Waiting for tax relief

Advocates say reforming the commercial rent tax will make life easier for rent-strapped Manhattan retailers. Photo: David Wilson, via flickr
Commercial rent tax reform not included in city budget
By Michael Garofalo

An effort to include commercial rent tax reform in the $85 million budget deal agreed upon by the mayor and city council earlier this month fell short, but legislators remain hopeful that a measure aimed at easing the tax’s impact on Manhattan small businesses will succeed in the months to come.

“It’s unfair and antiquated and doing real harm to Manhattan businesses,” said City Council Member Dan Garodnick, one of the leaders of the latest effort to reduce the number of businesses that pay the commercial rent tax.

Under the commercial rent tax as it currently stands, certain business tenants in Manhattan south of 96th Street are taxed at an effective rate of 3.9 percent of base rent. Businesses paying less than $250,000 in rent annually are exempt from the tax. A bill introduced by Garodnick and fellow Council Member Helen Rosenthal last year would raise the exemption threshold from the current $250,000 to $500,000 in annualized rent, thus unburdening approximately 30 percent of businesses that currently pay the tax. A separate proposal introduced this year and also co-sponsored by Garodnick and Rosenthal would exempt certain grocery stores from the tax as well.

The commercial rent tax has long been a peculiar feature of the city’s tax code; Florida is the only state in which businesses are taxed similarly. When the tax was first imposed in 1963, it applied to commercial spaces citywide. But over the years, revisions to the code have gradually carved out exemptions for large swaths of the city. Since 1996, businesses located in the outer boroughs and Manhattan above 96th Street have not paid the tax. Since 2001, tenants with annualized rents below $250,000 have been exempt from the tax. In 2005, certain tenants in Lower Manhattan were exempted to provide relief to the area’s businesses in the aftermath of 9/11.

The legislators supporting the proposal say that the bill will benefit large numbers of Manhattan businesses without having a significant negative impact on the city’s coffers. According to the city’s Department of Finance, raising the exemption threshold to $500,000 would exempt about 3,300 commercial tenants — about 30 percent of the businesses that currently pay the tax — and would decrease revenue by $52 million in the next fiscal year, just six percent of the projected $848 million the tax will generate. According to the city’s Independent Budget Office, newly exempted businesses would save, on average, $13,250 annually.

Because the commercial rent tax is imposed as a percentage of overall rent, a small number of businesses with high rents contribute an outsized share of the total revenue brought in each year by the tax. In the 2016 tax year, 368 taxpayers, less than five percent of all businesses taxed, accounted for over half of the total revenue generated.

Garodnick said he would like to see the commercial rent tax repealed in full eventually, but that raising the exemption threshold is more practical way to address the matter in the immediate term, given the more significant budgetary impact a full repeal would entail.

A common complaint among small business owners is that the commercial rent tax is unfair because it layers one tax upon another. Because landlords consider their own property taxes in charging rents, they say, and annual tax increases are often passed on to tenants in the form of rent hikes, the commercial rent tax is at least in part a tax on the property tax. “Such pyramiding is considered undesirable from a best practice perspective,” the Independent Budget Office stated in its analysis of the tax presented to the city council earlier this year.

Robert S. Schwartz, the owner of Eneslow Pedorthic Enterprises, operates two retail shoe stores in Manhattan. Schwartz, who sits on the board of the Manhattan Chamber of Commerce, which supports the bill, said that rising costs have eroded profitability for small businesses. “Look at all the vacancies on Second Avenue and Park Avenue and Madison Avenue,” he said. “There’s a reason: it’s because the rents are out of control. The real estate tax and commercial rent tax make it ridiculous.”

The bill to increase the threshold enjoys broad support in the city council, with 39 of the legislators in the body having signed on as co-sponsors since it was first introduced in May 2015. The lone potential stumbling block to passage is Mayor Bill de Blasio, who has not publicly taken a position on the bill.

On May 22, a coalition of 27 local, state and federal elected officials sent a letter to the mayor urging him to support reform efforts. Among the officials who signed the letter were Garodnick, Council Members Helen Rosenthal, Ben Kallos, Mark Levine, and Margaret Chin, Manhattan Borough President Gale Brewer, and U.S. House representatives Carolyn Maloney and Jerrold Nadler.

In an email statement in response to a request to explain the mayor’s position on the council’s commercial rent tax reform proposal, mayoral spokeswoman Freddi Goldstein instead pointed to alternative measures taken up by city hall to aid small businesses, which haven’t included adjustments to the commercial rent tax. “We’re committed to helping small businesses thrive and continue to look for ways that we can help,” Goldstein said. “This administration has a strong track record of helping small business, including the reduction of fees and fines, expanding free legal consultation programs, and providing marketing support through our new initiative, ‘Love Your Local.’”

Garodnick said he anticipates that the city council will vote on the bill at some point this year. “We have a lot of support in the council, and we hope to have the support of the mayor in this process,” he said.