70’s, it was relatively easy to find a home no matter what your income. It may not have been a great place to live but you could still find a home. Now it is nearly impossible for a working class person to find a home without being under rent control or a government program if they can even get that, and most don’t.
Is it any wonder that that elderly population of NYCHA is double the city’s population at 40% of residents? Even the city’s elderly population is 33% higher than the national figure. Keeping your income low for life will also hurt you when it comes time to collect social security in the form of lower benefits, this just further increases the dependence on these systems. The system I described also creates an incentive for the adult children and extended family to move in with parents who have secured homes with NYCHA and pay them rent under the table. In this way, the system may look like it’s housing the poor on paper but may actually be housing people who otherwise would not qualify for public housing. It’s the poor that aren’t lucky enough to secure these places that lose, like those that have been on the waiting list 10 years or give up altogether.
A Base for Comparison
In 2020, The median sales price of a home in NYC is $665,000. At the same time, another large city has little to no restrictions on its housing. That city is Houston Texas and it’s median home price is $249,000. That is just based on home prices, you also get way more for your buck in Houston. The median home size in NYC is 1,124 square feet while that of Houston is 1,713 square feet. This means that a home purchased in Houston is about 75% cheaper than a home purchased in NYC on a square foot basis.
NYC-like taxes and rent control exist in some of the most expensive cities: LA, San Jose and San Francisco. Post pandemic, having a good job no longer means you have to tie yourself to an expensive coastal city. It’s no surprise then that U-haul rates have exploded for folks clamoring to move to cities in Texas that have mostly free market housing policies.
Despite this, our state and local politicians think that more taxes and more affordable housing are the answer. Their sincere yet misguided attempts at alleviating the situation will only make it worse. A boon for Texas and a loss for New York and California due to self inflicted wounds.
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