The economic crisis and accompanying credit crunch has left a crater in New York’s once-untouchable real estate market, leading values to plunge and bringing sales to a standstill.
Now the drop-off in property sales is increasingly taking its toll on already strained public-sector budgets, as the city, the state and the M.T.A. are seeing but a fraction of the combined $400 million–plus in various taxes related to real estate transactions that they saw coming on a monthly basis at the peak of the boom in early 2007.
The continued drought in transactions has led officials to repeatedly come back with reports of increasingly pessimistic forecasts and growing budget holes.
Such was the case Monday, when the M.T.A. announced a new budget shortfall of $621 million for the year, about half of which was caused by lower-than-expected real estate transfer taxes. And such could well be the case May 1, when Mayor Bloomberg is expected to unveil his budget for the next fiscal year, which begins in July.
Already, services and agencies have substantial cuts as the recession has brought multibillion-dollar budget gaps.
In the cocktail of taxes that provide revenue for the city and the M.T.A., in particular, the transfer tax is a particularly potent liquor. It is far more volatile than almost anything else in the mix, soaring when times are flush and properties are flipping rapidly, and plunging when times are tough.
Public coffers have witnessed this to dramatic effect in the past two years, when budgets swelled as property sales soared to record heights. Between January and February of 2007, the city, for instance, took in $604 million in mortgage recording taxes and real property transfer taxes, according to numbers from its Office of Management and Budget. This year, $141 million came in during the same time period, the latest data available shows.
And those with similar taxes saw similar effects. The M.T.A., between its four separate property-sale-related taxes it collects, reported $96.7 million between January and March, far less than the $220.2 million it was expecting and less than one-fourth of the $439 million the agency took in between January and March of 2007. The M.T.A. now estimates it will take in about $500 million in transfer taxes for 2009, around one-third of the $1.58 billion the agency took in during 2007.
Transaction taxes have long been a lucrative source of revenue, albeit a thorn in the side of buyers and sellers, as the city, state and M.T.A. tack on taxes when large properties are sold. A transfer tax of 3.025 percent that goes to all three government bodies applies to commercial property sales of more than $500,000, and then mortgages over $500,000 are taxed another 2.8 percent.
Of course, these transaction taxes are by no means the only taxes in the mix, as the city and state rely far more heavily on income and property taxes. The M.T.A., too, takes in most of its revenue from other sources (fares and tolls, mostly), though proportionally, it became far more addicted to the real estate transaction taxes during the real estate boom than did the city and the state. During 2007, for instance, the M.T.A. took in more than $1.5 billion in transaction taxes, about one-eighth of the agency’s expenses. Transaction taxes in the city, by comparison, represented about 5 percent of its budget during the fiscal year that ended in June 2007.
Higher-than-expected tax revenues even caused the agency to abandon plans for an across-the-board fare hike, as the governor at the time, Eliot Spitzer, pushed the M.T.A. to raise fares on just the multi-ride passes in late 2007.
Now the agency is reeling, threatening a major fare hike and service cuts as soon as June, as debt payments have soared while revenues have tanked, particularly those related to real estate. Without the service and fare changes, it would face a projected $1.8 billion operating deficit this year.
“They’re more reliant on the real estate transaction taxes,” James Parrott, an economist at the Fiscal Policy Institute, said of the M.T.A. “The volatility that you’re seeing is particularly pronounced on the M.T.A. budget.”
Historically, the amount of money coming in from the real estate transfer taxes is now back to relatively normal levels. The taxes grew with the real estate market in the late 1990s; starting around 2004, when properties started flipping for ever-higher amounts, revenue soared.
Just how long things will stay bad is anyone’s guess, but at least for the next few months, the world of property sales isn’t looking great. Brokerage Cushman & Wakefield reported earlier this month that at the end of the first quarter of 2008—itself a slow time in property sales—there were $3.5 billion worth of large sales pending that had yet to close (and thus yet to deliver their transaction taxes).
The number this year: $100 million.