As we all know, one of Zohran Mamdani’s key campaign promises was that he would “tax the rich.” However, many pointed out that this was easier said than done, for two main reasons:
Zohran would need to get leaders in Albany on board (as the city cannot raise taxes on its own), and Governor Hochul had expressed skepticism of major tax hikes.
A tax on the rich, especially at the local level, needs to be smartly crafted to avoid having rich people pick up their things and moving to another state. While the prevalence of this is likely to be somewhat overstated (for example, when Massachusetts imposed a 4% income tax on incomes over $1 million, it didn’t see a mass exodus of rich people that opponents warned about), there is a valid concern about potential second-order impacts on a city-level tax and the need to craft progressive taxation on the federal level where it is much harder to avoid.
Thankfully, the pied-à-terre tax addresses both of these concerns. First and foremost, the Governor is fully on board. While Zohran and Gov. Hochul don’t always agree on everything, this is another example of the productive governing relationship they have built; a breath of fresh air after a decade of DeBlasio-Cuomo spats followed by Eric Adams’ corruption.
Second, the tax is well crafted to avoid incentivizing rich people to leave New York. That’s because it actually does the opposite: it incentivizes non-resident property owners to move to New York. While there has been some skepticism amongst the usual anti-Zohran crowd regarding this policy, the economic case is quite strong when you consider the three potential responses that pied-à-terre owners may take in response to the policy, detailed below:
Option 1: Move In
Many pied-à-terre owners may choose to change their residence to New York City full time to avoid paying the tax. This is a win because it would raise local NYC income tax revenues (and likely sales tax revenues as well). While there has been some skepticism along the lines of “why would a rich person move to avoid a pied-à-terre tax, just to be hit by NYC income taxes?”, it’s important to think on the margins here (as any good economist does). Imagine a semi-retired partner emertius at McKinsey who makes $500K/yr and has a $10M townhouse in the Upper East Side but resides at a mansion in Greenwich, CT. At a 1% pied-à-terre tax, that’s a $100K hit, much larger than the ~$50K in state and local income tax they would be paying (assuming limited deductions). If they don’t want to sell, it would be financially prudent for them to move into NYC.
And even in some cases where the pied-à-terre tax hit is smaller than the state/local income tax, it’s worth remembering that it could still be enough to incentivize someone to move into the city, because it lowers the marginal cost of residing in the city. For example, imagine someone who resides in Connecticut to save $100K in NYC state/local income tax but would be hit with a $75K pied-à-terre tax. Suddenly, their marginal cost of residing full-time in NYC vs. Connecticut goes from $100K down to $25K. Sure, some people will chose to sell in this scenario (which we will get to next), but many will simply chose to bite the bullet and move into their pied-à-terre full-time.
Summary of likely impacts (ranked from certain to more speculative):
Increased tax revenue from state/local income tax
Increased sales tax from additional consumption in the city
Increased NYC population and congressional representation
Potentially slightly increased municipal expenses (e.g., if parents decide to send their kids to public school in the city)
Option 2: Move Out and Sell
This is the scenario Ackman and other Zohran skeptics are warning about: a chain effect of billionaires abandoning their pied-à-terres en masse, destroying the high-end real estate market and decimating the city’s property tax revenue. This seems pretty unlikely to me for a few reasons: first, the number of homes impacted is simply not expected to be that large (estimated at ~13,000 homes by the Hochul administration, approximately 0.4% of NYC’s total housing stock). Accordingly, this is less likely to put NYC in a real estate death spiral and far more likely to simply result in the pied-à-terres being sold and bought for slightly cheaper prices. Ironically, freeing up this housing could lead to downwards pressure on rents across the city, thanks to what economists like to call “filtering”. This tweet from Tim Miller basically sums up the filtering argument.
But, if you take the filtering argument to the next level by looking at “moving chains” (described in the below analysis from California YIMBY), this policy could broadly improve housing affordability in New York:
Most people who move into new homes move out of existing, less-expensive homes in the same city. As such, new housing can theoretically free up inexpensive units at the low end of the market by inducing what researchers call “moving chains:” As people “move on up” into newer and nicer housing, they create vacancy in the older, less-expensive homes they are leaving. Go far enough down the chain and it’s possible that building a new high-end home pretty quickly frees up an existing home that’s affordable to a working class family.
Again, the total number of homes here isn’t that large, and an even smaller portion of those homes will be sold to buyers who plan to live there full-time, but even so, this will put downwards pressure on rents. And every little bit helps on that front given the severity of New York’s housing shortage.
Summary of likely impacts:
Increased short-term property transfer tax revenue (as pied-à-terre owners sell)
Slightly cheaper housing across the city (due to filtering/moving chains)
Accordingly, slightly decreased long-term property tax revenue (again, due to filtering putting downwards pressure on housing prices)
Potential decrease in long-term housing construction at the extreme high end of the market due to reduced demand from potential pied-à-terre buyers (this is likely to be extremely minor and only affect the very top end of the market - think Billionaire’s Row type buildings, not new high rises in Long Island City or Gowanus)
Increased sales tax from additional consumption in the city (if the seller is replaced by a resident moving into the city)
Option 3: Pay the tax
This is the simplest option. For a portion of pied-à-terre owners, who are already extremely wealthy, it will make sense to just eat the tax and keep doing what they’re doing otherwise. This is where the estimated $500 million in tax revenue is expected to come from. Of course, some pied-à-terre owners who fall in this bucket in the short-term will eventually move into bucket 1 or 2.
Summary of likely impacts:
Increased tax revenue
Conclusion: A smart policy, but nothing earth-shattering
At the end of the day, this is a well-supported policy that I expect will positively impact the city on the margins, due to downwards pressure on rent as pied-à-terres are filled, and increased tax revenue (both directly from the tax and indirectly as some pied-à-terre owners make New York their full time residence and start paying state/local taxes).
A few additional thoughts for the road:
The economist in me is excited to see how pied-à-terre owners react to this policy and how the second-order impacts end up shaking out. It will be an exciting natural experiment to follow.
As a big pro-housing YIMBY, one thing I do like about this tax is that it does inherently validate the filtering/moving chains YIMBY argument. Thinking about the policy intuitively points to the benefit of making sure as much housing as possible is filled with actual residents. Housing supply matters, and pied-à-terres basically eat up that supply without addressing the demand to actually live in a city.
While $500 million/year is cool, do you know what’s even cooler? $10 billion/year - and it’s literally just lying on the ground in the form of free parking that currently exists and subsidizes car owners (who are disproportionately wealthy in New York). I did the basic math here but even a pilot program implementing dynamically paid parking and loading zones in Manhattan and the most transit-rich parts of the Bronx, Queens, and Brooklyn could easily raise billions in revenue. And it looks like Zohran may be considering that, according to recent reporting and the fact that DOT has created a new “Office of Curb Management” that would be responsible for potentially implementing such a policy.
The reaction from Zohran's opponents to what is, by any measure, a common-sense and relatively modest policy, only further demonstrates how thoroughly they've lost the plot. If you think that a pied-à-terre tax is “one of the scariest things you have seen,” then you have probably lived an extremely pampered life.
Zohran Mamdani, Kathy Hochul, and Annemarie Gray (Open New York Executive Director) speaking at an event to reform SEQRA and make it easier to build housing. This is policy is a good example of Zohran and Hochul working together effectively. More broadly, Hochul is generally a bit to my right and Zohran is generally a bit to my left on the political spectrum. But together, they’re meeting in the middle and finding common ground on each others’ best policies (Hochul’s SEQRA streamlining to make it easier to build housing, Zohran’s pro-transit initiatives and universal childcare proposal, etc.). It is quite heartening to see and I hope it continues.
All-in-all, I have been quite pleased with Zohran’s first hundred days. From embracing pro-housing policies to pushing full steam ahead on safer streets with more bus and bike lanes to accelerating trash containerization, it’s clear that he is governing as a “sewer socialist” less focused on grand dreams of launching a proletariat uprising and more focused on executing the basics and making New York City more livable, affordable, and sustainable for everyone.
One might be surprised about people calling this "one of the scariest things you've ever seen", but bear in mind that Stephen Schwarzman, chairman and chief executive of Blackstone Group, once declared that a proposal to eliminate the Carried Interest tax loophole that benefits financiers like himself was "like when Hitler invaded Poland in 1939," and Tom Perkins (a founding member of well-known VC firm Kleiner Perkins) said that harsh criticism of the "one percent", in the Occupy Wall Street period, indicated that we were on the road to "a Progressive Kristallnacht." These people have lost their grip on reality. They're so accustomed to being surrounded by sycophants that the slightest criticism, the barest suggestion that they are not the Great and the Good, deserving of every penny of their wealth (and the concomitant right to lord it over the peasants), is interpreted by their fragile egos as a mortal threat.
Worked decently well in Vancouver, reduced the vacancy by something like 50% and raised something like $200 over 4 years or so. Problem is that it can be difficult to prove occupancy, and I remember hearing about people who were paid to pretend to live in buildings there to avoid the tax