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Mayor Zohran Mamdani and Gov. Kathy Hochul proposed a tax on empty second homes worth over $5 million.

NYC's proposed tax targets wealthy absentee owners, aiming to raise $500 million annually.

Other cities with vacancy taxes have used them to free up housing supply, but NYC wants cash.

Mayor Zohran Mamdani is gearing up to tax the rich β€” if they live elsewhere but own multimillion-dollar properties in New York City.

Mamdani and New York Gov. Kathy Hochul announced a proposal last week to tax pieds-Γ -terre β€” homes owned by people with primary residence outside the city β€” worth over $5 million. Hochul estimates it could raise $500 million in revenue annually, helping to close the city's budget gap and funding new affordability measures. The proposal has already invoked immediate backlash from business leaders and right-leaning politicians.

Significantly, the proposal would, indeed, tax the rich β€” a signature policy position of Mamdani's that Hochul has previously resisted in broader forms.

While New York has flirted with such measures before, other cities ranging from Vancouver to Berkeley, California, have enacted similar taxes. Those policies were often designed to bring empty housing back on the market and raise revenue in the process.

New York City's situation is different.

Its vacancy rate is near a 50-year low at 1.4%, and the new tax would only apply to around 13,000 affected units. This makes it unlikely to add a meaningful amount of housing supply the way it has elsewhere.

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New York's tax seems to be primarily focused on raising revenue from ultrawealthy out-of-city homeowners instead, said Rita Jefferson, a local analyst at the Institute on Taxation and Economic Policy who focuses on equity and fairness.

"It's possible that there's some new units that come on the market as a result of this, but I'd be willing to bet this is meant to be a tax generator," Jefferson said. "There's such high demand that people who can afford more are willing to pay however much they need to to live where they want."

The projected revenue would only cover a fraction of the city's budget gap.

"$500 million is a good start," said Emily Eisner, the acting executive director and chief economist of the Fiscal Policy Institute. "It's only 10% of the budget gap that we're looking at in the city, but it's a good start for raising some additional revenue to try to meet the city's needs."

New York would join a handful of US cities that target empty homes. A flat vacancy tax of $3,000 in Berkeley brings in about $3.9 to $5.9 million annually, according to the city attorney's analysis.

And in 2011, Washington, DC introduced a tax on vacant and blighted properties, levying $5 per $100 of assessed value on vacant properties. That tax has run into its own implementation issues, including incomplete data reports and too many exemptions; those administrative challenges may have cost the city nearly $1 million in potential revenue from buildings surveyed by the Office of the District of Columbia Auditor.

In San Diego, residents will vote in June on a vacancy tax that would ultimately reach $10,000 per unit per year. San Diego's Office of the Independent Budget Analyst estimates the measure could raise between $12.1 million and $23.8 million in its first year.

Other countries have their own versions of a vacancy tax, providing a benchmark for the longer-term impacts of the proposal.

France has had a vacancy tax on second homes since 1999. According to a 2020 study published in the Journal of Public Economics, its tax, which can reach 34% of a property's rental value, led to a 13% drop in the vacancy rate from 1997 to 2001, and most of the empty housing became primary residences.

In Vancouver, a 2017 tax targeted homes that were empty for more than six months a year. The number of vacant homes in Vancouver fell from around 8,000 homes in 2017 to around 5,000 in 2023, according to the Institute on Taxation and Economic Policy, although that reduction is not necessarily a direct result of the measure.

The tax did coincide with a fall in the vacancy rate from around 7% in 2016, before it was implemented, to around 5.5% in 2021 β€” what amounts to a "significant reduction" in empty homes, according to the Canadian think tank C.D. Howe Institute. The tax, now 3% of the empty home's value, has raised $202 million in Canadian dollars, amounting to around 1% of the city's total tax revenue, according to ITEP.

C.D. Howe found that the new tax didn't limit new construction, and also that it didn't bring down average rent. It incurred pushback from wealthy homeowners in Vancouver, with some resorting to renting out their mansions on the cheap in order to dodge taxes by leasing them out as rental units.

In New York City, the policy analysts who spoke with Business Insider said this tax likely won't bring affordable rental units to the market, but it could cause some homeowners to think about how they actually want to use their housing, or whether they want to buy in the city. If owners do decide to sell, that could be another tax boon, since the city would collect a real estate transfer tax.

"This is a small step on the path of increasing taxes on the wealthy, but it's significant," Eisner said.

Read the original article on Business Insider