A s the state legislative session nears a close, now is the time for lawmakers to consider the renewal of key housing laws affecting the city. In addition to the perennial struggle over whether and how to continue rent stabilization, another law, newly controversial, has taken center stage.
The 421-a tax exemption statute, which has come to be a key incentive for developers to build lower-rent housing, has faced criticism for its high cost — $1.1 billion in foregone taxes this year — and the fact that some of its exemptions have been applied to developments such as One57, a multi-million dollar luxury tower.
Mayor de Blasio, bucking the demands of progressive advocates, is pushing to reform and extend the law — including new, lucrative 35-year tax exemptions — as a building block of his twin housing goals: on-site economic diversity and 80,000 new affordable units.
But at a time of budget stress that makes it difficult for the city even to hire new police officers, the mayor should consider pushing to bring back a former part of the 421-a law that would allow affordable housing to be built at far lower cost to the city in lost tax revenue.
How? By encouraging developers to create that affordable housing off-site in far less expensive neighborhoods, rather than insisting that much of it be put in otherwise market-rate developments in pricey neighborhoods in Manhattan and Brooklyn.
Between 1985 and 2008, the 421-a law gave developers, mainly in Manhattan, a much shorter tax exemption, lasting just 10 years, if they purchased their tax break from an affordable housing developer elsewhere, typically the Bronx, Brooklyn or Queens.
Through this program, some 7,700 affordable housing units were built. Of those built between 2002 and 2006, in modern and attractive buildings, the present value cost in city tax revenues ranged from $283,512 to $354,390 per affordable unit.
That may sound like a lot. But in a new study for the Manhattan Institute, my co-author Alex Armlovich and I find, based on public data, that a reformed 10-year “tax certificate” program would be far less costly than the program on which the mayor proposes to rely — up to 35-year tax exemptions for inclusionary, on-site development.
Specifically, we found that the cost in foregone taxes for each affordable unit in an inclusionary on-site development would cost the city three times more, on average, than an equal unit in an all-affordable development in a less expensive part of the city.
Critics might complain that spurring the production of much more affordable housing further away from the city’s core will perpetuate the tale of two cities de Blasio decries. I would counter that, to the contrary, it’s a way to keep New York City a place of genuine economic opportunity for large numbers of working-class families.
Put simply, the city could support three newly-built 1-bedroom units in Astoria, or four units in Bed-Stuy, for the price of one new affordable unit in core Manhattan.
Keep in mind the city is making sizable investments through reduced taxes. The size of the current average rental subsidy passed on to a household earning 60% of median income is $3,855 per month in core Manhattan, versus $1,655 per month in Astoria.
It’s important to acknowledge that the original off-site approach was not perfect. Market-rate developers paid less for tax-exemption certificates than the actual value of the tax reduction. But that problem can be addressed by putting a cap on the exemption (as Mayor Bloomberg did near the end of his administration), and by limiting the areas eligible to supply certificates to the 15 neighborhoods targeted by the mayor for redevelopment.
Market-rate developers are still likely to participate — and the city will lose much less in tax revenue it desperately needs for a wide variety of purposes, not just low-income housing in high-income buildings.
City officials say that, through the onsite inclusionary approach, they are addressing a “fair housing” problem — but most low-income New Yorkers will always live in lower-income neighborhoods. This mayor must not give up on the idea of making poor neighborhoods good neighborhoods; his approach perversely implies that only by living with the wealthy can the poor be assured of good services.
By adding back a reformed 421-a tax certificate option in HPD-targeted neighborhoods, the state can help the city realize the construction of more low-income housing for the same, or much less, cost, while funding the mayor’s 15 neighborhood redevelopment initiatives. It’s a better use of limited tax dollars that’s likely to produce more housing for those in need.
Husock is vice president for policy research at the Manhattan Institute. He is co-author with Alex Armlovich of the upcoming report, “Renewing 421a Affordable Housing Tax Abatement: Mend It Don’t End It .”