A large portion of real estate development in New York City is dependent on the controversial 421-a tax exemption, which expired in June 2015 and is reportedly on the cusp of being revived by the state Legislature. The 421-a exemption is the fulcrum of a pitched debate between the development community, building trades unions, affordable housing advocates and city and state government officials. These interested parties are at odds over the cost of the 421-a program in lost tax revenue, how much affordable housing the exemption creates, and the wage requirements of the permanent and temporary jobs created by the program, among other arguments.

Rather than re-hash the debate point-by-point, we reached out to two housing policy experts, Tom Waters of the Community Service Society and Howard Husock of the Manhattan Institute, to debate the cost effectiveness of the 421-a program and how the program can be tweaked for greater development flexibility, respectively.

421-a doesn’t pass cost-benefit test

By Tom Waters

The Community Service Society and other advocates have pointed out that the 421-a tax exemption costs New York City an enormous amount of money while producing very little affordable housing. Any serious defense of reviving 421-a as policy should address this fundamental issue of cost versus benefit.

But instead, advocates for the real estate industry like to change the subject. For example, their talking points emphasize the importance of affordable housing, without acknowledging that costs matter. Others blur 421-a’s role in creating affordable housing by taking credit for apartments that were primarily produced by other, more efficient subsidies. And yet others take advantage of the 421-a structure as a tax expenditure to suggest that its costs don’t really count. These are obfuscations. A better understanding of how 421-a works would make it clear just how costly and wasteful it is.

For starters, the $1.2 billion 421-a tax exemption has a very real impact on the city’s budget. In a few 421-a buildings in neighborhoods like Brooklyn’s Crown Heights, the benefit is going to buildings that would otherwise not be built. In these cases, 421-a is not reducing the city’s revenue, although it is still increasing the demand for services. In other cases, buildings that receive 421-a are genuine affordable housing developments that would have been given another tax exemption if they didn’t receive 421-a. Here, too, the program is not really reducing revenues.

But most of the 421-a tax exemption is not going to either of those types of building. It is going to buildings that would have been built anyway and would not be otherwise eligible for tax exemptions, thus reducing revenue by hundreds of millions a year while producing very little affordability in return. This is why more than half of 421-a exemptions are in Manhattan.

The 421-a tax exemption costs $1.2 billion annually right now. We estimated that Gov. Andrew Cuomo’s latest suggestion to resolve the impasse over labor standards and revive 421-a would double that to $2.4 billion. We arrive at this figure by considering a number of factors: the longer term proposed for the tax exemption, 35 years instead of 10-25 years; some buildings will no longer see their tax benefits phase out; and the possibility that some buildings in Manhattan below Harlem will be marketed as condos rather than as rentals with 421a under the new rules. Either the city or state could certainly produce a much more refined estimate by using internal data. But until one of those governments decides to share an estimate with the public, we believe our calculations, simple as they are, provide the best substitute.

Despite the massive amounts of money involved, 421-a has never been a core component of the city’s affordable housing system. Most new affordable housing in New York City is the result of much better targeted government subsidies, such as the Low-Income Housing Tax Credit from the U.S. Department of Housing and Urban Development. Tax credit developments generally receive property tax exemptions, in addition to their other subsidies, because it doesn’t really make sense to give a building scarce affordable housing resources and then immediately take it back in the form of property tax. There are several different property tax exemptions that can serve this purpose, including 421-a. Allowing 421-a to lapse would not prevent this affordable housing from being built because the city could switch to one of the other available exemptions. It does not make sense to give credit for affordable housing to 421-a.

Mayor Bill de Blasio’s changes to 421-a don’t represent a real departure from past practice. The version of 421-a that passed in 2015 – but never took effect because of the requirement for an agreement on labor standards – contained two de Blasio-proposed improvements on the affordability side. It shifted the income targeting for some apartments from households earning around $48,000 a year down to those earning $32,000 a year in one scenario – and the addition of some apartments targeted at around $56,000 a year in another scenario.

These modest improvements are not without merit, but the only way to portray the new 421-a as a game-changer is to assign an enormous importance to a new provision for apartments targeting households with incomes around $105,000 a year, and rents around $2,600 a month. But that income bracket is not where the city’s most urgent affordable housing needs lie, and the provision in the new 421-a calling for such apartments do not represent a significant improvement in the program.

It should go without saying that 421-a is not really necessary to build market-rate housing in New York City. New high-rise housing in many areas of Manhattan, Brooklyn and Queens is extremely profitable – more than enough to be able to pay property taxes. Because condos receive very favorable tax treatment, most new buildings would be condos without 421-a. But the proper solution to that would be to bring the tax rates for condos and rentals in line with each other, not compensate one bad tax policy with another. In any case, converting $1 million condos into $5,000-a-month rentals has exactly zero impact on the city’s real housing problems.

At the Community Service Society, we advocate for many housing policies that can help resolve the city’s chronic housing shortage and support strong, mixed-income neighborhoods. For example, see our 2015 report, “Reinventing the Mitchell-Lama Housing Program” or our suggestion for the creation of an allocated tax credit, similar to the federal Low-Income Housing Tax Credit, as a substitute for 421-a in our 2015 report, “New York’s Unaffordable Housing Program: Time to End 421-a.” Either of these approaches would produce more affordable housing for less money than 421-a.

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

How to make sure the 421-a deal really works

By Howard Husock and Alex Armlovich

Those concerned about the construction of new residential housing in New York should hope Gov. Andrew Cuomo makes good on his promise to resolve the long-running dispute about the new housing tax abatement known by its state law designation, 421a.But those concerned about creating the most new housing per dollar of the tax exemption should go further than what the governor has proposed – and look back to a previous version of the law.

Earlier versions of the law allowed developers in Manhattan to build required below-market units in the outer boroughs, where land and construction are much cheaper. Lower costs meant shorter tax exemptions were still attractive to participants. The old off-site “certificate” program promised far less expensive 10-year partial tax exemptions. As we detailed in a 2015 report for the Manhattan Institute, the shorter off-site “certificate” exemptions – with caps on the benefit for luxury condos – would have given the most bang for the buck among the realistic reform options.

The proposal apparently endorsed by Cuomo has some serious drawbacks that lead to two key problems: higher-than-necessary costs for each new on-site apartment and fewer affordable units in exchange for a substantially more generous tax exemption compared to a previous version of the law. High on-site unit costs are exacerbated with this version’s extended 35-year exemption, ostensibly to fund new union wage requirements for large projects.

The broad reforms preferable to New York’s current housing and tax policy are too numerous to discuss. Even if the governor’s costly union bargain reflects the current political constraints on reform, there is still at least one small and realistic tweak worth making: copy the off-site affordable housing option from New York City’s Mandatory Inclusionary Housing law.

The city’s MIH law is intended to coordinate with the state’s 421-a law to provide 25-30 percent of rezoned new buildings with below-market units, with each program providing a similar menu of three compliance options for rental housing. MIH allows taller buildings to fit the extra affordable units without eliminating market-rate units, while 421-a helps fund the cross-subsidy.

But unlike the current draft of 421-a, MIH allows those affordable units to be located within one mile or within the community district in exchange for a 5 percentage point increase in affordable housing units. That’s not as flexible as the old 421-a off-site negotiable certificates, which had no distance restrictions, but even this watered-down off-site option can provide more units for the money. Developers can take advantage of slightly cheaper land and avoid costly fights over extra bulk and height inside historic districts.

Getting from 25 percent affordable to 30 percent affordable, or from 30 percent to 35 percent, for the same money may seem like a small efficiency for the off-site option. But almost one-third of Manhattan is covered by historic districts, whose constituents fight any increased height and bulk. Contextual zoning districts can also present a challenge in squeezing the affordable space on-site. It’s crucial to keep in mind that community opposition is blocking several of Mayor Bill de Blasio’s proposed affordable housing developments. Without the off-site safety valve, such affordable development could continue to be stymied. Accordingly, Cuomo should add the “1-mile or same community district” off-site option to accommodate rental projects eligible for both programs.

Improving the coordination of 421-a with MIH’s moderate off-site option does not represent any platonic ideal of housing policy – it’s just a small tweak to the complicated mess we’re working with. We continue to urge permanent comprehensive tax reform, as opposed to these temporary extensions of tax exemptions necessary to relieve the disproportionate tax on “Class 2” rental buildings.

We also deplore the use of even more public funds to help unionized construction workers – even as many less well-off New Yorkers pay the bill. The pros and cons of 421-a as a supply-side stimulant can be debated, but at least there’s a clear public purpose at stake – more than can be said for the union giveaway. Cuomo’s deal may be politically irreversible at this point, so the least he can do is make this small improvement by adding off-site compliance.

Howard Husock is vice president for research and publications at the Manhattan Institute. Alex Armlovich is a fellow at the Manhattan Institute.