Governor Cuomo’s flawed 421-a proposal

The 421-a tax exemption program for real estate developers is an extraordinarily wasteful giveaway, and the latest proposal to revive it, announced by Gov. Andrew Cuomo earlier this month, makes it even worse.

In recent years, 421-a has cost New York City more than a billion dollars a year in foregone tax revenue ($1.2 billion in 2016), while producing about $100 million a year worth of affordable housing.

Cuomo’s proposal would cost the city $2.4 billion a year in revenue, without bringing about a remotely comparable increase in affordability benefit.

This enormous new tax expenditure would be wasteful in any context, but it is especially ill advised at a time when vital federal subsidy streams to the city are in jeopardy in a Trump presidency. For comparison, the New York City Housing Authority currently receives $910 million a year in federal operating subsidies for public housing and $930 million a year for Section 8 vouchers. 

Last year, the city negotiated a proposal to update 421-a with the Real Estate Board of New York. This proposal called for a large increase in the value of the tax exemption along with smaller increases in the amount of affordability required. A version of the proposal passed the state Legislature and was signed into law by Cuomo, but the new law also required REBNY and the city’s building trades unions to sign a memorandum of understanding creating wage requirements before the new provisions could go into effect. This has not happened, and 421-a is now dormant.

On Nov. 10, Cuomo announced that REBNY and the building trades had finally come to an agreement – but only if the value of the exemption is increased even further. The governor has asked the state Legislature to call a special session so it can rush the enhanced exemption into law.

The 2015 increase in the value of the 421-a tax exemption was accomplished by increasing the total length of the exemptions allowed under the law. Previously, exemptions lasted from 10 to 25 years, depending on the location of the buildings and the amount of affordable housing included. The 15- and 20-year exemptions were most commonly used. The law expanded all exemptions to 35 years, roughly doubling their cost to the city.

The proposed new 421-a increase works a different way. Instead of phasing out the tax exemptions over time, it would allow a 100 percent exemption for the full 35 years in areas subject to the wage rules - certain 421-a buildings in Manhattan would pay construction workers an average hourly wage of $60, including wages and benefits, while those in Brooklyn and Queens would pay $45 - leading to a roughly 25 percent boost in the cost to the city.

We have estimated these increased costs by considering the buildings that are receiving the 421-a exemption now and projecting the benefits that they would receive under the current 2015 rules versus the proposed new rules. We assume that only 25 percent of the buildings receiving 10-year exemptions under current laws would have chosen to use 421-a under the new rules, but that all of the buildings with longer exemptions would have used one of the new 421-a exemption options, within or outside the wage areas. We do not consider the likely fact that more buildings would opt for 421-a due to the increased benefit; thus, this is a somewhat conservative estimate. We also do not consider the effect of inflation and other future changes in the housing market on the value of a 421-a exemption.

Using this approach, we found that the $1.2 billion in 421-a tax expenditure in 2016 would become a $2 billion tax expenditure under the 2015 rules and $2.4 billion under the new proposed rules.

New York can’t afford to spend billions of dollars a year on wasteful programs like 421-a. In a city where more than half of tenants pay unaffordable rents, the need for real affordable housing programs is far too great. And we certainly can’t assume that in 2051, we’ll be able to afford to still be spending the equivalent of billions of dollars a year to pay for the wasteful housing policies of 2016.

Tom Waters is a housing analyst for the Community Service Society.